President William Ruto is seeking a deal with fintechs such as Safaricom to disburse cheaper loans to small traders at single-digit interest rates.
The planned partnership will see the State rely on Safaricom’s lending infrastructure -- that has facilitated its credit products Fuliza and M-Shwari -- to offer loans to small and micro businesses under the so-called ‘hustler fund’.
It reflects a policy shift from previous administrations that have relied on commercial banks to disburse State-owned affirmative action funds such as Uwezo Fund.
Under the deal, Safaricom and in conjunction with local banking partners will earn commissions for administering the ‘hustler’ loans.
The ‘hustler fund’ will provide State-backed concessional loans to small businesses that have struggled to access financing from mainstream banks.
The Sh250 billion fund will be the centerpiece of President Ruto’s job creation agenda, especially with the outgoing government having extended the hiring freeze in parastatals, dashing the hopes of thousands of jobless Kenyans in an economy where companies are shedding jobs.
“The government of Kenya, and I have the nominee for Treasury and the nominee ICT here, …will be working with you in the fintech space because we want to work on a credit [facility], especially for micro, small and medium enterprises,” Dr Ruto told the chief executives of Safaricom, KCB and NCBA in Nairobi Wednesday.
“In the short-term, the assignment my good friend Eliud Owalo (Cabinet Secretary nominee for ICT) and Prof Njuguna Ndungú [Cabinet Secretary nominee for National Treasury] will have is to structure with yourselves [Safaricom and its partners] the hustler fund.”
Prof Ndung’u, the 62-year-old former central bank governor, is a key architect of Ruto’s so-called bottom-up economic model, a pro-poor programme that seeks to channel government resources to industries that can create the most jobs such as farming and small businesses.
M-Pesa offers a range of payment services, loans and savings to more than 30 million active users in Kenya.
Fuliza is underwritten by Kenyan banks KCB Group and CBA Group, which already had partnerships with Safaricom to offer short-term loans on the M-Pesa platform under the M-Shwari product.
The mobile money service has become the principal driver of profit growth for the dominant telecoms operator, as revenue from traditional voice and text services has flattened off.
The State is seeking to hinge the M-Pesa network to offer microloans, whose interest will be capped at single digit.
Presently, mobile phone-based micro-lenders charge borrowers annualised interest rates of more than 100 percent.
The President had in his campaigns promised a new economic order that would address unemployment and lack of opportunities for low-income earners through affordable credit. He has pledged to pump in billions of shillings to support small traders such as mama mboga [grocery retailers] and the boda bodas [two-wheel taxi operators].
The establishment of a ‘hustler fund’, which he previously said will initially have Sh50 billion, is geared towards providing cheap and easy loans for low-income earners without collateral under his bottom-up economic model.
“Progressively, and the assignment that I am going to give to these two gentlemen [nominees for Treasury and ICT ministries] is to work with you in the private sector to develop a product where people – a mama mboga in Ruaka [ a Nairobi suburb] and a boda boda person – also have access to credit at single-digit rates.
"That is the space where we have the largest opportunity. It employs almost 80 percent of our population and, yet, they are constrained by access to credit,” Dr Ruto said.
He added: “I have listened to many of them on the campaign trail, and I am willing to work with you in a public-private arrangement so that we can mitigate some of the risks that come with lending to that category of Kenyans.”
Despite banking industry data showing over the years that the rate of default among small businesses was lower than that for corporates, lenders continue to assign a higher risk profile to the MSMEs, which usually prices them out of the credit market.
Findings of a 2016 survey by the Kenya National Bureau of Statistics (KNBS), for instance, suggested that about 71 percent of the 7.4 million MSMEs in 2015 got less loans than they had applied for from the banks, with about 86 percent forced to rely on family and friends for funding.
The previous administration, in which Dr Riuto served as a Deputy President, sought to address access to funding for low-income groups through affirmative action funds.
It created the Uwezo Fund in 2014 to support enterprises owned by youth, women and people living with disabilities (PWDs). The debt-ridden revolving fund followed similar ones created by the Mwai Kibaki government – Youth Enterprise Development Fund and Women Enterprise Fund.
The affirmative action funds have over the years chalked up massive bad debt, creating a liquidity crisis that has threatened their sustainability.
For example, Uwezo Fund chief executive Peter Lengapiani said in June that only Sh2.5 billion out of the Sh7 billion issued since 2014 had been repaid, a default rate of 64 percent.
This is much lower than the default rates for digital mobile lenders like M-Shwari and KCB-M-Pesa as well as Fuliza – an overdraft facility run by Safaricom in partnership with KCB and NCBA.
“I am very confident that if we give Shiko [a mama mboga he used as an example to demonstrate high cost of mobile loan] and her team the opportunity to borrow at single-digit interest rates, they can double if not triple their business,” Dr Ruto said.
“It is good for everybody. It is good for fintechs, banks, taxpayers, taxman and also me. I think we are going to have a win-win arrangement.”