KENYA CREDIT INFORMATION SHARING INITIATIVE A PROPOSED MECHANISM FOR ALTERNATIVE DISPUTE RESOLUTION FEBRUARY 2014

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1 KENYA CREDIT INFORMATION SHARING INITIATIVE A PROPOSED MECHANISM FOR ALTERNATIVE DISPUTE RESOLUTION FEBRUARY 2014

2 The AKCP was registered in April 2013 and provides a platform for the involvement of all credit providers in a comprehensive and all-embracing data sharing initiative. The AKCP also serves as the Secretariat to the Kenya Credit Information Sharing Initiative (KCISI) and promotes self-regulation among licensed and non-licensed credit providers while ensuring a level playing field for credit providers participating in the initiative. This initiative was set up by Central Bank of Kenya and Kenya Bankers Association in 2008 and is currently supported by FSD Kenya. For more information, visit the AKCP website A report by Steven Gatembu Kairu & Anne Amadi This report was commissioned by FSD Kenya. The findings, interpretations and conclusions are those of the authors and do not necessarily represent those of FSD Kenya, its Trustees and partner development agencies. FSD Kenya Financial Sector Deepening The Kenya Financial Sector Deepening (FSD) programme was established in early 2005 to support the development of financial markets in Kenya as a means to stimulate wealth creation and reduce poverty. Working in partnership with the financial services industry, the programme s goal is to expand access to financial services among lower income households and smaller enterprises. It operates as an independent trust under the supervision of professional trustees, KPMG Kenya, with policy guidance from a Programme Investment Committee (PIC). Current funders include the UK s Department for International Development (DFID), the Swedish International Development Agency (SIDA), and the Bill and Melinda Gates Foundation. Government of Kenya

3 KENYA CREDIT INFORMATION SHARING INITIATIVE - PROPOSED ADR MECHANISM i Table of contents EXECUTIVE SUMMARY Chapter 1 1 BACKGROUND AND APPROACH Background The problem Objectives of the study Methodological approach and scope Study methods Limitations of the study 2 Chapter 2 3 POLICY AND LEGISLATIVE FRAMEWORK FOR ALTERNATIVE DISPUTE RESOLUTION IN KENYA The policy framework Legislative framework 3 Chapter 3 5 COMPARATIVE ANALYSIS OF EXISTING ALTERNATIVE DISPUTE RESOLUTION MECHANISMS The Insurance Regulatory Authority The Media Complaints Commission 5 iii 3.2 The Cooperative Tribunal The Chartered Institute of Arbitrators The Dispute Resolution Centre (DRC) The Federation of Women Lawyers (FIDA) Kenya Comparisons with other jurisdictions 6 Chapter 4 9 STAKEHOLDER PERCEPTIONS ON LEGAL/POLICY FRAMEWORK Introduction Conclusion 11 Chapter 5 12 RECOMMENDATIONS Attributes of an effective ADR mechanism Preventive measures Operationalising the recommended ADRmechanism 14 Annex THE RECOMMENDED MODEL FOR PROCESSING CREDIT INORMATION SHARING COMPLAINTS AND DISPUTES 15

4 ii KENYA CREDIT INFORMATION SHARING INITIATIVE - PROPOSED ADR MECHANISM Abbreviations AKCP Association of Kenya Credit Providers MFI Micro Finance Institutions ADR Alternative Dispute Resolution NCR National Credit Regulator CBK Central Bank of Kenya NGO Non-Governmental Organizations CIS Credit Information Sharing UDHR Universal Declaration of Human Rights CRB Credit Reference Bureau UK United Kingdom CRS Credit Reference System SACCO Savings and Credit Cooperative Society DFI Development Finance Institutions DRC Dispute Resolution Centre DTM Deposit Taking Microfinance institutions EU European Union FGD Focus Group Discussions FIDA Federation of Women Lawyers FSD Financial Sector Deepening GJLOS Governance, Justice, Law and Order Reform programme IRA Insurance Regulatory Authority KBA Kenya Bankers Association KCISI Kenya Credit Information Sharing Initiative LSK Law Society of Kenya

5 KENYA CREDIT INFORMATION SHARING INITIATIVE - PROPOSED ADR MECHANISM iii EXECUTIVE SUMMARY OVERVIEW Credit information sharing (CIS) is a risk management tool designed to assist in making lending decisions. It is a mechanism through which banks and other financial institutions may justifiably divulge information about their customers without breaching the banker s duty of confidentiality, which is one of the key tenets of the banker customer relationship. 1 The Banking (Credit Reference Bureau) Regulations 2008 were adopted 2 to provide a framework for the governance of licensing, operation and supervision of Credit Reference Bureaus (CRBs) by the Central Bank of Kenya. The CIS initiative in Kenya is, however, threatened by the risk of litigation arising from information shared by lending institutions, particularly in cases where adverse reports have led to decisions unfavourable to a customer seeking credit facilities, such as denial of the facilities sought. Left unchecked, the result could be the reversal of gains made towards addressing the challenge of the non-performing loans portfolio that led to the collapse of financial institutions in the 1980s and 1990s in Kenya. STUDY OBJECTIVES In recognition of the need to minimize the threat of court action by dissatisfied customers, the Kenya Credit Information Sharing Initiative (KCISI), now the Association of Kenya Credit Providers (AKCP), with the support of Financial Sector Deepening, Kenya (FSD) commissioned this study whose objectives were: a. To review the existing complaints mechanisms in Kenya. b. To recommend a suitable ADR mechanism to deal with disputes arising from credit information sharing. c. To develop a monitoring and evaluation framework for the implementation of the proposed ADR mechanism. KEY FINDINGS The study found that there is sufficient legal and policy backing for the application of ADR to deal with disputes in Kenya, even though the existing 1 The law on the banker s duty of confidentiality was authoritatively laid down by the Court of Appeal in England in Tournier vs. National Provincial and Union Bank of England [1924] 1 K B 461. That decision has been followed in Kenya. 