Introduction
One of the election promises made by the Kenya Kwanza Alliance in the Kenya Kwanza Plan, The Bottom Up Economic Transformation Agenda 2022 to 2027, (“the Kenya Kwanza Manifesto/ the Manifesto”) was the setting up of a ”Hustlers Fund”.
The Hustler Fund is first mentioned in the Manifesto regarding the promise of transforming the micro, small and medium enterprise (MSME) economy. The Kenya Kwanza commitment on the Hustler Fund on this issue is defined as follows:
Access to finance: We will commit to Sh 50 billion a year to provide MSMEs with 100 percent access to affordable finance through SACCOs, venture capital, equity funds and long-term debt for start-ups and growth oriented SMEs;
Thereafter, the Hustler Fund is mentioned in the Manifesto about seven more times detailing how the Fund should be leveraged in the following sectors:
- in healthcare to aid in access to NHIF by setting up occupational schemes.
- in promoting the digital superhighway and creative economy and music.
- to promote e-mobility in development of the nascent EV motorcycle assembly industry.
- in the financial services sector to promote access to affordable credit while cushioning those affected by predatory lending.
- on the women agenda to provide access to finance and capacity building for women led groups like chamas and table banking groups; and
- to aid vulnerable citizens like persons living with disability (PWDs) by ringfencing an adequate percentage of the hustler fund for PWDs.
The Draft Public Finance Management (Financial Inclusion Fund) Regulations, 2022, (“the Regulations”) which are available at the National Treasury and Economic Planning website, are aimed at delivering on the promise for a Hustler Fund.
The term “hustler” which gained prominence in the campaigns for the August 2022 General Elections in Kenya generally refers to workers in the lower economic segment with low and/or irregular incomes and includes those who work in the informal and MSME sector.
Most hustlers lack access to benefits such as health insurance and pensions which are mostly accessible to the higher income earners. This lower income segment of the population also has challenges such as access to affordable credit. They are prone to predatory lenders such as shylocks and expensive digital loans which are advanced at very exploitative interest rates and also employ very crude methods of loan recovery in the event of default.
It is crucial that the Regulations address the concerns of this large segment of the economy since MSMEs contribute to about 80% of employment opportunities in Kenya and almost 50% of the Gross Domestic Product (GDP) of the country.
What do the Regulations contain and do they reflect the promises made to Kenyans in the Manifesto about the Hustlers Fund?
A Review of the Provisions of the Regulations
Definitions
This section contains definitions of various terms and phrases which deal with the targeted beneficiaries and entities. The official name of the Hustler Fund is Financial Inclusion Fund (“the Fund”).
The phrase “bottom of the pyramid” means the largest but poorest socio-economic group with low disposable income.
The Regulations state that “enterprise”, “medium enterprise” and “micro-enterprise” has the same meaning assigned to it under section 2 of the Micro and Small Enterprises Act, 2012 (MSE Act)
Noting that the MSE Act defines “enterprise” as an undertaking or a business concern, whether formal or informal engaged in the production of goods or provision of services, it is clear the Hustler Fund is intended for micro, small and medium enterprises in both the formal and informal sector.
The MSE Act defines micro enterprises as firms with an annual turnover not beyond KES. 500, 000/= (plant & equipment of a value of up to 10 million for manufacturing sector and 5 million for services sector); employs less than 10 people and has total assets and investments as defined by the Cabinet Secretary (CS) from time to time. This is the CS in charge of the Ministry of Co-operatives and Micro, Small and Medium Enterprises, Hon. Simon Chelugui.
The MSE Act defines small enterprises as firms with an annual turnover between KES. 500, 000/= and 5 million (plant & equipment of value of up to 10-50 million for manufacturing sector and 5-20 million for services sector), employs 10 to 50 people and has total assets and investments as defined by the Cabinet Secretary from time to time.
Of note is that the term “medium enterprise” is not defined in the MSE Act.
The Regulations state that the capital of the Hustler Fund from monies appropriated by the National Assembly shall be 50 billion shillings. It is clear that the Manifesto intended it to be a commitment of 50 billion per year.
The Regulations should clarify whether it is 50 billion per annum or if the amount is a one-off injection. The sources of money for the Fund also include income generated from the Fund such as interest and investment return and also grants, donations and gifts to the fund.
