How Banks and Digital Lenders Will Decide Loan Amounts for Borrowers

Banks and digital lenders will no longer have to come and collect property as collateral for loans borrowers are unable to pay.

Instead, these credit institutions will be issuing loans that their customers can repay.

Thanks to innovations from TransUnion Kenya and FICO, which allow lenders in Kenya to access advanced credit risk assessment tools. 

These products allow borrowers to get loans using their reputational collateral instead of physical collateral, and 17 banks and other credit partners are already implementing them. 

With these new credit risk tools, lenders can now offer more personalized loans, ensuring that borrowers get an amount they can comfortably repay.

Consequently, this is expected to increase loan approval rates by 15-20% while reducing lending risks.

Also Read: Updated List of Interest Rates Announced by Banks in Kenya After CBK’s Directive

Data Analysed by TransUnion and FiCO 

Traditionally, banks and lenders relied on basic credit history and income levels to determine the loan eligibility of customers. However, this method usually leaves out individuals and small businesses who lack formal financial records.

Therefore, with TransUnion’s CreditVision Variables and the FICO Score, lenders can assess a borrower’s financial behaviour on a deeper level.

The CreditVision Variables solution analyzes over 145 data sources and up to 24 months of financial activity, giving lenders a detailed view of a borrower’s creditworthiness.

Instead of just looking at past loans, banks can now consider payment patterns, spending habits, and other financial behaviours of their clients.

“The effects of these innovations are expected to be profound. Consumers, Small, Micro, and Medium-sized Enterprises (SMMEs) and other businesses can benefit from greater access to credit and financial services, enabling them to improve their financial health and achieve their goals.

“Lenders will have access to better risk management and decision-making tools, leading to greater financial inclusion and economic empowerment, driving sustainable economic growth and stability,” Morris Maina, CEO of TransUnion Kenya, stated.

The FICO Score, specifically designed for the Kenyan market, takes this data and assigns a credit score ranging from 300 to 850. The higher the score, the lower the credit risk.

Lenders can then use this score to decide whether a borrower qualifies for a loan.

Also, they can make a decision on the maximum amount the customer can borrow.

Another variable that can be determined is the interest rates and repayment terms they should receive.

Also Read: CBK Lowers Interest Rates on Loans Again, Puts Exploitative Banks on Notice

Better Loans for More People From Banks

One of the biggest challenges in Kenya’s financial sector is that a lot of people have been left out of the credit system, especially those in microlending and mobile loan markets.

According to TransUnion’s Q2 2024 Consumer Pulse Study, 36 percent of consumers felt they had enough access to credit, a slight increase from 33% a year ago.

For small businesses and everyday borrowers, these tools ensure that lenders will consider more than just their past loans, giving more people access to credit.

Additionally, digital lenders, especially in the mobile loan sector, can make quicker and more accurate lending decisions.

Follow our WhatsApp Channel and join our WhatsApp Group for real-time news updates