2 The Regulations were made by the Minister for Finance under Sections 31(3) and (4) and 55(1) of the Banking Act, Chapter 488 of the Laws of Kenya. provisions in the Constitution and laws are yet to translate into institutional structures to support its implementation. The complaints mechanism contained in the 2008 Regulations is inadequate to deal with the kind of disputes arising from CIS as they are not specific on how ADR should be applied. The existing complaints mechanism is generally viewed as inaccessible, inadequate, unreliable and unresponsive to the needs of consumers. The foundation of the Regulations is also weak and liable to challenge since Section 31 of the Banking Act upon which the Regulations are based is not intended to deal with matters arising from banker-customer relationship, or indeed with the establishment of CRBs. RECOMMENDATIONS The study recommends conflict prevention measures that should be put in place to minimize disputes relating to CIS. These include the need to revise the contractual documents provided by lenders to commit borrowers to the ADR process before resorting to court action. It suggests an ADR mechanism that is comprehensive, prompt, free to consumers, fair and reasonable and accessible. It further recommends the creation of an Ombud to deal with appropriate cases, although the first port of call for all complaints should be the relevant branch of the institution alleged to have given the disputed information. The mechanism proposed aims at providing an effective redress mechanism for consumers, and also assist in raising standards of behavior in the consumer credit market, which in turn should benefit business by encouraging best practice. The expectation is that the proposed ADR mechanism can be replicated for other types of disputes through an incremental approach that will eventually cover other credit disputes, including those involving utility entities. It finally recommends substantive amendments in the Banking Act to address the anomalies existing in the Regulations. Appropriate structures for the implementation of the initiative have also been provided. At the initial stage, a lean staffing of four members is proposed which shall include the Ombud, an administrative assistant, a registry staff and office assistant. The initial setting up should be funded by the KBA, while subsequent operational costs will be funded by contributions from AKCP members. Close collaboration with the judiciary is recommended to ensure courts do not entertain cases that have not first attempted ADR through the proposed mechanism. A deliberate public awareness strategy is also recommended.

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7 KENYA CREDIT INFORMATION SHARING INITIATIVE - PROPOSED ADR MECHANISM 1 Chapter 1 BACKGROUND AND APPROACH 1.1 BACKGROUND Credit information sharing is a risk management tool critical in the process of making lending decisions, and a legal way through which the bankercustomer confidentiality can be broken. The enactment of the Banking (Credit Reference Bureau) Regulations 2008 was a legislative intervention aimed at providing a framework for the governance of licensing, operation and supervision of Credit Reference Bureaus by the Central Bank of Kenya. Credit Reference Bureaus exist to improve the information available on borrowers in an effort to ease financing constraints. The information they make available from a borrower s credit information such as previous and current loans, repayment history, bankruptcies, among others, allows banks to better distinguish between good and bad borrowers, which enables them extend greater credit at more favourable interest rates. The 2008 Regulations provide for mandatory sharing of credit information on non-performing loans and voluntary sharing of credit information on performing loans. More recently, the the Central Bank of Kenya Act, Banking Act and Microfinance Act have been amended to introduce positive information sharing and participation of deposit-taking microfinance institutions. The expected outcome is that it should be both cheaper and easier to obtain loans. 1.2 THE PROBLEM The dispute resolution procedure provided for in the Banking (Credit Reference Bureau) Regulations 2008 is not compulsory, neither does it specify how or by whom the dispute resolution process should be conducted. A borrower who feels prejudiced by the application of the regulations has an option to by- pass them and head straight to court. The aim of CIS is not to stop lending to bad borrowers. Rather, it is meant to guide the pricing of lending. Although its aim is to help the lender decide the terms upon which they may provide a credit facility, the emerging trend is that it is becoming just about the only determining factor as to whether a customer will be granted credit at all. A CRB listing has acquired the notoriety of a black listing and a serious dent to one s credit reputation; hence negative the perception with which it is generally viewed. Resistance to a CRB listing is further compounded by the requirement that the negative listing remains on the records for a period, which increases the anxiety and resentment caused by a negative listing. The imbalance of bargaining power between contracting parties in a lending arrangement has led to the general perception that the borrower is powerless where banks insist on the correctness of an adverse report. The existing system is therefore viewed by the borrower as unfair, favouring the stronger party over the borrower. In spite of the progressive judicial reforms being undertaken, court process is still inordinately long, tedious and expensive. Courts also tend to exercise a great measure of caution before interfering with contracts as executed by parties, and have often held the view that parties are bound by the terms of their contract, unless coercion, fraud, or undue influence are pleaded and proved. 