High Default Rates on Kenya’s Hustler Fund Raise Concerns

Borrowers on Kenya’s state-backed financial inclusion fund, known as the Hustler Fund, are defaulting on payments at a higher rate than those at commercial banks, microfinance banks, and Sacco lenders, reflecting the challenges that mobile lenders face when advancing unsecured loans to the informal sector.

Default Statistics:

  • The Hustler Fund, which started operations in November 2022, has an outstanding loan book of Sh10.2 billion (approximately $92 million).
  • About 29% of this outstanding amount is categorized as non-performing loans (NPLs), indicating that borrowers have not serviced these loans as per the agreed schedule.
  • This translates to around Sh2.9 billion (approximately $26 million) in non-performing loans.
  • The Hustler Fund offers short-term loans, and the default rate stands at 29% for the outstanding amount.

Comparison with Other Sectors:

  • In the banking sector, the overall non-performing loans to loan book ratio (NPL ratio) stood at 14.5% at the end of June 2023.
  • Sacco lenders had an NPL ratio of 8.86% at the end of December 2022, attributed to their lending model that involves guarantors and collateral.
  • Microfinance banks recorded a default rate of 23% on their loan books as of December 2022.

Efforts to Improve Recovery:

  • The quality of the Hustler Fund’s loan book has seen improvement since the introduction of credit scoring for all borrowers in February.
  • The government has linked existing affirmative action funds to the Hustler Fund, meaning defaulters are barred from accessing another fund until they repair their credit scoring.
  • Credit scoring under the Hustler Fund is reviewed every four months to manage risk.

Impact on Borrowers:

  • The Hustler Fund has disbursed Sh33.3 billion (approximately $300 million) worth of loans to 17.2 million borrowers.
  • The fund has mobilized about Sh1.8 billion in savings, with 30% accessible after one year and the remaining 70% reserved for borrowers’ pensions.
  • Defaults on the Hustler Fund could have implications for accessing other state services.

Challenges in Mobile Lending:

  • Mobile lenders face challenges due to their arms-length lending nature, which often results in defaults.
  • Private digital lenders, previously unregulated, have adopted tough recovery measures, including debt shaming.
  • Banks have more developed Know Your Customer rules and can offer collateralized credit, aiding in assessing credit risk and debt recovery.

Despite the efforts to enhance the Hustler Fund’s performance and control defaults, the challenge of managing non-performing loans remains, echoing concerns faced by various lending institutions, particularly in the digital lending sector.