MAy 2009 48687 About the Author Developing a Credit reporting MAkenA Mwiti Framework in kenya joined iFC in 2006 as the Program Manager for the In 2000, the level of nonperforming loans in Kenya topped Kshs 112 Africa Credit bureau Program. She currently works as the billion (US$1.4 billion). This posed a threat to the stability of the Gender Coordinator for the region. She is responsible for financial sector, and there was a consensus that a credit information identifying and managing opportunities for gender work sharing mechanism would help resolve the tendency of some debtors across the various business lines in Africa. to take advantage of information asymmetry and resort to multiple borrowing, thus becoming serial defaulters. After several failed APProvinG MAnAGer rubin Japhta, operations initiatives by various local stakeholders to set up credit bureaus, IFC officer, Private enterprise Partnership for Africa. was invited to provide assistance to the government authorities in setting up a legal and regulatory framework as well as to support private sector operators. Background In march 2006 a conference was held at the request of several financial institutions for IFC Until about 10 years ago, very few countries to provide leadership in accelerating the outside of the organisation for economic Co- development of credit reporting in east africa. operation and Development (oeCD) and Latin the conference was well attended, with 88 america had operational credit bureaus. In participants representing central banks, recent years, as retail growth has picked up commercial banks, government ministries, dramatically around the world and technology revenue authorities, bankers' associations and become more available, many countries in institutes, credit bureaus, stock brokers, eastern europe, asia, and now the middle east insurance firms, small and medium enterprise and north africa have established credit (Sme) finance and microfinance institutions, bureaus. Sub-Saharan africa, excluding South among others. the conference confirmed that africa, is the only region without fully credit information sharing was indeed a very functioning credit bureaus. important area, and the CBK Governor expressed the government's commitment to For several years a private operator in Kenya issuing the necessary rules to fast-track the struggled to initiate a credit bureau. In 2002, growth of credit reporting. IFC's africa Credit the Kenyan Bankers association (KBa) began Bureau Program would provide support to the an initiative to develop a private sector credit authorities on the international best practice bureau that would be owned by the banks, in legal and regulatory framework as well as but it eventually concluded that the preferred assist private sector operators. model would be to utilize the services of a private sector bureau licensed and supervised Lessons Learned by the Central Bank of Kenya (CBK). 1) Our role as "honest broker" needs to the CBK took the initiative, and the banking come out very clearly. law was amended in 2006 to require financial institutions to share information with licensed IFC's involvement in the program came at the private bureaus. the KBa had also been right time, as several earlier attempts by involved in various consultations in the past various players had failed. IFC had extensive with the commercial banks but had not experience promoting the use of credit succeeded, so the banks were looking for an information services around the world and independent party to help manage the had no vested interest in running a private process. credit bureau in Kenya. We were therefore IFC SmartLeSSonS -- may 2009 1 quickly requested to take on the role of an honest broker stakeholders semi-jokingly referred to them as the and were well positioned to do so. "animal," as they had only a limited idea of what a credit bureau was and how it would work. With IFC in this role, financial institutions, the KBa, and the CBK were willing to work together to develop the credit one of the key lessons here was the importance of reporting framework. We were also able to share global investing in education and exposure from the very experiences that supported comprehensive information beginning of the project. the first conference in 2006 was sharing; none of the banks had been willing to share such successful because it involved both private and public information, fearing that other banks would steal their officials and they all had a chance to be educated on the clients. needs and benefits of credit bureaus. as project implementation continued, we organized workshops and 2) Get multi-stakeholder buy-in from the beginning of study tours for the KBa and CBK teams. Supervisory the project. authorities need training and capacity building to effectively enforce laws and regulations governing after the successful conference in 2006, we received the information exchange. government's commitment to put in place the necessary steps that would fast-track the development of the credit information sharing framework. one of the lessons we learned was the importance of creating a task force that would include representatives from all the key stakeholders. this task force created the forum needed to discuss the various steps and key issues. With IFC's help, the CBK consulted with all the stakeholders and drafted credit bureau regulations that reflected their interests. this ensured the full buy-in and engagement of all key players. 3) Identify an internal champion in the Central Bank. Banks are the major providers of credit in most african countries, and the central banks, as the banks' supervisor, have an important role to play in the development of credit reporting. as we moved along, we quickly realized that it was important for us to identify someone on the inside who would advocate on our behalf and make sure that the issues discussed in the task force were presented to the senior Members of the study tour at the Central Bank of Morocco management.Wefoundsuchapersoninmr.JaredGetenga, who at that time was working as a manager in the Banking Supervision Department. We also asked him to chair the there has been a lot of debate in the past about the cost taskforcemeetings.Withcontinuousdialogueandexposure of study tours and their effectiveness. In Kenya, it was to various programs in the region, mr. Getenga quickly very clear that the exposure visits were highly beneficial. developed an understanding of credit reporting and was For example, during their study tour to South africa, the able to move the agenda internally within the CBK. KBa and CBK teams visited three credit bureaus to understand their operations, and met with the national as an insider, he engaged with the CBK Governor and Credit regulator in South africa to discuss their carefully worked through all the internal procedures and regulations. after the tour we noticed a marked politics so as to finalize the regulations. as a result, the enthusiasm to advance the project, which led to the minister of Finance formally published the Credit reference official publication of the regulations. the CBK has now Bureau regulations on July 11, 2008. the regulations, which begun to receive applications from viable credit bureaus. come into effect in 2009, provide for the licensing and establishment of credit bureau operations in Kenya. the Conclusion regulations also make it mandatory for financial institutions to report nonperforming loans, and provide for the Some testimonials from our partners: protection of consumers by defining their rights. John Wanyela, executive Director of the Kenya Bankers 4) The two important E's! ­ education and exposure. association: "IFC has played a major developmental role to ensure that Kenya establishes credit reference bureaus. as credit bureaus are a relatively new feature in most of IFC's global view has been greatly appreciated." africa, a comprehensive awareness campaign is essential for the successful development of the credit information Jared Getenga, an official from the ministry of Finance, system. It was telling that at the initial meetings and "the ministry of Finance will work with the Central Bank of discussions regarding credit bureaus, most of the Kenya and IFC to share international best practices in order 2 IFC SmartLeSSonS -- may 2009 to ensure that we support the successful operation of credit bureaus under the new regulations." the development of credit bureaus in Kenya presents a significant opportunity to improve the overall credit culture and support the development of credit markets. But this process takes time. to ensure success, consistent effort and focus are required over a period of time to ensure progress and success. now that the regulations are in place, the CBK has started receiving applications from viable credit bureaus. one private credit bureau has already submitted its application, and two internationalfirmsarelookingforlocalpartners before submitting theirs. once the applications have been accepted, the CBK will license and supervise the credit bureaus. another highlight ­ the KBa is recruiting a program manager who will coordinate the relationship between the licensed bureau and the commercial banks, finalize the different fees and contracts, and define the reporting framework to ensure that the sharing of information between the bureaus and banks actually takes place. With our intervention, the new regulations will guide the system of credit information sharing and will help identify and isolate serial loan defaulters, who account for the huge stock of nonperforming loans. With time, this will enable banks to lower the price of credit facilities for borrowers who show a good credit profile. DiSClAiMer iFC Smartlessons is an awards program to share lessons learned in development-oriented advisory services and investment operations. the findings, interpretations, and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of iFC or its partner organizations, the executive Directors of the world bank or the governments they represent. iFC does not assume any responsibility for the completeness or accuracy of the information contained in this document. Please see the terms and conditions at www.ifc.org/ smartlessons or contact the program at smartlessons@ifc.org. IFC SmartLeSSonS -- may 2009 3