3 To contest CRB listing, borrowers may resort, and have indeed resorted to court action challenging contents of credit reports seeking a wide range of remedies. Left unaddressed, this trend could reverse the gains intended by the credit information sharing initiative. It is in recognition of this risk that the AKCP now sees the need for alternative dispute resolution mechanisms and rehabilitation mechanisms for over indebted customers to be included in the credit sharing system OBJECTIVES OF THE STUDY This study was specifically undertaken with a view to determining the nature of the existing ADR structures in different institutions, their successes, challenges and lessons that could be drawn and incorporated in the proposed ADR mechanism for the AKCP. Specifically, the objectives of the study were: To review the existing ADR mechanisms in Kenya and identifying the strengths and weaknesses of each of them. To recommend a suitable ADR mechanism for the AKCP. To develop a monitoring and evaluation framework for the implementation of the proposed ADR mechanism. 1.4 METHODOLOGICAL APPROACH AND SCOPE The study was undertaken mainly through desk research and the grounded theory approach. Through the grounded theory approach, lived realities of the sample population were documented, the goal being to assess the informants daily interaction either with CIS operations or existing ADR approaches. The sample population included representatives of banks, the CRBs, microfinance institutions (MFIs), development finance institutions (DFIs), the Law Society of Kenya (LSK), non- governmental institutions (NGOs) dealing with ADR, relevant government departments and borrowers. The inclusion of borrowers in the study aimed at determining the extent of their knowledge of and interaction with the 2008 Regulations and to gauge the level of their satisfaction with the application of the Regulations, both in terms of process and outcome. For a balanced view, the study also targeted the credit providers, borrowers who have had negative credit reports as well as ADR providers. Focusing on real life experiences allowed for the rechanneling of views expressed to the recommended ADR mechanism for CIS related disputes. 3 National Bank of Kenya Ltd vs Pipe Plastic Samkolit (K) Ltd & another [2002] 502, AKCP(2010) Kenya Credit Providers Association Roadmap.

8 2 KENYA CREDIT INFORMATION SHARING INITIATIVE - PROPOSED ADR MECHANISM The study mainly covered Nairobi, although some key informants outside Nairobi were interviewed through telephone conversations. To accommodate diversity, representatives of banks, CRBs, MFIs, DFIs, DTMs, NGOs and government were included. All the borrowers interviewed had some experience with negative credit reports. 1.5 STUDY METHODS Survey questionnaires Survey questionnaires were developed and used to source information from the respondents. The tool captured basic information on respondents knowledge, perception and key recommendations for mainstreaming ADR in the consumer credit providers sector Key informant interviews Key informants or respondents were chosen by virtue of their expert knowledge and working experience in credit providing institutions, dispute resolution institutions and those who have been negatively affected by the Regulations. The interviews targeted officials in banks, microfinance institutions (MFIs), development finance institutions, CRBs, LSK, Judiciary, dispute resolution institutions, KBA and policymakers at the Treasury, Ministry of Finance and the Ministry of Justice, National Cohesion and Constitutional Affairs. This method was useful for identifying the gaps that exist in the Regulations, and indeed the laws and policies in general, with a view to developing and ADR mechanism that responds to the areas of concern Focus Group Discussions Focus Group Discussions (FDG) that were carried out were particularly helpful in providing information on the current experience with the Regulations and identifying the gaps. This was only undertaken with the KBA staff. The FGD provided crucial insights as to the services currently offered under the Regulations clients needs and challenges Literature and law review Literature review was done on both foreign and local texts on CIS initiatives and ADR. The documents reviewed included reports of the KCISI, Financial Sector Deepening, KBA including policy documents and papers presented on CIS covering a range of topics and issues. National, regional and international legislative frameworks that address ADR in Kenya were also examined. Policies that have been adopted at various levels to guide the consumer credit services as well as broad consumer protection issues were also explored. 1.6 LIMITATIONS OF THE STUDY This survey like any other was faced with challenges, key being that most institutions lacked comprehensive statistical data on customer complaints. This is partly attributed to the fact that there are no existing standards as to what amounts to a complaint. Seemingly, complaints not recorded were not considered as complaints, hence the difficulty of determining the nature and extent of the complaints that were not recorded. This presented a challenge as regards current trends, and therefore may have affected validity. To minimize this challenge the specific organizations were asked to give estimates as to the numbers. As a consequence, the recommended mechanism may not have the benefit of all the types and nature of complaints that may have enriched the proposed design. It was also difficult to ascertain the existing systems for addressing complaints or quality of services within the key institutions as most did not have a designated officer to handle complaints. Further, there were no benchmarks against which comparisons could be made. Limited time too was a constraint.

