Queries over Hustler Fund loans

In the immediate Day Zero (November 30th) post-launch, registration applications reportedly flowed at 500 per second (effectively 1.8 million applications per hour) before slowing on day one (December 1, 2022) to 190 per second (or 684,000 per hour).

A 24-hour snapshot shows that 1.14 million Kenyans were registered and Sh408.5 million had been disbursed in loans. This pointed to an early registration rate of about 13 per second at that stage, ignoring multiple applications.

Interim subsequent data offered that 2.3 million Kenyans were registered with almost one million transactions (loans and repayments), total disbursements around Sh566 million and Sh11 million repaid.

A more recent statement for the end of day two (December 2, 2022), notes that cumulative numbers had risen to roughly Sh1.38 billion in loans and Sh48.52 million in repayments from 2.35 million transactions, with the number of persons registered at almost 5.2 million.

Assuming 98 per cent of transactions (by volume) were loans and two per cent were repayments, this translates to a loan uptake of 43 per cent to 44 per cent at an average loan size rising from Sh577 to Sh599.

Given that the range of personal loans was understood to be between Sh500 and Sh50,000, public expectations will need to be carefully managed. Even at these lower averages, Sh1.4 billion in two days is no mean statement considering Fuliza's loan book runs at Sh1.8 billion to Sh2 billion a day.

These are probably the headline thoughts that will occupy the minds of "naysayers, theorists, critics and analysts" whom Deputy President Rigathi Gachagua regrettably dismissed at the launch event.

Complete design

Yet, it is fair to state, beyond these interesting numbers, that the Hustler Fund is nascent, and there is much that remains to complete its full design or at least communicate a more complete design to the public, as well as our many financial engineers and statistical number-crunchers.

A more interesting enquiry might go back to some basics. Two core questions emerge following this rapid-fire launch, which was clearly aimed at quickly delivering a political promise made to Kenyans.

First, how is this fund operating before the institution is itself fully operationalised (board, secretariat, facilities etc.)? Second, what is the source of the loan funds being disbursed?

These are not idle questions.

The process of translating the HF concept into reality involved the formulation and promulgation of regulations in line with the Public Finance Management Act.

This includes regulations around the sourcing of finances to establish the Fund's lending base.

In simpler terms, who is lending out these funds, and what is the source of the funds being lent out?

In clearer terms, is there a danger that the rush to get HF up and running circumvented the law?

This is where as much transparency at the front end is needed from this administration as is accountability at the back end. This is, after all, a public fund drawn from public resources, that is, taxpayers.

It is a public, not private, lending facility because, by definition, the government has no money of its own.

It represents, like other public loan funds, a deliberate allocative and distributive choice to draw money from all Kenyans, on one hand, to lend out to all Kenyans on the other hand.

This is why Treasury's final PFM (Financial Inclusion) Regulations, which were passed without amendment by the National Assembly on the same morning on which the HF was launched, are so important at two levels of good governance - institutional and financial, as suggested earlier. The institutional questions are straightforward. In the absence of the board and secretariat, who is accountable for the early, ongoing HF operations? National Treasury or the parent Ministry of Cooperatives and MSME Development?

If this is the case, then what purpose do the regulations serve? If this is not the case, then what is the HF beyond its website and Twitter handle? Is it an institutional and organisational phantom at the moment? Or are the partner institutions - banks and telcos - the new Hustler Fund in institutional substance and form?

Interest rate

Might we then not have completely outsourced this enterprise in the first place, with eight per cent as an interest rate subsidy rather than a more complicated single-digit interest rate to administer, manage and revolve the fund?

These questions strike at the principles of transparency and accountability demanded by the constitution and its supporting laws, including laws on public funds in the PFM Act.

Related financial questions are just as difficult. In the simplest interpretation, public monies cannot be spent if they have not been appropriated by the National Assembly.

As is usually the case, the regulations allow for other sources of income, beyond budget appropriations, such as internal revenues (interest and other charges), investment income and grants, donations, gifts and other bequests as well as "monies from any other source" approved by the Cabinet Secretary.

It makes sense to presume that the institutional framework needs to be in place to manage, control and account for these other sources of income, but it is normally the case that this applies equally to any funds appropriated by the National Assembly through budget estimates.

Is it possible that the current 2022/23 printed budget estimates, prepared by the previous administration, were provided for the HF?

The short political answer is No. In normal circumstances, therefore, an immediate HF allocation would have to be part of the 2022/23 supplementary budget estimates, as presented to, considered, approved and appropriated by the National Assembly.

That these supplementary estimates are not available is proved by a simple test: no public participation. This is how Kenya's established constitutional and legal framework protects the public purse.

As with the institutional points above asking about who is running the HF without a board and staff, an equivalent financial point might then be to enquire where the current HF loan funds are coming from without a budget appropriation.

They cannot fall under the loose rule that allows the government to spend and seek retrospective parliamentary approval because that strictly applies to existing, not new, budget lines (outside of emergencies, unless the HF is an emergency!)

Parliamentary approval

An untidy picture that might emerge is that this initial financing has come from external partner (bank, telco) resources, which effectively means unauthorised borrowing (without parliamentary approval) with a promise of reciprocation through guaranteed portions of the HF.

Note that the regulations provide that the (HF's) partnerships must not be exclusive or preferential, must be technology neutral and should not confer market advantage to any partners over competitors (this is not happening already, only one telco has an HF-ready app at the time of writing).

A similar concern may also apply to emerging partners (intermediaries) and their mode of selection in line with public procurement law; economies of scale and scope advantages notwithstanding. The first principle in applying the rule of law is that it must apply equally to all, without prejudice.

This is not to say that these are the only immediate areas of clarification that the promoters of the HF must provide. The regulation's definition of the qualifying individual (other than being over 18 with an ID) as being "a person with low disposable income" (with the bottom of the pyramid defined as a socio-economic group of these persons) is a point of clarity not being made publicly.

The financial product and service range needs better harmony between the preamble and the body of the regulations. For now, a successful and sustainable Hustler Fund must build acceptance and credibility from the beginning.