Responsible lending is what Kenya needs to realise economic ambitions

Banks now embrace responsible lending to protect their clients

For a majority of people, a personal loan represents an opportunity for a better life.

Whatever the vision of progress might be, the eventual commitment to repay a loan is anchored on the premise of continuous personal growth. But life, it is said, happens. The chances of a default for one reason or another is a reality all borrowers live with.

Interestingly, emotional and financial considerations link inextricably in the borrowing process. When people borrow money, the words they use can foretell whether they will pay it back. By analyzing the accounts borrowers give and the identities they construct, bankers can predict whether borrowers will pay back.

Generally, predicting loan default is often a difficult task because loans are repaid over a lengthy period of time, during which unforeseen circumstances may arise.

Conventionally, the credit assessment process for lenders was aimed at avoiding losses to banks.  Initially, this was done by way of ensuring there was sufficient equity in any security so that moneys lent could be recovered in circumstances of default.

Credit assessment

Today, due to innovation, lenders look at the credit assessment process in terms of capacity of the borrower to repay the amount lent from their own resources rather than realization of any security, which has given rise to unsecured loans.

With responsible lending, we are agitating for a paradigm shift where credit assessment procedures are no longer about protecting the position of the lender but instead, about protecting the borrowers from financial commitments they cannot afford to meet. It should be about saving borrowers from themselves.

Banks have the moral obligation, and the responsibility to ensure that borrowers not only commit to meet their financial obligations, but can also comfortably pay back their loans. Globally, several countries around the world have started on this journey of financial protection and are enacting responsible and sustainable lending laws.

Locally, with the tightened lending environment occasioned by the impact of interest rates regulation, responsible lending is a good response not only to borrowers, but also to banks and ultimately the economy.

As part of risk assessments, banks now have to be responsible for verifying borrowers’ income, having a detailed understanding of the borrower's expenditure, assessing future affordability, and conducting affordability assessments on guarantors.

At KCB Group, responsible banking and sustainability are integral to how we undertake lending across all our business both in Kenya and in our subsidiaries. As a policy, we carefully evaluate all loan applications to gain an understanding of a personal or business customer's financial situation.

As such, in all our credit decisions, we are committed to acting in the best long-term interests of a sustainable financial sector by protecting borrowers. 

Banking practices 

Additionally, the ongoing development of the UNEP FI International Banking Principles for Responsible Banking will see the alignment of a standard and sustainable banking practices.

Kenya Commercial Bank Group Plc has joined hands with 28 other global banks—with a combined asset base of US$17 trillion to adopt six new guidelines which were unveiled in Paris, France on Monday November 26, 2018.

We believe that the Principles— Alignment, Impact, Customers and Clients, Stakeholders, Governance and Culture, Transparency and Accountability—will obligate banks to take responsibility for their actions and, over time, build trust and market confidence with our stakeholders.

We believe that through these principles, banks will be able to align their business strategies with their customers' needs and society’s goals.

Closely linked to responsible lending is enhanced transparency. When extending credit to a customer, banks are mandated by law under Consumer Protection Act to explicitly explain to borrowers the breadth of the commitment, so that they can understand the risks they are taking. 

This entails fairness and pre-contractual disclosure practices that highlights all fees, liabilities or obligations.

The journey to responsible lending is not an easy one, but a strategic approach and commitment to change will augment and regenerate the banking sector, to enable the industry better play its part in driving economic growth.

Mr Oigara is the KCB Group CEO and MD