The Hustler Fund (also known as the Financial Inclusion Fund) was launched this week. This is a flagship project of the Kenya Kwanza government established to disburse low interest rate credit to ‘hustlers’ through digital means. The term ‘hustlers’ refers to those in the informal sector or the unemployed. It is estimated that 11.6% of adults are unable to access financial services in the country while access to finance in 2021 stood at 83.7% driven by technology and well-regulated financial sector. Vellum recently published a white paper which delved into the raison d’etre for the fund and the gap it will be exploiting.

Previous government-backed funds such as the Uwezo Fund, the Women’s Enterprise Fund and the Youth Enterprise Development Fund were all established in the last decade to serve a similar purpose albeit with minimal differences amongst them such as the targeted audience, equitable allocation through constituencies or support for youth enterprises. All disburse their funds through commercial banks. They all target youth, women and groups, and provide loans and grants that would enable the targeted demographic to access cheap loans or grants.

The government also set up the Credit Guarantee Scheme to offer credit to MSMEs lacking the requisite collateral to access loans from banks and other formal financial institutions. Kenya had 38 commercial banks as of December 2021. Of these, the government has been working with around 7 banks to disburse the funds in this scheme.

The main problem with all these schemes has been:

• A high demand for credit and limited supply of funds since most of these Funds get their monies from the Exchequer and sometimes their allotment is slashed as in the case of Youth Enterprise Development Fund whose initial allocation was halved.
• The method of disbursement as borrowers are required to have a bank account to access the credit.
• The high interest rates hovering over 12% from financial institutions and resulting in an annual percentage rate of over 16% in 2021 if one takes into account other bank charges involved in getting the loan.
• Corruption and poor accountability in funds such as the Youth Enterprise Development Fund as can be surmised from the Auditor-General’s report for 2020 and previous reports.
• The Funds still follow the general principles of determining the creditworthiness of applicants which exclude ‘hustlers’ who don’t have collateral and would benefit from a small loan to start a small business.
• Predatory lending practices by digital lenders forcing the government to step in and even establish a framework for offering relief to defaulters of digital lending.
• The growth of digital financial services such as ‘Fuliza’ and ‘M-shwari.’ Digital and mobile loans particularly from the private sector exposed the huge appetite for quick credit by showing how accessibility to credit facilities increases demand.

 Hustler Fund appears to have resolved some of these issues by:

• Offering a prorated interest rate of 8% per annum which compares quite favourably to the Monetary Policy Committees’ November 2022 Central Bank Rate (CBR) of 8.75% and commercial banks’ lending rate of 12.27% as of June 2022.
• Digital disbursement via an app and also through the USSD platforms to enhance accessibility.
• Fast online registration without any need for paperwork and quick turnaround time
• It will also encourage both short- and long-term savings in a set up where the government will adopt a two to one ratio model to match the savings of the borrower. Five percent of all monies borrowed will be deducted for savings.
• Four loan products will be in the initial offering targeting individuals and SMEs; Personal Finance, Micro-Loan, SME Loan and Start-Up Loan. Loan limits ranging from Kshs. 500 to Kshs. 50,000/- for individuals, for groups, loan limits range from Ksh 50,000 – Ksh 250,000 and there is also SMEs and Cooperative Borrowing. Repayment is in 14 days.
• Use of already established frameworks such as Saccos, Chamas and other community groups to derisk the project from non-performing loans. Follow up of defaulters to pay up the loans will largely be relegated to these groups.
• The fund includes an entrepreneurship center that will be housed at the Kenya Industrial Estates which will be co-sponsored with the German government.
• The fund has opened up to private sector initiatives and is open to working with other government partners  

A number of interesting developments have emerged as the fund has attracted the attention of the private sector.

• Equity Bank is offering Kshs. 250 billion for successful two-time loanees of the fund as a way to reduce the lending risk and an increase in limit to Kshs. 150,000/-.
• Twiga Foods, an agricultural technology company, will benefit from Kshs. 300 million to be disbursed to its suppliers and others in its supply chain.

These modalities point to a flexibility previously unseen in the earlier funds and pose a risk to formal financial institutions especially microfinance institutions. Equity Bank will be able to leverage on an MNO network encompassing the whole country. This gives the bank a competitive advantage over other banks.

But it also offers a big boost to digital financial services in the country as digital adoption in the public sector will stir up the earlier funds to also go the digital route and also encourage further adoption of digital services. 

Already, banks like NCBA have identified the opportunity in the digital business as shown in its latest investor briefing where it expresses the intent to set up a different entity called Loop DFS Ltd so as to expand into new markets across Africa. NCBA has presence in all East African countries and in Ghana but plans to expand to another 10 countries and targets 500 million customers. So far, NCBA Loop has been used to allow clients manage their financial transactions from their phone. But according to its briefing, NCBA wants to segregate its digital business to cushion the banking business from risks attendant to the digital world such as cyber fraud and also to promote the expansion of this part of the business to other countries.

A report by the Central Bank of Kenya notes the changing digital payments landscape and shows a shift towards the adoption of Payment as a service (PaaS).  Kenya is in the process of finalising a Digital Finance Policy that will offer much needed coherence in the regulation of the field and in infrastructural development.