Establishment, Objects and Purpose of the Fund
The objects of the Fund are provided in Regulation 7. Besides expanding access to credit to natural persons and groups such as chamas, table banking groups, SACCOs and start-ups, the Regulations also contain other objectives which are aimed at:
- Strengthening the financial and operational capacity of the informal sector membership institutions such as chamas, table banking groups etc.
- Addressing the low participation of non-formal wage workforce such as entrepreneurs, small holder farmers and other self-employed persons in health insurance, retirement benefits schemes for the purpose of achieving universal health coverage and universal social security.
Eligibility – Accessing Funding under the Fund
Section 2 defines eligible person as follows:
“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 question of who qualifies for monies under the Fund is also further elaborated in Regulation 16. Eligibility applies to both natural persons and enterprises such as micro, small and medium enterprises, SACCO societies, chamas, groups, table banking groups.
Regulation 16 provides for the following requirements:
Further to the eligibility criteria set in these Regulations, an eligible person may qualify for a loan under these Regulations –
a) where the applicant is a natural person, if that person-
i) is eighteen years of age and above;
ii) is a holder of a Kenyan national identification card; and
iii) fulfils any other conditions as may be determined by the Board.
b) where the applicant is a micro, small and medium enterprise, SACCO societies, chama, group, table banking group or other association, if that applicant –
i) has all members who are eighteen years of age and above;
ii) is registered with the relevant government institution; and
iii) meets any other conditions as may be determined by the Board.
As indicated above, the Micro and Small Enterprises Act, 2012 defines micro and small enterprises but it does not define medium enterprise, contrary to what is indicated in section 2 of the Regulations.
It can be deduced from the eligibility requirements that medium enterprises are those whose turnover exceeds that of small enterprises as defined above i.e. turnover above 5 million shillings but below 100 million shillings.
The provision of a Fund to cater not only for micro and small enterprises but also medium enterprises is a step in the right direction as the medium category tends to fall through the cracks in access to funding, despite its great potential to generate employment. This is because the credit opportunities in the market may be too little for them or the terms applicable to the higher market segment may not be friendly to them.
Management of the Financial Inclusion Fund
The Fund shall be led by an Advisory Board (“the Board”) made up of seven members, including the non-executive Chairperson.
The Regulations provide for the qualifications, functions and term of the Board. The Board shall serve for a term of 3 years, renewable for another term of three years. The functions of the Board include providing oversight to the Fund, determining additional disbursement conditions, approving and developing policies relating to the Fund.
The Board under Regulation 12 (g) is tasked with setting the criteria and conditions for accessing the various financial services under the Fund, including the rate of interest and furtherance of loans. The Board also plays other important functions such as promoting access to the services of the Fund and mobilizing resources for the Fund.
The Chief Executive Officer of the Board
The Board is also responsible for recommending to the Cabinet Secretary responsible for matters relating to micro, small, medium enterprises, names of three persons for the position of the Chief Executive Officer (CEO). The CEO shall be the secretary of the Board and is an ex-officio member of the Board.
The CEO shall be the Administrator of the Fund with the functions listed in Regulation 13 and 16. These functions of the CEO include operation of bank accounts, day to day administration of the Fund, ensuring books of accounts are kept, consulting with the Board on matters relating to policy and administration of the Fund, among other roles.
The Fund shall have a Secretariat which is headed by the CEO. Prior to appointment of the Secretariat, the Cabinet Secretary responsible for matters relating to micro, small and medium enterprises may second public servants to perform the duties of the Secretariat.
Hustler Fund Advances Loans NOT Grants – No Free Government Money
Regulation 19 on Repayment states categorically that borrowers are expected to repay the financial product advanced to them. It is not free money. The Regulation reads as follows:
19 (1) a financial product advanced under these regulations shall be repaid in full within the period determined in the agreement.
(2) All sums due to the Fund shall be recoverable as debts due to the Fund.
Regulation 18 and 19 contain provisions allowing the Fund to lend to a financial intermediary for onward lending to a business person or micro, small and medium enterprises.
The Regulations state that such an intermediary may provide for matching funds and that where matching funds are provided for money under the Fund, the interest rate shall be lower compared to where non-matching funds are provided.
