The State will seize savings accrued by borrowers of the Hustler Fund in case they default on loans to mitigate against losses, The Standard has learned.
The unpublicised terms and conditions will help the State ring-fence the Fund against abuse – a fate that has befallen past similar Government-backed funds.
“To mitigate against the risk of total default by the borrowers, the (implementing) bank shall retain the 30 per cent intended for short-term savings in a suspense account until full repayment of the loan,” secret terms of the Fund seen by The Standard show.
“Upon full repayment of a loan, the amount shall be released to the customer who will be at liberty to withdraw it or keep it as savings.”
The savings are mandatory as they are done when a loan by a borrower from the Hustler Fund is approved, meaning borrowers make them upfront before drawing down the loan.
For instance, out of the total approved loan amount, 95 per cent will be deposited into a borrower’s mobile money wallet, and the remaining five per cent deposited to their savings account scheme.
For example, if a customer borrows Sh1,000, they will receive Sh950, with the Sh50 channeled to the savings scheme. The scheme will split savings into 70 per cent long-term (pension) and 30 per cent short-term.
The newly launched Fund, which attracts a low interest rate of eight per cent per annum, has already proven an early hit with borrowers.
According to official data, Kenyans borrowed at least Sh408.5 million from the Hustlers Fund barely 24 hours after it was launched on Wednesday, underlining the pent-up demand for cheap credit.
Co-operatives and SMEs Development Cabinet Secretary Simon Chelugui said yesterday that the money was disbursed to some 1.14 million borrowers.
The average number of transactions was 500 per second on Wednesday, dropping to 190 every second on Thursday, Mr Chelugui said.
But there has been concern against potential abuse of the Fund. This saw President William Ruto and his Deputy Rigathi Gachagua ask Kenyans not to abuse the Fund by ensuring prompt payments for it to be sustainable.
President Ruto spoke when he unveiled the much-awaited Hustler Fund on Wednesday, as his administration took the first step to fulfil a key campaign promise.
Ruto said Kenyans previously blacklisted by credit reference bureaus would be given a reprieve under the new credit scoring system.
“Today we have approximately eight million Kenyans who cannot access credit because of their bad credit history. Even if in the past you have been locked out, the Hustler Fund is giving you a fresh start,” he said.
“Those of you who will be given a second chance, please do not abuse that second chance, use it well. It will work for you.”
Defaulters risk higher interest rates as well as freezing of their accounts. They may also be subjected to debt collection raids.
“In the event of default by the customer (non-payment within 14 days from the date of disbursement), interest shall accrue at the rate of 9.5 per cent per annum with effect from the 15th day,” say the Fund rules.
“If the customer fails to repay by the 30th day from the date of disbursement, the customer’s credit rating may be reviewed by the bank, which may result in a review of the customer’s assigned credit limit. The interest applied on the loan shall accrue on a daily basis from the date of loan disbursement until the 365th day, or such other earlier date upon which the loan may have been fully repaid.”
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 earlier.
The involvement of debt collection could set up thousands of borrowers for property seizures.
Involving debt collectors signals the new government is stepping up efforts to enhance repayment of the key inaugural Fund and stem defaults.
Similar State funds have in the past suffered embezzlement and mismanagement and, in some instances, faced collapse under the weight of loan defaults.
Auditor General Nancy Gathungu, for instance, in May this year flagged the State-backed Uwezo Fund for not producing records showing the people who owe the kitty Sh4.64 billion.
In her report for the year ended June 30, 2021, Ms Gathungu said there were no debtors’ ledgers detailing loans issued by the fund since inception and repayments made over the years on account of loan recoveries.
Like the proposed Hustler Fund, the Uwezo Fund was fashioned as a flagship programme for the previous administration of former President Uhuru Kenyatta and was aimed at enabling women, youth and persons with disabilities access loans to promote businesses and enterprises at the constituency level.
The strict repayment terms of the new Hustler Fund come at a time findings of a recent household survey by the Central Bank of Kenya, FSD Kenya and the Kenya National Bureau of Statistics showed that more than half of the respondents have defaulted on mobile loans.
The survey defined a loan default as including missing a scheduled repayment, paying late and not making any payment at all. Mobile banking and digital loans are issued without collateral, making them vulnerable to default by borrowers.
The new administration has touted the new Fund as a game-changer in the credit market that is set to undercut the costlier credit products.
The new kitty offers affordable credit, taking on popular mobile phone lenders in the battle for quick loans.
President Ruto said the Sh50 billion kitty, which is backed by three mobile phone service providers and financial institutions, will bring to an end the era of predatory lending that has been characterised by high-interest rates.