Credit Information Sharing helping in addressing information asymmetry

By Bob Aston 

Information asymmetry between farmers and financial institutions often results in adverse selection, unsuitable loan products/terms and exclusion of some farmers from the credit market. This problem is being addressed by the Association of Kenya Credit Providers (AKCP) through its Credit Information Sharing (CIS) project which offers a comprehensive range of information shared.

Jared Getenga, Interim Chief Executive Officer from the Association of Kenya Credit Providers (AKCP) was at the Fin4Ag Conference: revolutionising finance for agri-value chains which is taking place at the Kenya School of Monetary Studies to highlight the importance of CIS during the plug and Play Day.

CIS is a mechanism through which various lenders electronically pool and pull borrower information using centralised (credit reference bureau) databases, with the aim of addressing information asymmetry between borrowers and lenders.

One of the biggest things holding back farmers is credit access. Agricultural financing is often affected by lenders’ insistence on physical collateral like land as a primary consideration in credit decision-making.

CIS has been helping in reducing reliance on tangible collateral which leads to a faster turnaround time processing credit thus resulting in increased access to affordable credit for farmers.

Photo: Gwendolyn Stansbury/ IFPRI

With the collection and sharing of credit history, farmers are finally gaining a credit identity and one that most financial institutions are increasingly prepared to lend against. This has led to improved agricultural production and an orderly, efficient and stable credit market.

CIS helps farmers to build a credit history for negotiating better credit terms such as lower interest rates, and more flexible installment plans. This has also resulted in improved liquidity thus improving the supply of loanable funds available to finance agricultural needs of farmers in various stages of the value chain.

AKCP has created a sharable pool of credit data that gives banks and other lenders more confidence to lend to farmers.

AKCP has already signed up banks, licensed MFIs, development finance institutions and the M-Shwari mobile phone-based loan product to its CIS project, which provides a framework under which credit providers log both positive and negative data about clients through credit reference.

Over the next 12 months AKCP will also enable savings and credit cooperatives (SACCOs) to participate and will work to enrol non-traditional lenders like utilities and solar light providers, which will be able to provide data as simple as whether a smallholder farmer pays his electricity bill.

A big part of giving credit to small holder farmers is that there is no formal record of their credit history. Without the ability to make credit assessment banks are reluctant to lend to them.

The availability of credit information facilitates a transition from collateral based lending to greater reliance on information in the credit risk appraisal process. This has helped to ensure greater financial inclusion among farmers in the agricultural finance value chain.