The Regulations cap the administrative costs of the Fund to 3% of the approved budget. This is an important requirement as it prevents the wastage of the money that should be available for lending to “hustlers” on unnecessary administrative expenses. This is quite a decent amount for administrative costs, since 3% of 50 billion is 1.5 billion.
Proper administration of such a massive Fund requires sufficient resources or else the Fund will be plagued with challenges such as mismanagement of funds and delays in disbursement and recovery of loans, which may hamper realization of the promises made in the Manifesto.
To ensure financial accountability and prudent use of resources, the Regulations state that existing financial and procurement regulations, shall to the extent possible apply to the Fund. The Regulations also provide for the investment of funds that are not readily required in government securities, the requirement to keep accounts and submit to the Auditor General accounts on an annual basis for auditing purposes.
The Regulations also provide for protection of the Board and staff from personal liability for any matter or thing done bona fide, in executing the Regulations. It follows that any actions that are not done in good faith, such as misappropriation of funds, would not shield the Board or staff from personal liability. The Regulations also provide for winding up of the Fund.
Offences and Penalties
There is a misconception that failure to repay loans advanced under this Fund will result to arrest. A reading of Regulation 26 which provides for offences and penalties reveals that this is not the case.
Under the Regulations, the following offences attract a fine not exceeding ten million shillings or a term of imprisonment not exceeding five years, or both for:
A person who:
- misappropriates any funds or assets of the Fund, or assists or causes any person to misappropriate or apply the funds otherwise than in the manner provided in these Regulations; or
- fails to give information or gives inaccurate or misleading information or falsifies information or misrepresents information required under these Regulations; or
- having an official duty or being employed in, or in connection with the administration of these Regulations, fails to deal with all documents, information, returns and forms relating to applications for loans or to the granting of loans under these Regulations as secret and confidential; or
- having possession of, or control over, or access to, any documents, information, returns or forms and communicates anything contained therein—
- to any person other than a person to whom he is authorized by the Board to communicate it; or
- otherwise than for the purposes of these Regulations,
Commits an offence and shall be liable to a fine not exceeding ten million shillings or a term of imprisonment not exceeding five years, or both.
Recommendations on Improving the Public Finance Management (Financial Inclusion Fund) Regulations, 2022
Do the Regulations as currently drafted, meet the needs and expectations of the target group and do they promote financial inclusion for this “bottom of the pyramid group” i.e., the largest but poorest socio-economic group with low disposable income?
In their current state, it is not possible to tell whether the Regulations for this Fund will be “hustler-friendly” since they lack critical details which would enable us to gauge this important element. Some of those details such as terms and conditions of the loans will likely be included in policies to be developed by the Board and the secretariat.
Interest Rates, Total Cost of Credit and Loan Limits
Upfront knowledge of cost of credit is crucial in helping borrowers make an informed decision on whether to borrow. You cannot have financial inclusion without full disclosure on interest rates and other applicable fees such as loan processing fees.
The various cost elements that will be applied to funds disbursed under the Fund will determine the actual cost of credit and whether the loans advanced under the Fund are affordable and accessible to the “bottom of the pyramid”.
Determination of interest rates and conditions of borrowing is listed as one of the functions of the Board in Regulation 12 (g). Selection of a Board that is sensitive to the needs of the target group will be essential in ensuring that the terms set by the Board are appealing to the target group they are meant to address.
It is not clear why the Regulations have taken the approach of leaving the determination of interest rates and conditions of borrowing to the Board since this denies the Fund certainty and predictability. It is easier to do upward revision of interest rates, other fees and conditions contained in a policy document compared to terms contained in a Regulations.
This approach is different from that taken in the revoked Public Finance Management (Biashara Kenya Fund) Regulations, 2021 where the interest rate for that Fund had been set in Regulation 16 as being at the rate of six per cent per annum on a monthly reducing balance.
The Despatch from Cabinet dated 15th November 2022 stated that in the first phase expected to be rolled out by 30th November 2022, the loan limits will be determined by the borrower’s credit score and capped at Ksh. 50, 000. As the first single digit credit product in the country and in the region, the loan interest will be capped at a maximum of interest rate of 8% per annum computed on a pro-rated basis.
