Legal Drafting Expert at Palladium International

Project Overview and Role:

USAID/Feed-the-Future, Kenya Investment Mechanism (KIM)

KIM is a five-year USAID funded project that will unlock $400 million of investments to key agricultural value chains, namely horticulture, dairy, and livestock and to the energy sector. KIM will address constraints on the supply-side and demand-side of investment transactions and boost the enabling environment (policy and regulations) to promote the flow of capital for business expansion.  Through the mobilization of capital and building partnerships between stakeholders in the financial ecosystem, KIM supports USAID's overall goal of fostering broad-based, sustainable, and inclusive economic growth for Kenya. 

KIM provides smart incentives to both business advisory service providers and Financial Institutions. These incentives create a sustainable ecosystem for businesses to access finance and investments needed to expand and grow. Business transactions are further supported by a diverse range of sustainable partnerships--with and among strategic businesses, institutions, government counterparts (county and national) and other development partners. These partnerships will lead to scaling and replicating creative approaches to unlock finance and investments, reduce risks of extending credit to the agriculture and energy sectors, and offer testing of innovative business models that can be scaled. 

Background:

The World Bank, in its Improving Access to Finance for SMEs report states that one way to reduce financing obstacles for SMEs is to strengthen the infrastructure that supports financial transactions, including credit reporting. The report focuses on practices aimed at improving SMEs access to finance in three areas: credit reporting, secured lending and insolvency.

A comprehensive Credit Information Sharing (CIS) (credit reporting system) is a key element for financing for SMEs, although often overlooked. CIS is a mechanism that:

1. Increases SMEs’ access to finance by consolidating their payment information for use in assessing creditworthiness.
2.  Reduce collateral requirements and improve loan terms using “reputational collateral” for SMEs.
3. Reduce turn-around time in the credit granting process
4. Improve Investment Climate by contributing to the economy’s Ease of Doing Business index as measured by the World Bank

Credit information Sharing is still new in Kenya even though it was rolled out in 2010. While much has been achieved, challenges continue to persist that hinder SMEs, particularly those in the agricultural sector, from benefiting from the service it offers to the financial sector. This is due to:

a) Narrow Participation: Over 5,000 credit providers operate in Kenya. Only about 500 currently share data with Credit Reference Bureaus (CRBs), most of which are based in urban areas. Agricultural SMEs are generally based in the rural areas and this limited participation locks out agricultural data and thereby reduces chances of investment into agriculture as the SMEs in the sector have no credit profiles at the CRBs.

b) Inadequate Implementation of Cross-cutting Data Sharing Standards: Only 44 Commercial Banks and 13 Microfinance Banks are regulated on their CIS conduct by the Central Bank of Kenya (CBK). The absence of a Code of Conduct that provides standards for CIS participation compromises data quality from non-banks, because many do not;

• Share positive data
• Share with all licensed bureaus
• Update the CRBs regularly
• Handle customer queries/disputes efficiently or at all
• Pass benefits of good credit profiles to customers
• Share full portfolios
• Submit accurate data

c) Risk Based Pricing: As a result of the CRB data being limited and, in some cases unreliable, Risk based pricing has not been entrenched, resulting in reduced access to credit by SMEs who are considered largely uncreditworthy. Though the interest capping law has been amended, the data at the CRBs needs to be rich enough to be useful for risk-based pricing.

d) Lack of Data Submission Tools for Less Sophisticated Lenders: CRB data is submitted using a complex template and any lender submitting to the 3 licensed bureaus must submit to each bureau separately. This requires excellent internet connectivity and hence locks out many rural lenders, particularly the ones lending to SMEs in the agricultural sector. Insignificant agricultural data in the CRBs renders potential borrowers in the agricultural sector invisible in the credit information system and thus unable to access credit based on their risk profiles.

e) Lack of capacity in CIS: CIS knowledge is concentrated in the urban areas, again locking out rural lenders and borrowers who are essentially in the agriculture sector.

In recognizing the need to address the challenges noted above, the draft CRB Regulations 2019 seeks not only to expand the category of lenders sharing data but also to ensure proper standards are set through an industry Code of Conduct. CIS industry efforts are spearheaded by Credit Information Sharing Association of Kenya (CIS Kenya).  KIM wishes to support CIS Kenya’s initiation of drafting an appropriate Code of Conduct. This code will support in establishing CIS standards that participants must adhere and participate in the future. It will improve the quality and reliability of CRB’s data, provide for risk-based pricing, and lead to unlocking capital for SMEs.