9 KENYA CREDIT INFORMATION SHARING INITIATIVE - PROPOSED ADR MECHANISM 3 Chapter 2 POLICY AND LEGISLATIVE FRAMEWORK FOR ALTERNATIVE DISPUTE RESOLUTION IN KENYA 2.1 THE POLICY FRAMEWORK Currently there is no standard comprehensive and integrated framework to govern alternative dispute resolution in Kenya. Recent developments in the country, however, recognize the use of ADR as one of the ways through which disputes ought to be dealt with without the necessity of litigation. The policy position of ADR can therefore be inferred from national and legislative frameworks that have been adopted at various levels that offer a basis for its application. It can also be inferred from reforms within the justice and financial sectors Justice sector policy initiatives Justice sector reforms have been going on in Kenya since 2003 when the Governance, Justice, Law and Order Sector (GJLOS) Reform Programme was initiated. The GJLOS is a reform minded initiative led by the Government of Kenya to give its citizens better governance, justice, law and order. The programme seeks, among others, to enhance access to justice for all. This includes the expedition of justice through ADR. The national development blueprint, the Kenya Vision 2030 also provides a basis for the promotion of ADR. Under its political pillar strategy, it aims achieving adherence to the rule of law applicable to a modern, market based economy in a human rights-respecting state. The political pillar's intermediate goal for 2012 is to enact and implement the policy, legal and institutional framework vital for promoting and sustaining fair, affordable and equitable access to justice, a perfect reflection of the principles of ADR. Specific strategies under this pillar involve increasing service availability and access to justice. One of the ways through which access to justice can be enhanced is through ADR. Credit information sharing is about improving the business environment and so litigation arising from complaints emanating from CIS could reverse the policy direction sought by Vision Financial sector policy initiatives Under Kenya Vision 2030, one of the steps identified as urgent for the creation of a competitive financial environment in Kenya is the introduction of legal and institutional reforms that will enhance transparency in all transactions, build trust and make enforcement of justice more efficient. The overarching Vision under Vision 2030 or the national development blueprint is to be a world class financial service sector able to mobilize savings to fund investments requirements of the country. The flagship project for 2012 is to make Nairobi the leading international financial service centre, able to compete with similar financial centres in western financial sectors. The broad goal is to enhance efficiency and stability for the sector, incorporating integrity of the financial system. Efficiency in the financial sector could be hampered by long winded and complicated court processes in the event of a dispute arising. Credit information sharing being part of the essential input of the financial/market infrastructure, it is imperative that gains so far made under the initiative are protected through providing for an effective ADR mechanism to address disputes emanating from CIS disputes. 2.2 LEGISLATIVE FRAMEWORK The Constitution of Kenya 2010 The Constitution is the highest law of the land. It formally recognizes the use ADR and has made provisions requiring the formal justice processes to embrace it. 5 Under the Constitution, courts and other adjudicating authorities have a constitutional duty to give cases fair hearing within reasonable time and to ensure that substantive justice always prevails over procedural justice. The Constitution further enjoins courts and other adjudicating authorities to promote and encourage reconciliation, mediation, arbitration and other alternative dispute resolution methods in settlement of disputes. All ten constitutional commissions created by the constitution also required to entrench ADR mechanisms within their structures. 6 It further provides that national legislation shall provide procedures for settling inter-governmental [i.e. between national and county governments] disputes by alternative dispute resolution mechanisms, including negotiation, mediation and arbitration. 7 Traditional justice systems, which play an important role in dispute resolution within communities are also given formal recognition by the Constitution. These provisions, although not directly linked with the purpose of credit information sharing, are a strong indication that the ADR is now recognized as a desirable route for the settlement of disputes at all levels The Civil Procedure Rules 2010 The Civil Procedure Rules 2010 give formal recognition to ADR as a viable avenue for the enhancement of access to justice. The amendments introduced into the Rules are aimed at facilitating just, expeditious and proportionate resolution of civil disputes. Under the Rules, ADR mechanisms may be explored and resorted to at preliminary stages of a case. The provisions require the referral of suitable suits to mediation, and courts now have power to enforce private mediation agreements as long as they are in writing and facilitated by qualified mediators upon registration in the court registry. 5 Article 159 (2)(c)of the Constitution. 6 Article 252 Ibid. 7 The Constitution, Article 189 (4).

10 4 KENYA CREDIT INFORMATION SHARING INITIATIVE - PROPOSED ADR MECHANISM The Statute Law (Miscellaneous Amendment) Act 2012 This Act introduced provisions that lay the basis for a more structured approach to ADR by the Judiciary. The amendments introduce the establishment of a Mediation Accreditation Committee to be appointed by the Chief Justice, which will be made up of the Chair of the High Court Rules Committee. The Kenya Bankers Association is specifically named by the Act to be represented in the committee. These new developments offer greater opportunities for the institutionalization of ADR, which is set to change the manner in which civil disputes are addressed in Kenya. These provisions inevitably require the introduction of appropriate institutional structure, such as the proposed CIS dispute resolution mechanism The Banking (Credit Reference Bureau) Regulations 2008 The 2008 Regulations do not provide for a comprehensive dispute resolution mechanism. Further, the Regulations apply only to institutions licensed by the CBK, leaving out all other consumer credit providing agencies. These Regulations are made pursuant to sections 31(3) and (4) and 55(1) of the Banking Act. Section 31 of the Act which deals with publication of information falls under part VI of the Banking Act, which is concerned with information and reporting requirements by institutions licensed under the Act, pursuant to the supervisory role of the CBK. That section was not intended to deal with matters arising from banker-customer relationship, or indeed with the establishment of CRBs. Sub- sections 3 and 4 of section 31 therefore seem misplaced under sec 31, and the Regulations made there under should have been the subject of substantive amendments in the Act. The foundation of the Regulations is therefore weak and liable to challenge The Arbitration Act 1995 The Arbitration Act, 1995, which is nearly identical to the United Nations Commission on International Trade Law (UNCITRAL) model Arbitration Act, governs domestic and international arbitration in Kenya. The Act requires parties who desire to arbitrate to formalize an arbitration agreement in writing, and any disputing parties can enter into such an agreement. The Arbitration Act 1995 continues to guide the practice of arbitration in Kenya, and it is realistic to expect that other forms of ADR will eventually find a home within the new developments in the legal framework. The practice is that courts do not entertain litigation arising from agreements with Arbitration clauses before an arbitration process is first attempted. The emerging trend giving formal recognition of ADR by key legal frameworks lays a firm foundation for the creation of structures such as the proposed ADR mechanism that will give life to the provisions on ADR. In creating these mechanisms, collaboration with the judiciary is critical, hence the need to secure the commitment of the judiciary to support the recommended framework. This way, consumer credit providers can have a legitimate expectation that courts will decline to consider and determine cases that have been filed without first submitting to the provided ADR mechanism.

