What credit score means to hustlers

Wednesday, November 30, 2022, marked the launching of the Hustlers Fund in Nairobi, a political promise that has come to fruition.

The Hustlers Fund is an initiative by the government to give affordable loans to personal, micro, small and medium-sized enterprises (MSMEs) in Kenya. The loan value range is between Sh500 to Sh50,000.

In his speech during the launch in Nairobi, President William Ruto said: "We are moving from a collateral system that is based on title deeds to building a collateral system that is based on credit score. So credit scoring ladies and gentlemen is the future and is considered as one of the best methods of mitigating credit risk and exposure."

What is a credit score? This is a measure of trust, it is a numerical expression that is based on previous credit history and is used to determine the creditworthiness of a borrower.

A borrower's credit score will guide and help inform whether a lender approves a loan, how much to loan and the interest rate to charge.

The tabulated number usually gives a score ranging between 300-850. A score of 300-629 indicates bad borrower behaviour, 630-689 fair, 690-719 good and finally 720-850 score usually indicates excellent borrower behaviour.

Loan repayment

The credit score is usually based on loan repayment, types of loans, length of credit history, individual's total debt and other factors.

What does the credit score mean to a hustler? In previous years before credit reference bureaus (CRBs) and credit scores were introduced in 2010, banks relied heavily on loan security either in the form of assets such as cars and title deeds or payslips showing the ability to repay loans.

This mode of loan approval ended up locking out a significant percentage of the market from accessing commercial loans, especially those who are not formally employed and those who lack substantial assets to deposit as security when taking the facility. We shall call this segment of the population hustlers.

Yet for most of those locked out of credit, they were still able to diligently pay their rent and other utilities like water and electricity every month, and the fact that they were able to meet these monthly obligations meant that they could also pay off bank loans if they were afforded the opportunity.

But before deciding whom to lend to, how much and what interest rate to charge, the lenders needed to establish a trust meter or credit score.

Importance of credit score to a hustler

When a borrower is taking their first loan, there's no credit score and so the lender cannot afford to risk by lending out a huge sum of money without first ascertaining whether the borrower is a good or bad borrower.

To separate the wheat from the chaff, the lender will disburse the minimum amount to borrowers; say Sh500.

Those who pay on time will be rewarded by gaining access to higher loan limits and those who fail to repay will be blocked.

By doing this, the lenders reduce their risk exposure, eliminate bad borrowers and reward good behaviour.

The credit score favours the hustler who is a good borrower, as each time he or she borrows and successfully repays the loan limit grows from Sh500 to eventually Sh50,000 which has been set as the limit in the Hustler Fund.

A huge number of our country's youth is unemployed and a substantial number underemployed, thus few people would be willing or are able to lend you Sh50,000.

Hustlers should take advantage of this opportunity by developing a positive repayment history.

How is the hustler fund credit scoring system different from the conventional mobile money loan scoring?

The Hustler Fund is not entirely unique, as it gives loan access to its borrowers via their phones. Mobile lending is not new to the Kenyan market, with mobile lenders coming in as early as 2014.

Credit rating

However, what makes the fund different from other mobile lenders is that first it is managed by the State.

Secondly, they have not integrated with the CRB database and so if you default on the Hustler Fund, this default does not affect credit rating with other creditors.

The proposed loan period is 14 days; some may view this period as short as on average mobile lenders offer a 30-day credit period.

Fortunately, the interest rate is charged per annum as opposed to per month. This will work in making the fund more affordable.

Loan limit

The Hustlers Fund presents a unique opportunity for Kenyans to access affordable credit and grow their loan limit each time they repay their debts on time.

The fact that the government is also not listing with CRBs works in favour of borrowers who default as negative information is usually held for at least five years in their credit history.

Unfortunately, not listing with the CRB is a double-edged sword because the young hustler who always repays his loan on time and has reached the Sh50,000 loan limit will not have a credit history.

This hustler has ambitions of growing his business from a small business into a large multinational and for that, he will need access to capital worth millions.

The Hustler Fund administrators should consider this transition by sharing positive credit information with the CRBs and aid hustlers who have outgrown the fund so that their customers can have access to larger capital in the open market.

The writer is a credit and risk officer at The Standard Group