Recently, the World Bank released the 12th Edition of the Ease of Doing Business Report. Themed Going Beyond Efficiency, the Report compares Business Regulations for domestic firms in 189 Economies across the globe.
Separately, Prof Kaushik Basu, Senior Vice President and Chief Economist of the World Bank, pitched for the expansion of BRICS to BRICKS. BRIC is a grouping acronym that refers to the countries of Brazil, Russia, India and China, which were all deemed to be at a similar stage of newly advanced economic development. South Africa was recently recognized as an emerging economy and added to the previous BRIC, making BRICS. Prof Basu, who previously served as the Chief Economic Advisor to the Government of India, argued for Kenya’s inclusion in this bloc, citing recent reforms in the country’s Credit Information Sharing (CIS) mechanism.
Prof Basu’s endorsement of Kenya’s developments is not at all surprising. The gazettement of the Credit Reference Bureau Regulations 2013 in late January 2014, which paved way for exchange of positive and negative credit information between commercial and microfinance banks and reduced data retention period to five years from the previous seven years, significantly transformed Kenya CIS landscape. There are now moves to expand the CIS mechanism to include non-bank credit providers such as Saccos, Microfinance Institutions and other non-traditional lenders. This will increase the proportion of adults whose borrowing records are available in the Credit Reference Bureaus (CRBs). Other reforms include the upcoming introduction of an Alternative Dispute Resolution mechanism for CIS and setting up of a strong self-regulatory framework.
Kenya’s Rankings on Depth of Credit Information Index (CII) still very low
It would appear surprising that, despite these reforms, Kenya’s score in the Depth of Credit Information Index (DCII) for 2015 has dropped significantly from four (4) to zero (0), according to the World Bank report. In fact, as shown in the comparative statistics below, only Rwanda has shown improvement in the East African region.
|Economy||2013 DCII (0–6)||2014 DCII (0–6)||
2015 DCII (0–8)
Source: Ease of Doing Business Reports (DB 2013, 2014 & 2015)
Two main reasons can be used to explain this irony. First are the changes in methodology adopted by the World Bank, and second is the change in setting of the 2015 cut-off date.
Changes in Methodology
Over the last 10 years since the commencement of the publication in 2004, the number of indicators measured by the Report has increased from 5 to 11 and the number of economies sampled from 133 to 189, as shown in the figure below:
Specifically, the number of points used to measure the Getting Credit Indicator has increased from 10 to 12 (for the strength of legal rights index) and from 6 to 8 (for the depth of credit information index). The DCII introduced two new factors: online access of credit bureau services and the presence of credit scores in economies with credit information systems.
Kenya’s drop to zero in this index can be explained by another interesting change in methodology: only credit bureaus and registries that cover at least 5% of the adult population can receive a score on the depth of credit information index. Only Rwanda, due to its relatively low population, scored a positive Depth of Credit Information Index. The other member countries got a zero, despite meeting the two indices above.
Because data captured under the DCII is as at January 1st 2014 and not the usual June 31st, the reforms arising from the Credit Reference Bureau Regulations 2013 were excluded.
What do changes in Getting Credit Indicator mean?
Doing Business 2015 reported that of the 10 top improvers in business reforms globally, 7 implemented reforms making it easier to get credit. This underscores the immense role access to credit plays in the Ease of Doing Business Ranking.
According to the FinAccess Survey 2013, only 6 million out of the 22 million adult population in Kenya currently have a credit facility. Rapid expansion of the CIS system that includes non-traditional lenders will help bring the untapped 73% of adults to the formal credit market. Increased reliance on credit histories as compared to physical collateral will contribute to a reduction in proportion of adults who are financially excluded and improve the ease of getting credit. This will help improve Kenya’s Doing Business ranking.
Ongoing Reforms to Enhance Access to Getting Credit
There are several measures being spearheaded by the private sector and the Government with an aim of improving access to credit and business reforms. In July 2014, the Kenya Bankers Association (KBA) and the Central Bank of Kenya launched the KBRR+K formula and KBA’s Annual Percentage Rate framework, aimed at enhancing transparency in pricing of loans.
Notably, among the components of the ‘K’ factor in KBRR+K is credit risk profile of a borrower. The advancement of the CIS in Kenya will enable lenders to efficiently and reliably assess the risk profile which will, in turn, contribute to preferential credit terms for borrowers with a good credit history, owing to their lower risk profile.
Closely related to the above measures, the Association of Kenya Credit Providers recently launched a five-year roadmap to guide in the implementation of the Regulations. The Association aims ensure 748 credit providers will be sharing credit information on their ‘good and bad’ borrowers by end of 2019, up from the 52 commercial and microfinance banks. By implementing the Regulations, institutions are expanding both the breadth and depth of information exchanged and therefore opening up the space for strong credit scoring tools. The Association is keen to see improved data accuracy in the credit bureaus, and legal changes to support an expanded CIS environment.
We view the new factors introduced by the Doing Business Report 2015 a game-changer; providing an opportunity for countries to go back to the drawing board and formulate strategies that will help them improve in the Doing Business Indicators. The report is not an end by itself, but a means to an end. So, let’s roll our sleeves, rethink and re-strategize!