Hustler fund: The good, bad and ugly

The much-awaited Sh50 billion Hustler Fund was launched by President William Ruto, offering hope for an affordable and quick credit to low-income groups and individuals without collateral.

The Fund is a core campaign promise by the Kenya Kwanza administration that was elected on a platform of lifting low-income earners (hustlers).

President Ruto is keen on implementing the campaign pledge that will see individuals and small businesses charged single-digit interest rates to access the money.

The cheap credit targets the President's support base, which included jua kali artisans, boda boda operators and roadside traders.

"Affordable credit makes a huge difference in the rate of business growth," said Dr Ruto at the opening of the 13th Parliament.

But how will the Hustler Fund work?

For starters, the Fund will be a lending service via mobile phone aimed at giving credit to small- and medium-sized businesses.

Borrowers will only need to be aged above 18 and have a national identity card to access up to Sh50,000 and a minimum of Sh500.

Credit scores

"The Fund shall leverage on existing commercial infrastructure, including mobile payments platforms and financial institutions, including agency, co-financing and on-lending partnerships," said the National Treasury earlier.

The loans will be priced at 8 per cent per annum on reducing balance meaning they will be cheaper than the market rate of commercial loans.

But there is a catch.

Borrowers will be subjected to a credit score, which will determine whether or not one gets the loan and at what interest.

"The Fund shall leverage on credit scoring model to determine the creditworthiness of an eligible person to qualify for subsequent and enhanced financial services or products," says the Treasury.

More than four million loan defaulters are already set to be removed from Credit Reference Bureau (CRB) blacklists under plans mooted by President Ruto to reform the credit market.

The President earlier directed the Central Bank of Kenya (CBK) to abolish the blacklisting of borrowers and instead have a scoring method where defaulters will get a low grade instead of being shut out of the financial system.

The new lending service will be collateral free and will take on the fast-growing quick credit services.

According to the rules of the micro, small and medium enterprises (MSMEs), a group or any other association will be eligible to apply for loans.

Financial institutions including banks, micro financiers, and Saccos can also apply or enter into a lending agreement for a loan from the Fund for on-lending to a business person or MSMEs.

Main products

"The ground-breaking Fund is expected to open up affordable credit facilities for the majority of Kenyans who had previously been locked out of credit facilities and to boost a savings culture while creating momentum for sustainable development," said the Cabinet recently.

"The implementation of the administration's signature pledge is tipped to liberate the people of Kenya from the bond of predatory lending."

The Fund has four products; personal finance, microloans, SME loans and start-up loans. It will also have an element of saving for retirement benefits, health insurance benefits and ordinary savings.

The first phase to be launched today covers personal finance.

It will not be a walk in the park for those who abuse the fund, however. For instance, anyone who abuses the facility risks jail and a heavy fine as the new administration moves to clamp down on embezzlement by borrowers and officials that have been synonymous with similar funds.

"A person who misappropriates any funds or assets of the Fund, or assists or causes any person to misappropriate or apply the funds otherwise than in the manner provided in these regulations; or fails to give information or gives inaccurate or misleading information or falsifies information or misrepresents information required... commits an offence and shall be liable to a fine not exceeding ten million shillings or a term of imprisonment not exceeding five years, or to both," say the regulations by the Treasury.

The State has also signalled it could deploy debt collectors to pursue unpaid loans. "All sums due to the Fund shall be recoverable as debts due to the Fund," said the Treasury.

The involvement of debt collectors could set up borrowers for property seizures. Similar State funds have suffered embezzlement and in some instances faced collapse under the weight of loan defaults.

The Hustler Fund will be run by a secretariat headed by a chief executive officer. The staff will be competitively appointed by the Cabinet Secretary upon recommendation by the Fund's board.

The launch comes at a time it is costing more to service one's loan or access a new one after CBK recently increased its benchmark lending rate by 50 basis points to 8.75 per cent - the highest in over three years.

The move has dealt a blow to President Ruto's move to actualise his promise of cheap credit to his support base.

Myriad competitors

The new microloans service will join many competitors, including KCB M-Pesa and NCBA's M-Shwari. Market leader Safaricom also operates the Fuliza overdraft facility, which was launched on January 5, 2019, in partnership with Commercial Bank of Africa (now merged into NCBA) and KCB Group.

Launched in 2012 on the Safaricom mobile money application M-Pesa, M-Shwari has become a key growth driver for both Safaricom and NCBA. KCB M-Pesa, on the other hand, was launched in March 2015.

Safaricom dominates the mobile loans segment where borrowers get loans within seconds via their mobile phones, making digital loans a quick fix for daily bills.

Mobile money has grown to be a lucrative revenue stream for telcos and credit providers, as customers use them to send cash, pay for goods and services and take short-term credit.

However, it has not been an easy ride to get to the launch. When the President mooted the idea, he said the best way to improve the lives of the poor is through grants, where the government will fund enterprises from which the hustlers can get rewards. No sooner had the election passed than Dr Ruto changed his mind, wondering aloud "ati unangojea pesa ya serikali ya bure? Hio hakuna. Hii ni pesa ya kufanya biashara na unafanya biashara na unarudisha. (You are waiting for free government money? There is nothing like that. This is money for business and you must pay back)."

Economist and politician Billow Kerrow described the Fund as mischief, saying only grants will elevate the hustlers.

"Sh500 to Sh50,000 loan at 8 per cent interest, with a compulsory 5 per cent saving amount is unlikely to create a 'momentum for sustainable development' as suggested, and is not revolutionary either. The Sh50 billion fund was meant to be a game-changer for MSMEs. It started off as a grant during the campaigns, and mutated fast to be a conditional loan. To many, it appears too little and much ado about nothing. A new boda boda costs Sh80,000 and above. Can it fund start-ups? No. For sure, it can buy a half dozen quality wheelbarrows and can help mama mboga stock up on her vegetables. If the borrowers were given the maximum of Sh50,000, which is highly unlikely, only a million Kenyans at most will benefit. At best, the fund will compete with Fuliza and other digital credit providers on the interest rate," he wrote.

Patrick Muinde, also an economist, wondered how the fund will fair where similar initiatives failed.

"Assuming the Hustlers Fund is the magic bullet, is its architecture definitively different to make it succeed where her elder siblings Youth, Women and Uwezo funds have failed? What innovations, if any, does it bring to the table that make it truly transformative as it is marketed to be?"