11 KENYA CREDIT INFORMATION SHARING INITIATIVE - PROPOSED ADR MECHANISM 5 Chapter 3 COMPARATIVE ANALYSIS OF EXISTING ALTERNATIVE DISPUTE RESOLUTION MECHANISMS Currently, Kenya lacks a standardized approach to ADR. However, industries have taken the initiative to develop dispute schemes to resolve disputes arising within their operations, with varying levels of success. Some of the dispute resolution mechanisms reviewed in this study include the Insurance Regulatory Authority, the Media Complaints Commission, the Cooperative Tribunal, the Dispute Resolution Centre (DRC), and the Federation of Women Lawyers (FIDA) Kenya. 3.1 THE INSURANCE REGULATORY AUTHORITY The Insurance Regulatory Authority (IRA) is an autonomous government institution created by an Act of parliament, the Insurance (Amendments) Act of 2006 cap 487 which creates two third-party dispute resolution methods to customers. A customer may choose to file a complaint with the Office of the Insurance Commissioner, which is at the level of a magistrate s court, and which makes a binding decision. Alternatively, the customer may pursue the matter with the IRA whose decision is not binding. One of the functions of the IRA is to receive and handle all complaints pertaining to insurance business as raised by members of the public. The dispute resolution process followed is fairly informal. It entails convening meetings between a complainant and the providers or their agents to discuss and resolve the disputes amicably. It also involved advising complainants about the status of their complaint, for example, whether or not their insurance claims are payable. The relevant division calls for the necessary information regarding the issue in dispute. The IRA dispute resolution mechanism handles about 3000 cases per year. 3.2 THE MEDIA COMPLAINTS COMMISSION The Media Complaints Commission is made up of five members appointed by the Media Council of Kenya but who are not members of the Act.8 The Commission handles complaints relating to media coverage and the conduct of journalists. It is mandated by the Media Act to establish conciliation, mediation or arbitration panels consisting of not less than three members of the Commission to deal with relevant complaints. The Commission has been hearing cases and delivering rulings on various complaints. So far the Commission has not been applying ADR as envisioned by the Media Act, a fact attributed by the Chair of the Commission to lack of capacity, and plans are underway to equip members with the necessary skills to mediate between disputants with a view to arriving at settlements that best suit the interests of the parties. Appeals from the Commission go to the media Council. One of the main challenges facing this model is the perception that the independence and neutrality are compromised since the Commission is 8 Media Act, Cap 114B of the Laws of Kenya. an establishment of the Council, fully paid for by the Council. However, parties continue to submit to its jurisdiction and if dissatisfied, may proceed on appeal to the High Court. By the time of this study, the Commission had handled 811 cases since its establishment in It was, however, not possible to get reliable information on how many of these cases had been overturned by the courts on appeal. 3.3 THE COOPERATIVE TRIBUNAL The Cooperative Tribunal is a quasi-judicial body established under the Cooperative Societies Act, No.12 of 1997 as amended by the Co-operative Societies (Amendment) Act, It is established for purposes of a fair and just settlement of co-operative disputes, specifically to maintain and administer effective and efficient settlement of co-operative disputes, cognizant that justice delayed is justice denied. The Tribunal is open to all forms of disputes arising from societies operations including mismanagement, high interest rates, elections and loan defaults. Disputes are brought to this tribunal through the filling in of simple forms provided free of charge and officers in the registry assist if need be. To ease access to its services, the tribunal has decentralized its services and regularly moves to hear disputes at the Provincial Registries and this has assisted a great deal in decongesting the Nairobi Tribunal and also reducing case backlogs. Timelines set by the Act for the dispute resolution processes are strictly adhered to. In 2011, 872 cases were filed with the tribunal in Nairobi, Mombasa, Nyeri, Embu, Kakamega, Nakuru and Kisumu. A total of 664 cases were determined. Plans are already underway for the Co-operative Tribunal in Kenya to be devolved to the county level, where it will have regular sittings, shortening the period it takes to resolve disputes between societies and their members. 3.4 THE CHARTERED INSTITUTE OF ARBITRATORS The Chartered Institute of Arbitrators (CIArb) Kenya Branch with its headquarters in London focuses on promoting and facilitating determination of disputes by Arbitration and other forms of Alternative Dispute Resolution (ADR), which includes mediation and Adjudication. The Kenya Branch has about 300 registered members and maintains a register of knowledgeable and experienced Arbitrators and facilitates their appointment to undertake ADR for willing disputants. It also runs a secretariat with physical facilities for arbitration and other forms of ADR. The institution by itself does not provide ADR services. 3.5 THE DISPUTE RESOLUTION CENTRE (DRC) The DRC was founded in 1997 in response to an increasing need in East Africa for a new dimension in resolving disputes, by seeking non-adversarial means of settlement, promoting reconciliation and cutting the cost of conflict in terms of both time and money. It focuses on building capacity for the practice of non-confrontational means of prevention, management and resolution of