Considering this is a Hustlers Fund that is supposed to be different from other credit products in the market, the loan limits which are linked to a credit score and an interest rate of 8% are quite underwhelming. Also, considering the Biashara Fund that never came to be (referenced above) had proposed advancing businesses loans at the rate of 6%, the Hustler Fund loans at the rate of 8% are not very affordable.
The limit of Ksh. 50, 000 is too little and far from optimal. Considering that the Regulations also apply to enterprises which have turnovers of 5 million and upto 100 million, loan limit of Ksh. 50, 000/= will be of little or no value to the medium enterprise category.
However, even for the lower cadre borrowers, a loan limit of Ksh. 50,000/= largely limits the kind of businesses one can invest in. It costs more than 50, 000/= to buy a decent motorbike. For creatives intending to venture into the creative space, you need more than 50, 000/= to procure a decent laptop, camera or video cameras, a smart phone or other tools of trade like musical instruments.
If your business idea has any element of value addition or manufacturing, however basic, the Hustlers Fund is unlikely to offer you sufficient credit to set you up. The initial proposed limits fail to deliver on the promises made in the Manifesto on how the fund was to be leveraged in certain sectors.
The Objective of Strengthening Financial and Operational Capacity
Training and capacity building of the target group is key if the Fund is to have long term positive impact on the economy.
Regulation 7 (2) (c) lists the objective of strengthening the financial and operational capacity of the informal sector membership. The implementation of this objective must be done in a practical way, tailored to fit the target audience.
Availing affordable credit without accompanying it with the necessary education is a recipe for disaster. There should be opportunities for the borrowers to be trained on the basics of business and money in practical and simple ways. Education on how and why to register your business, grow it and scale it in a sustainable manner are helpful.
Training on financial principles like how compound interest works both for savings and debt and how to grow your money (no matter how little) over time are a good starting point. Easier access to credit without support will only result to increased indebtedness.
Repayment Periods
One of the challenges with the mobile and other loans available to the category of citizens the Fund is targeting is the short duration of repayment of loans, usually 30 to 60 days. The shorter the duration, the more hectic it is to repay and the higher the risk of default.
If the loans are spread over a longer and reasonable duration, it allows the borrower more time to repay the loan while still leaving them with sufficient funds to cover their basic needs and business-related obligations.
Patient Capital and Grace Periods
Another drawback with the current funding in the market is that it does not allow for grace periods to permit borrowers to finish setting up their business ventures or for the investment to start giving returns before loan recovery can start. Recovery starts in the first month after lending, regardless of the nature of the investment.
Allowing a reasonable grace period depending on the type of business venture the borrower is engaged in may allow for better chances of repayment since the amount owed does not start to accumulate immediately. An initial default creates a sense of anxiety and panic in the borrower, which may have other effects such as reduced output.
Another approach would be to allow lower repayments for the initial months before the borrower starts reaping returns from their investment and increase the loan repayment amount after a couple of months.
Considering that this Fund comes to fill in a gap in the credit market in Kenya, it should explore creative ways of addressing the needs of the target group and not simply copy and paste what existing commercial lenders are currently doing.
Loan Recovery Methods
The Board should ensure that the methods employed to recover the loans in case of default are humane. These should include opportunities to meet the loanees to understand the challenges they are experiencing with loan repayment and flexibility to adjust the loan repayment period or even apply a moratorium or waiver depending on the circumstances of each case.
It is expected that the Hustler Fund will not employ the crude methods used by digital lenders such as calling employers or random people on the borrower’s phone book as a way of embarrassing the borrower to pay. Getting a hustler fired from their job will not aid in repayment.
The Board should also consider using incentives, not just penalties, to encourage repayment. For instance, those with a good repayment history could benefit from lower interest rates.
Application of Loan Moratoriums Waivers or Certain Cases
The policies developed by the Fund should allow for loan moratoriums or waivers in certain exceptional circumstances. Noting that this bottom of the pyramid group has no access to protections such as insurance or savings and most are daily workers, circumstances such as serious ill health, accidents or disability could make it impossible even for a willing borrower to repay the loan.
There should be room to negotiate repayment terms in case of permanent or temporary business closures occasioned by factors beyond the borrower’s control. For instance, during the COVID-19 pandemic, owners of businesses that had to close for a certain duration, such as bars and restaurants, needed a total moratorium during the period of closure.
