The State should fix the loophole that favours Hustler Fund defaulters in terms of giving them early access to savings compared to good borrowers who will wait for one year.
When one borrows from the State-backed fund, five per cent of the amount is automatically deducted and retained for savings and pension.
The savings component, representing 30 per cent of the retained amount, can be accessed after 365 days.
Defaulters, however, can take the savings once they settle their debt in full. This is quite surprising and runs counter to what one would expect.
It does not make sense to reward default and punish those servicing their loans on time.
Failure to fix this loophole will encourage borrowers on the mobile-based platform to default at a marginal cost to have the option of early access to their savings.
Designers of the Hustler Fund may have expected that most of the defaults will last for weeks or months in which case the growing interest burden will wipe out the savings.
What they failed to anticipate is that the loophole can encourage short-term default purely aimed at unlocking the savings.
A person borrowing Sh10,000 at the annual rate of eight per cent will, for instance, incur total interest expenses of Sh30.67 over 14 days. On day 15, which marks the entry into default, an additional interest of Sh2.6 will be due and will take the total cost of the loan to Sh33.27.
On settling the debt, however, a borrower will be free to take the Sh150 that will have been deducted as the short-term savings component of the scheme.
A person who borrowed a similar amount and repaid it within 14 days will, on the other hand, have to wait until after 365 days to access the savings.
The government should either remove the loophole or allow all borrowers the option of early access to their savings. This will be fair to all.