12 6 KENYA CREDIT INFORMATION SHARING INITIATIVE - PROPOSED ADR MECHANISM disputes in a wide range of sectors including rural and commercial, political and legal, religious and judicial, academic and domestic; thereby promoting advocacy and bridge-building. The most common processes applied by DRC is mediation. DRC is now engaged in providing professional ADR services as well as training and consultancies to communities as well as the private and public sectors of about 20 countries around the world. 3.6 THE FEDERATION OF WOMEN LAWYERS (FIDA) KENYA As part of quick justice for the indigent woman, FIDA Kenya works with existing ADR mechanisms, particularly mediation between willing disputants. This is undertaken between parties who have not yet exercised the option to go to court. But even for cases already in court, parties sometimes, exasperated by the long drawn court processes, abandon courts and decide to settle matters out of court. In such a situation, the agreed settlement is then filed in court as a consent judgment. In such situations, it has been found that parties are more willing to comply with orders they have participated in negotiating through the help of a third party neutral, rather than a judgment imposed by court. The mediations are mainly carried out by neutral volunteers. Being a women s rights organization dealing with family mediations, there is always the perception of bias towards the woman disputant. This perception has been allayed through a system by which the process is thoroughly explained to parties, so that parties appreciate that impartiality, neutrality and independence of the process will be observed at all times. The organization has developed a handbook on the mediation process to help disputants better understand the process. To deal with the huge numbers of disputes presented, female and male volunteer mediators have been trained by the organization and are constantly engaged to provide mediation services on need basis. 3.7 COMPARISONS WITH OTHER JURISDICTIONS The United Kingdom In the United Kingdom (UK) credit reference is highly efficient and competitive. Credit agreements are required to contain information on access to out of court resolution procedures, and actually specify the formalities to be followed if a creditor or credit intermediary makes use of such procedures. Member states of the EU are required to ensure that adequate and effective out of court settlement of consumer disputes concerning credit agreements are put in place using existing bodies, where appropriate. 9 The Financial Ombudsman Service is a statutory ADR scheme for financial services in the UK set up under the Financial Services and Markets Act Its role includes taking complaints and resolution of disputes by mediation or recommendation. The ombudsman can make awards of up to 100,000 Pounds, which, if accepted by the consumer, is binding on the financial institution. The consumer, however, has the option to go to court if not satisfied with the award. All financial firms are regulated by the Financial Services Authority (FSA). Complaint handling by consumer credit firms entails the consumer making a complaint to the financial firm first. The financial firm therefore has the first opportunity of resolving the complaint. This implies that the financial firms should be under an enforceable obligation to have appropriate complaint handling arrangements with clear timelines within which they should comprehensively respond to the complaint. Ordinarily, they should acknowledge the complaint within 5 working days and provide a further response within four weeks. A final response is required within eight weeks. If there is no resolution the consumer then has to go to ADR Malawi The Malawi Credit Reference Bureau Act 10 provides for the establishment of a customer claims and enquiry service section as a department in the CRB. This department is charged with the task of attending to customers complaints regarding information in the database and correcting errors in the information system within 5 working days. The Act provides some level of protection for CRBs by allowing them to file claims against the information providers and users whenever the CRB is held liable for having provided false information about the account holder. There may be three different parties that may be found liable: 11 where the source of information is at fault, it will be liable for the cost of correction; where the CRB is at fault, it will rectify the information and cater for the costs of correction; if the account holder is at fault, she will be liable for the costs and the CRB may take legal action against her. Where bad faith is detected, the Malawi Registrar of Financial Institutions appointed under the Financial Services Act has the power to request for any relevant information he may require to evaluate complaints, accusations or inconsistencies detected in a CRB report. 12 The CRB or its employees, however, shall not be put to task for anything done in good faith in the administration or discharge of powers, duties or functions under the Act Section 26 ibid th report of the Great Britain House of Lords, European Union Committee ( ), Consumer Credit in the European Union: Harmonization and Consumer Protection, Vol II. 11 Section 24, ibid. 12 Section 27, Malawi, Credit Reference Bureau Act, op. cit. 13 Section 29, ibid.

