Borrowers of the State-backed financial inclusion initiative known as the Hustler Fund are experiencing a higher rate of default compared to borrowers from commercial banks, SACCOs, and microfinance banks. This trend mirrors the challenges faced by mobile lenders who offer unsecured loans to individuals in the informal sector.
Out of the Hustler Fund’s outstanding loan amount of Sh10.2 billion, approximately 29 percent is classified as “portfolio-at-risk,” indicating that borrowers have not fulfilled their repayment obligations according to the agreed schedule. This translates to around Sh2.9 billion of loans being in default. The Hustler Fund commenced operations at the end of November 2022, offering personal loans starting as low as Sh500.
In contrast, the overall ratio of non-performing loans to the loan book (NPL ratio) for the banking sector stood at 14.5 percent by the end of June 2023, though the specific share of mobile loans within this ratio is not specified.
Notably, the Central Bank of Kenya revealed last year, as it introduced its credit repair framework, that banks held Sh30 billion in non-performing mobile loans by the end of October 2022. This figure represented 0.8 percent of the gross banking sector loan portfolio, which was valued at Sh3.6 trillion at the time.
SACCO lenders fared better with an NPL ratio of 8.86 percent at the end of December 2022. This lower default rate was attributed to their lending model, which includes the use of guarantors and collateral tied to members’ shares.
Microfinance banks, however, recorded a higher default rate of 23 percent by December of the same year. This was primarily due to their substantial exposure to lending for small enterprises, coupled with comparatively higher interest rates compared to traditional banks.
Moses Banda, the President’s adviser on financial inclusion, highlighted that out of the Sh33 billion disbursed under the Hustler Fund, Sh10.2 billion remained as an outstanding loan book. Approximately 29 percent of this amount is not performing according to schedule. Banda emphasized that non-performing loans are a common challenge in lending and noted that the quality of the Hustler Fund’s loan book has improved since the implementation of credit scoring for all borrowers in February.
To address the issue and improve loan recoveries, the government has linked existing affirmative action funds to the Hustler Fund. This means that borrowers who default on one fund will be unable to access another until their credit scores are repaired.
The Hustler Fund, which has disbursed Sh33.3 billion in loans to 17.2 million borrowers, is playing a significant role in expanding access to credit. However, as with many lending ventures, the challenge of defaults remains a concern, highlighting the need for ongoing efforts to manage risk and support responsible borrowing.