The National Treasury has published draft regulations that have shed new light on the administration and distribution of the Ksh50 billion annual Hustlers' Fund.
This week, Treasury Cabinet Secretary Njuguna Ndung’u published the Public Finance Management (Financial Inclusion Fund) Regulations 2022 as part of the public participation process.
The development came two weeks to the launch of the Hustlers' Fund, which President William Ruto promised to launch on December 1.
Among the clarifications provided in the new regulations include details of the people who qualify, the recovery process, administration of the funds, consequences for misappropriation, and the President’s role in the fund.
The Cabinet later on Tuesday, November 15, approved a number of policy guidelines - including setting loan amounts under the Hustlers' Fund at between Ksh500 and Ksh50,000. The Cabinet also set an 8% interest cap.
The regulations published by the National Treasury confirm that the Hustlers' Fund will have the largest pool of potential beneficiaries among similarly structured funds.
There are no age, gender, or regional limitations as any Kenyan who is above age 18 will be eligible to apply for loans under the Hustlers' Fund. For businesses, the only limitation is that the annual turnover should not exceed Ksh100 million.
“Eligible person means a person who is above 18 years of age and who intends to take a personal loan, or start a business or is in a business whose turnover does not exceed one hundred million shillings,” the regulations read in part.
The broad eligibility criteria is further expected to be tightened by the board of the Hustlers' Fund - which will have policy oversight on its operationalisation.
However, there is a reference to a credit-scoring system and management of savings - which align with the government’s previous pronouncements on the fund.
“The object and purpose of the Fund shall be to innovate, develop and deploy bottom of the pyramid financial services and products that are affordable, accessible and appropriate for the unserved and underserved persons, including credit, saving, insurance and investment products,” the draft regulations indicate.
President Ruto announced in October that the Hustlers' Fund would encourage savings - including having an incentive system where the loan amount would be calculated based on the savings. The government would also top up a shilling for every two shillings saved by Kenyans who save through the Hustlers' Fund.
All borrowers on the Hustlers' Fund will also participate in a short-term savings plan and long-term pensions programme. Every saving made by borrowers on this platform will be matched by the government of Kenya on a 2:1 ratio to a level to be determined by the programme,” the President said on October 20.
The board will determine the credit scoring method - the intention being to ensure all Kenyans are allowed to participate in the fund without restrictions on the basis of a lower credit record.
However, the board has been mandated to develop bespoke interest rates - through the risk-lending model.
This means that if two Kenyans with varying credit scores walk in with a request for a loan - they will both be considered, but the one with a high credit score will get a low-interest rate for the same amount applied by the member who has a lower credit score.
The Central Bank of Kenya (CBK) recently allowed nearly half of the country’s 38 banks to adopt the risk-based lending model in the distribution of loans.
The new regulations allow banks to go beyond the current interest caps and offer interest rates that accommodate borrowers with low credit scores - but at a higher interest rate. There is no confirmation, however, on the banks that will participate in the distribution of the Hustlers' Fund.
“Under the Hustlers' Fund programme, we will lower the interest to below 10% per year so you can save and when/if your business fails, after a few years you can get that money and boost your business,” the president promised earlier in October.
The management of the Hustlers' Fund aligns with other bodies formed under the Public Finance Management Act.
It will be operated through a board whose chairperson will be appointed by the President.
The eight-member board will also include a Chief Executive Officer - who will be in charge of the fund’s secretariat and Secretary to the Board.
The fund’s CEO will be appointed by the Cabinet Secretary in charge of Cooperatives and Micro, Small, and Medium Enterprises Development (position currently held by Simon Chelugui).
The CS will also appoint two members of the board who will not be public officers.
The rest of the board composition will be as follows:
Members of the board will serve for a term of three years and will be eligible for a maximum of two terms.
The question of how the Hustlers' Fund will reach beneficiaries has been the subject of speculation since the Kenya Kwanza administration assumed office.
A number of corporates have been eyeing the distribution of the multibillion funds and based on the regulations - those with strong infrastructural and technological systems may be considered.
The regulations do not specify the distribution channel but notes that it will ride on the existing infrastructure including mobile payments technology and lending partnerships.
However, the regulations include a rider that such partnerships, presumably with telcos, banks, and microfinance institutions, will not be preferential or should not be aimed at disrupting the market.
“The Fund shall leverage on existing commercial infrastructure, including mobile payments platforms and financial institutions, including agency, co-financing and on-lending partnerships: Provided that such partnerships are not exclusive or preferential, are technology neutral and do not confer market advantage to any partners over competitors.”
The proposed rules are cognizant of some challenges similar government-sponsored funds have faced.
One of the biggest issues has been the alleged misappropriation of funds, where the fund managers were accused of engaging in graft and using taxpayers’ money for personal benefit.
The Treasury proposed that those found guilty of offences related to misappropriation of the Fund should be liable to a fine of up to Ksh10 million or a prison term not exceeding five years.
The offences under misappropriation include:
The second challenge has been high default rates. During the campaign, Ruto had promised to offer the Hustlers' Fund as a grant - raising concern that there would be low repayment.
However, he changed tact after taking office and the new regulations confirm his public pronouncement that the money provided through the funds will be a loan which will be recovered as a debt.
However, the recovery actions and penalties have not been stipulated in the regulations, which will become law after the public participation phase.
“A financial product advanced under these Regulations shall be repaid in full within the period determined in the agreement. All sums due to the Fund shall be recoverable as debts due to the Fund,” the proposal reads in part.