13 KENYA CREDIT INFORMATION SHARING INITIATIVE - PROPOSED ADR MECHANISM Ethiopia The Ethiopian Credit Reference System (CRS) is operated by the CRB of the National Bank, and reference to this system is limited to banks registered with the CRS and other entities authorized by law or the National Bank. 14 The Ethiopia CRB handles complaints of borrowers on accuracy and correctness of their credit information maintained in the CRS. 15 The borrower submits a written complaint to the respective branch office of the bank which initially supplied the information to the CRB the bank branch or head office issues a response within five (5) working days; if the borrower is not satisfied with the response, he may file his complaint in writing to the CRB by paying the investigation fee determined by the CRB. Upon receipt the CRB shall investigate the complaint and respond within fifteen (15) working days. If the CRB identifies errors, the bank or branch shall promptly correct the error and refund the borrower the investigation fee. If the bank or branch does not correct the error within five (5) working days of the receipt of instruction from the CRB it shall issue a written explanation. The CRB shall issue the customer with information about the actions of the bank South Africa South Africa is considered a leader in ADR with regard to CRBs and credit information sharing disputes and has a very comprehensive system. The National Credit Regulator (NCR), which is responsible for dealing with consumer complaints, handles very few disputes concerning consumer information because these are ably handled by the CRBs and an independent Credit Ombud office. 16 South Africa s National Credit Act of 2005 (NCA) is the umbrella legislation that seeks to provide for a consistent and accessible system of consensual resolution of disputes arising from credit agreements. 17 The Act provides for the process of initiating complaints or applications, informal resolution or investigation of complaints, tribunal consideration of complaints, applications and referrals and tribunal orders. The structure provides for an ombud with jurisdiction, which deals with complaints between a customer and a financial institution. The National Credit Regulator regulates the consumer credit industry in the country, and is required by the Act to, among other things: 18 promote informal resolution of disputes arising in terms of this Act between consumers on the one hand and a credit provider or credit bureau on the other, without intervening in or adjudicating any such dispute; and receive complaints concerning alleged contraventions of (the) Act. 14 Section 4.3, ibid. 15 Section , National Bank of Ethiopia (2012) op. cit. 16 Kenya Credit Information Sharing Initiative (AKCP)(2011) op. cit., p 7 17 Section 3(h), Republic of South Africa (2005) National Credit Act, No. 34 of Section 15, ibid. The law requires that a credit bureau or national credit register must take reasonable steps to seek evidence in support of the challenged information, and within the prescribed time after the filing of the challenge must; provide a copy of any such credible evidence to the person who filed the complaint; remove the information, and all record of it, from its files, if it is unable to find credible evidence in support of the information, within 20 business days after receiving a copy of evidence the person who challenged the information held by a credit provider, credit bureau or national credit register may apply to the National Credit Regulator to investigate the disputed information as a complaint. The Act also establishes the National Consumer Tribunal and provides that the Tribunal or any of its members acting alone may adjudicate in relation to any application made to it in terms of the Act; make any order provided for in the Act in respect of such an application, determine whether prohibited conduct has occurred and, if so, impose a remedy provided for in the Act; or grant an order for costs. 19 The South African system consists of a three-step process. 20 A customer who disputes information in the CIS is required to try resolving the disputed entry directly with the credit provider, then through alternative dispute resolution, and if all else fails, may apply to the Tribunal to resolve a disputed entry shown on a statement of account; or a dispute concerning a statement of the settlement amount. If the Tribunal is satisfied that an entry, or the settlement amount, as shown on a statement is in error, the Tribunal may determine the matters in dispute and may make an order to correct the statement that gave rise to the dispute. Of particular importance is the provision that as an alternative to filing a complaint with the National Credit Regulator a person may refer a matter that could be the subject of such a complaint to an ADR mechanism. If the credit provider concerned is a financial institution the matter may be referred only to the Ombud with jurisdiction to resolve a complaint or settle a matter involving that credit provider. If the credit provider is not a financial institution the matter may be referred to either a consumer court, for resolution in accordance with this Act and the provincial legislation establishing that consumer court; or an alternative dispute resolution agent, for resolution by conciliation, mediation or arbitration. The respondent in a matter referred to an ADR may object to that referral in writing within 10 business days, in which case the matter may not be resolved by an alternative dispute resolution agent; if the matter is the proper subject of a complaint to the National Credit Regulator (NCR), the matter is deemed to have been filed as a complaint to the NCR. If the matter is the proper subject of an application to the Tribunal, the matter is deemed to have been an application directly to the the Tribunal, after considering the matter is of the opinion that is could have been properly resolved by conciliation, mediation or arbitration carried out in good faith, the Tribunal may make an exceptional order of costs against the respondent. 19 Section 27, ibid. 20 Section 72, ibid.

14 8 KENYA CREDIT INFORMATION SHARING INITIATIVE - PROPOSED ADR MECHANISM In respect of any dispute between a credit provider and a consumer that could be the subject of an application to the Tribunal the consumer or credit provider, before either may apply directly to the Tribunal must attempt to resolve that matter directly between themselves; and if unable to do so, must refer the matter 21 to the Ombud with jurisdiction if the credit provider concerned is a financial institution; a consumer court, for resolution in accordance with the Act and the provincial legislation establishing that consumer court; or an alternative dispute resolution agent, for resolution by conciliation, mediation or arbitration. If the dispute has not yet been settled, the customer may bring the matter to the National Credit Regulator. It is interesting to note that the customer may bring this complaint by a simple phone call. 22 This demonstrates the ease of access of this avenue for dispute resolution. The customer may also use fax, or mail. The consumer may further appeal to the Tribunal established by the Act. CONCLUSION Experiences of the countries studied shows that significant strides have been made in the region and elsewhere to deal with disputes arising from CIS related complaints through channels outside of the court process. The systems developed for ADR specify the formalities and procedures to be followed whenever there is a complaint by a customer. Indeed all of them provide measures to ensure that adequate and effective out of court settlement of consumer disputes concerning credit agreements are put in place. The South Africa model has gone further to provide for both an ADR Ombud and a tribunal. All these are largely lacking in our jurisdiction and therefore lessons can be drawn from the examples above in developing an ADR mechanism that suits Kenya s CIS related disputes. 21 Section 134, ibid. 22 Section 50, Republic of South Africa (2005) National Credit Regulations, Regulations made in terms of the National Credit Act, 2005 (Act No 34 of 2005).

