Metropol GMD Discusses CIS Mechanism at SACCO Leadership Forum in Nairobi

The credit information sharing (CIS) is a mechanism where customer credit behavior information is pooled and shared among credit providers.

Here are some key aspects of credit information sharing:

• Purpose: CIS provides lenders with another framework to measure the riskiness of their customers. It aims to improve the assessment of the probability of default of a customer.
• Mechanism: Credit bureaus collect and analyze data shared by various financial institutions such as banks, microfinance institutions (MFIs), and SACCOs. This data includes credit history and write-off information.
• Benefits for Lenders:
  • Improved Risk Assessment: Access to shared credit information gives lenders better visibility of a customer’s credit history from different lending sources. This helps in making more informed lending decisions and reducing errors.
  • Accurate Probability of Default (PD) Estimation: Credit scores provided by bureaus are a measure of the probability of a customer defaulting, based on a vast amount of pooled data. This leads to more robust scores compared to those based on internal data only.
  • Superior Loss Given Default (LGD) Values: Bureaus deliver more accurate LGD values because they are based on actual write-off data shared by multiple lenders. This provides a more realistic estimate of potential losses in case of default.
  • Proper Loan Pricing: By using accurate PD and LGD values derived from shared information, lenders can calculate the expected credit loss (ECL) and price their loans appropriately to account for potential losses. This helps in minimizing loss values.
  • Automation of Decision Making: The availability of comprehensive credit information and tools to process it allows for the automation of lending decisions, making the process more efficient and potentially reducing biases.
• Challenges:
  • Lack of Total Visibility: Despite the existence of CIS, a challenge remains in achieving total visibility of borrowers who may be taking credit from multiple lenders. This incomplete picture can lead to an underestimation of risk.
  • Market Perception of High Risk: There’s a general market perception that customer risks are high, which needs to be addressed through better risk assessment enabled by comprehensive credit information sharing.

In essence, credit information sharing, facilitated by credit bureaus, is a vital tool for lenders to better understand and manage credit risk by providing a more comprehensive view of a borrower’s credit behavior and history. This ultimately contributes to a more efficient and stable credit market.

Reach me at sam.omukoko@metropol.co.ke for more engagement on matters risk management