This SOW provides for a domestic expert in legal drafting, short term technical assistance (STTA to support CIS Kenya’s internal legal expert to draft an industry Code of Conduct on Credit Information Sharing.

OBJECTIVE 

The objective of this assignment is to implement best practices for Credit Information Sharing through the drafting of an appropriate Code of Conduct that all participants will be required to comply.

This scope aligns to the CIS Kenya’s vision to be the institution that leads Africa in shaping and transforming the credit markets to achieve sustainable and inclusive growth, focusing on development of standards of conduct in the CIS industry to:

• Provide for wider participation by bridging the knowledge gap existing on CIS. This will entail the use of a learning platform that CIS Kenya has developed as well as its Data Quality and Compliance team.
• Provide for ease in data extraction and submission by requiring the industry to avail a tool that will enable every lender, including the rural based ones, to efficiently submit data to the 3 licensed bureaus at once.
• Provide for creation of credible credit profiles for SMEs, especially the ones in the agricultural sector that are largely rural based by providing the support required for all lenders to participate in CIS and to submit whole, accurate and timely data to CRBs.
• Set standards that must be adhered to by all lenders to ensure the CRB data is credible, reliable, timely and predictive.

The drafting of the Code of Conduct is a high priority for CIS Kenya and other stakeholders in the credit market. The standards to be established will be based on best practices as well as incorporate World Bank’s Credit Reporting Principles[1] that support the following public policy objectives: Credit reporting systems should have relevant, accurate, timely and sufficient data—including positive—collected on a systematic basis from all reliable, appropriate and available sources, and should retain this information for a sufficient amount of time.

 Primary Duties and Responsibilities: 

The Consultant will focus activities on the CRB Regulations from 2013 and the draft CRB Regulations from 2019 as well as any other relevant literature, working closely with CIS Kenya. CIS Kenya will provide its head of Legal Services to lead this consultancy. The Consultant will draft a Code of Conduct that ensures its optimal adoption by the industry and increased market participation. The geographical reach of this assignment is country-wide within Kenya. Expected outcome will include expansion of participants in the CIS mechanism, access to credit and better credit terms by SMEs and risk-based pricing based on quality CRB database. Key stakeholders will include; CIS Kenya, CBK, CRBs, KBA, Commercial Banks, MFBs, MFIs, SACCOS, Digital lenders, etc.

Activities will include: 

• Research and classify best practice in CIS management and identify barriers and weakness that limit the optimal use of CIS among financial institutions.
• Interview, consult and engage with stakeholders CIS Kenya, CBK, CRBS, KBA banks, SACCOS, MFIs, Digital lenders, etc. regarding the barriers, gaps and options to codify the Code of Conduct. The Consultant shall consult with relevant staff of the CIS industry to gain insights and concerns for the CIS Standards. Best international practices shall take into consideration the Kenyan environment of compliance, regulation and enforcement. The goal is to attract more participants and increasing access to finance by SMEs.
• Draft the Code of Conduct. An initial draft of the Code of Conduct shall be delivered to the KIM Financial Services and Investment Advisor within 40 days after initiation of this assignment. Comments will be forwarded to the consultant within 10 business days. The consultant shall disseminate a draft of the Code of Conduct and hold a workshop for input and comments by all stakeholders. Final comments will be collated, and the draft code will be finalized for adoption.
• The consultant, in support of CIS Kenya and in collaboration with KIM will present the final Code of Conduct for consideration and approval by the CBK in line with the draft CRB Regulations 2019.
• The consultant will support CIS Kenya to facilitate the launch and adoption of the Code of Conduct. 

Level of Effort (LOE):

The Consultant will have 30 days level of effort, spread over a period of 3 months. An additional (up to) five days LOE may be granted by the KIM COP, with deliverables remaining the same.

Required Qualifications:

• Bachelor of Law Degree;
•  5 years legal drafting experience;
• 5 years litigation experience on Credit Information Sharing disputes;
• Previous experience on CIS;
• Demonstratable Experience working in the financial sector;
• Strong verbal and written communications skills;
• Excellent English writing and communication skills.