15 KENYA CREDIT INFORMATION SHARING INITIATIVE - PROPOSED ADR MECHANISM 9 Chapter 4 STAKEHOLDER PERCEPTIONS ON LEGAL/POLICY FRAMEWORK 4.1 INTRODUCTION Credit Reference Bureaus were introduced in Kenya almost a decade ago, yet serious disputing only began with the introduction of the Banking (Credit Reference Bureau) Regulations The general perception is that a CRB listing is equivalent to a blacklisting. The desire by banks to recover everything lost has resulted in disputes that could have been avoided by closing such accounts altogether, for example, listing a customer for ledger fees on dormant accounts. The attitude banks have taken towards blacklisting any customer listed with the CRB, regardless of the amount of debt or the circumstances leading to the listing, has made the situation worse. The fact that the origin of CRB stems from the experience of collapsed banking institutions which led to the creation of the Deposit Protection Fund further compounds the negative perception of CRB and credit information sharing. The shortcomings of the Regulations were identified as follows: a) Accessibility to Credit Reference Bureaus Currently, initiating the dispute is in itself problematic. The two licensed CRBs are in Nairobi and complainants outside Nairobi are generally inconvenienced when they need to initiate a complaint. b) Awareness of the Banking (Credit Reference Bureau) Regulations 2008 The study found that the public is generally unaware of the provisions of the Regulations. Consumers also are generally ignorant of actions that may lead to a default listing. Out of all the borrowers interviewed, none had knowledge of the Regulations prior to being listed by a CRB. Indeed all respondents from the banks, MFIs, DFIs and DTMs were in agreement that lack of knowledge is a major impediment to the implementation of the CIS initiative. A significant number of disputes also arise from lack of financial education, financial literacy and financial capability. Financial education is necessary for financial literacy, which gives rise to financial capability that enables people to make well informed financial decisions. All the respondents expressed the view that there is need to invest in public awareness on the provisions of the Regulations, which in turn would result in fewer disputes. In addition, the need to give notice to the borrower prior to listing is critical. c) Adequacy of the Banking (Credit Reference Bureau) Regulations, 2008 To a large extent, stakeholders hold the view that the Regulations are not adequate for addressing disputes arising from credit information sharing. Although the Regulations provide for dispute settlement, they do not assign the dispute resolution role to any particular entity. Further, the Regulations only make provision for credit information sharing among institutions licensed under the Central Bank of Kenya (CBK), leaving out non deposit taking institutions such as the Higher Education Loans Board (HELB), which at the time of the study had an enormous non-performing loans portfolio. The need for legislation to cover the entire consumer credit entities was identified as a critical need. On the other hand, it was questioned why an institution like HELB should share information for purposes of, for example, job appointments when CIS is only meant to assist in lending decision making. Until recently, the Regulations only provided for the sharing of negative information. Respondents felt that some of the complaints raised by consumers are unjustified, which is evidenced by the fact that some of the cases filed are based on technicalities rather than substantive issues. An example was given of a case whereby the consumer is seeking damages on the basis that the bank failed to follow the laid down procedure in listing him, even though the default itself is not disputed. The study, however, noted that a large majority of the disputes are resolved internally by the institutions and never get to litigation or threatened litigation. In some cases, the internal mechanisms result in a delisting of the borrower from the CRB. d) Reliability of the Customer Records It emerged that one of the greatest challenges relates to poor credit practices, particularly inadequate and unreliable record keeping by the credit providers. From the information received during the interviews, financial institutions have recently changed their systems and in the process found that some information on mandatory fields is missing, hence the legacy data is incomplete. For example, some previous records do not contain identity card numbers of their customers. In such a situation, using the identity card number as the unique identifier gives misleading information on the customer or leads to non-listing of a defaulter altogether. There have also been cases where an identity card number is recorded wrongly with the result of mismatching information with a customer. The Regulations require that a customer who has been listed should be notified through the last known address. There are challenges with postal systems and letters get delayed, although sometimes the challenge is caused by customers changing addresses without updating their information. The institutions also do not have a constant client details updating system or practice so a significant number of customer accounts still bear addresses they no longer use. Massive amount of data is required to be entered by the CRBs, which sometimes leads to technical difficulties, which may result in erroneous listing. e) Responsiveness to customers circumstances Consumers default on loan repayments for various reasons, ranging from poor business decisions, loss of jobs, illness, and other unforeseen negative circumstances. Others borrow without the intention of ever paying back. The Regulations do not provide a classification of the kinds