While it may be hard for private lenders to extend such flexibility, it is expected that this Fund should exercise more patience than commercial lenders in case of such unexpected events.
The policies adopted by the Fund should provide for clear and strict circumstances under which a loan moratorium or outright waiver may be extended to eligible borrowers and the application, verification and approval process for a moratorium or waiver.
Specific Reference to the Data Protection Act, 2019 and the Regulations thereunder
The Regulations should make specific reference to the provisions of the Data Protection Act, 2019 including requiring strict compliance with the Data Protection Act.
Noting the magnitude of data that the Fund is likely to be collecting, the high number of data protection breaches in the lending sector industry and the possibility that it will eventually have to adopt automated processing, the following should be included in the Regulations from the onset:
- the need for the Fund to develop a Data Protection Policy detailing the rights of data subjects, the need to conduct Data Protection Impact Assessments, the procedure for handling data breaches and safeguards, amongst other provisions.
- The appointment/designation of a Data Protection Officer within the Fund.
- The procedures for lodging, admitting, and handling data protection related complaints.
Offences and Penalties
The Regulations should include the following additional offences:
- Requiring a bribe, kickback, or other favour or benefit in cash or in kind to approve a loan or speed up the process of disbursement of the loan or effect a loan moratorium or waiver.
- Failure to follow the “first-come first-serve basis” in processing and approving loans, except where the Regulations or written policies allow for official fast track mechanisms for certain categories of applicants e.g. persons living with disability.
- Approving or fast tracking the loan approval process based on factors such as nepotism, cronyism, tribalism, or such other non-objective requirements.
- Knowingly advancing funds to a non-eligible person or enterprise.
Final Thoughts on the Hustler Fund Regulations
The effectiveness of the Hustler Fund in addressing the intentions of the Government will depend very much on the approach taken by the Board, the CEO of the Fund, and the Secretariat. This is because the Regulations are very skeletal in nature, and they have left a lot to be addressed through policy.
While this approach is strategic as it allows for flexibility whenever certain aspects of the Fund needs to be revised e.g., interest rates, it may work against the beneficiaries who may have to deal with uncertainty of not knowing when changes are introduced. The approach for providing skeletal regulations creates room for arbitrary actions and decisions and abuse of power.
The capital of the Fund, this being 50 billion shillings is a colossal amount and if applied to good use, it has potential to improve the quality of life of the beneficiaries and cause a positive shift in the market, thus resulting to improved terms of credit for all citizens.
Easy access to information on the Fund, including use of concise forms and documents presented in simple language in both English and Swahili will be important. Further, the Fund services should easily be accessible at County level to avoid a situation where people have to travel to the headquarters of the Fund for services.
It is often said that the devil is in the detail. Noting that the Regulations have only provided for the skeleton, the process of fleshing it will rest with the Advisory Board, the CEO who is also the Fund Administrator and the Secretariat.
The intended annual budget of the Fund, which is 50 billion per year if we go by what the Manifesto intended, is bigger than the budget of a single County Government. It is also bigger than the budgets of most financial institutions and SACCOs, yet these entities operate under a highly regulated environment.
It is likely that in the initial foundational years before the Fund develops proper structures, the Fund will struggle to absorb the funds allocated to it and discharge its mandate efficiently. The Fund must leverage on technology and automation of systems if it is to achieve operational efficiency.
Over time, we might find that these Regulations may not suffice in terms of providing the regulatory guidance required to manage such a massive Fund. For now, it is important to beef up the draft Regulations to ensure they are fit for purpose.
For the Hustlers Fund to achieve its lofty and well-intentioned objectives, the Board and Secretariat must breathe life to the purpose and objectives of the Fund and comply fully with the Regulations and the law. It goes without saying that financial accountability, transparency and prudence must be at the core of the Fund’s operations for it to succeed.
Article authored by:
Susan Wairimu Munene, Advocate – LLB (UoN), LLM (Notts), CS
Partner, Gerivia Advocates LLP
Fourth Season Centre, JKIA Cargo Centre, 1st Floor, Office Suite B.1.1/
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P.O. Box 64859-00620
NAIROBI
Email: legal@gerivia.co.ke / susan.munene@gerivia.co.ke
Tel: 0700135555 / 0721297055
Date: 18th November 2022
