Borrowers on the State-backed financial inclusion fund, popular as Hustler Fund, are defaulting on payments at a higher rate than those at commercial banks, saccos and microfinance banks, mirroring the headache mobile lenders face advancing unsecured loans to the informal sector.

Out of the Hustler Fund’s outstanding Sh10.2 billion worth of loans, 29 percent is deemed to be portfolio-at-risk, implying it has not been serviced by the borrowers as per the agreed schedule.

This means that borrowed amounts worth about Sh2.9 billion in Hustler Fund loans fall in the category of non-performing loans. The fund started operations at the end of November 2022, advancing personal loans as low as Sh500.

In the banking sector, the overall ratio of non-performing loans to loan book (NPL ratio) stood at 14.5 percent at the end of June 2023, although the lenders do not segregate their loan book to show the share of mobile loans.

The Central Bank of Kenya (CBK), however, disclosed last year when rolling out its credit repair framework that banks held Sh30 billion in non-performing mobile loans as at the end of October 2022, equivalent to 0.8 percent of the gross banking sector loan portfolio that stood at Sh3.6 trillion at the time.

For Sacco lenders, the NPL ratio stood at 8.86 percent at the end of December 2022, the latest data from the Sacco Societies Regulatory Authority (Sasra) show, with their lower default rate attributed to their model of lending which has guarantors and collateral tied to members’ shares.

Microfinance banks had by December last year recorded a default rate of 23 percent on their loan books, owing to high exposure lending to small enterprises and higher interest rate charges compared to banks.

“Out of the Sh33 billion that has been lent out [under the Hustler Fund], the outstanding loan book is about Sh10.2 billion; remember these are short-term loans so they get repaid pretty fast. Out of the outstanding amount, 29 percent is not performing on time,” the President’s adviser on matters of financial inclusion, Moses Banda, told the Business Daily.

“So, about Sh7.9 billion of the outstanding amount is performing on time. Just like any other lending, there will always be challenges of non-performing loans.”

He added that the quality of the Hustler Fund loan book has witnessed a general improvement since the introduction of credit scoring for all borrowers at the end of February.

To boost recoveries, the government has also moved to link existing affirmative action funds to the Hustler Fund, implying those who default on one are barred from accessing another until they repair their credit scoring.

The government says that credit scoring under the Hustler Fund is reviewed once every four months to ensure that risk is managed prudently.

“It used to be over 30 percent and now it is coming down. It is doing pretty well compared to many other funds that the government has run in the past. We have developed new products which are tied to the Hustler Fund platform, which then means that if you don’t repay on time you cannot access another and this is helping a lot,” Mr Banda said.

The Hustler Fund is so far reported to have disbursed Sh33.3 billion worth of loans to 17.2 million borrowers, of which 7.6 million are repeat borrowers, translating to an average loan size of Sh1,936.

The fund has mobilised about Sh1.8 billion in savings, 30 percent of which are accessible after one year while the remaining 70 percent is ring-fenced towards borrowers’ pensions.

Debt shaming

Similar to other mobile loaning products, however, the spectre of defaults looms large, despite the repeated reminders by the government that such defaults would have implications when one is looking to access other State services.

Private digital lenders have not been making their default data public in the past, partly due to being unregulated until the CBK brought them under its regulatory umbrella starting March 2022.

These digital lenders had adopted tough recovery measures against defaulters, including some considered unethical such as debt shaming.

This pointed to a segment that was suffering heavy defaults, partly owing to the arms-length nature of lending via mobile platforms.

Banks on the other hand have much more developed Know Your Customer rules, allowing them to better assess credit risk, which also helps in debt recovery in case of default.

The lenders are also able to offer collateralised credit to borrowers, which can be liquidated in default cases and used to settle all or part of the unpaid dues.