Hustler Fund borrowers will be able to access their savings immediately after they settle the short-term credit facilities, giving them an advantage compared to good borrowers who will wait for a year.
This gives them an opportunity to access the amounts – equivalent to 1.5 per cent of the principal — immediately rather than after 365 days which applies to non-defaulters.
The window to tap the savings instantly is seen to take into account the fact that interest charges will start piling up, eating into the defaulters’ reserves.
The arrangement, however, means that one can access the savings after defaulting for just a day –the 15th day— on which the additional interest burden is minimal.
“The bank shall retain the 30 per cent [of principal] intended for short-term savings … in a suspense account until full repayment of the loan,” reads the terms and conditions of the Hustler Fund Savings and Loan Product.
“Upon full repayment of a loan, the amount … shall be released to the customer who will be at liberty to withdraw it or keep it as savings.”
A person borrowing Sh10,000 at the annual rate of eight per cent will 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.
The interest rate jumps to 9.5 per cent per annum for the days on which the facility goes into default.
On settling the amount, 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.
This structure means that one can default for a day at a marginal cost and unlock the savings.
The loophole can only be exploited profitably early in the default phase since it takes about two months for the additional interest charges to match the savings.
“Any funds available in your Hustler Fund account shall be applied towards repayment of the amount due in the following order of priority … First in repayment of unpaid interest [and] secondly towards repayment of the principal amount,” the terms and conditions read. A borrower receives 95 per cent of the amount he or she applies for. The other five per cent is split into short-term savings (at 30 per cent of the amount) and pension remittance (70 per cent).
The terms are not clear whether the savings will earn a return and no indicative rate of interest was given.
Whereas good borrowers are penalised by being made to wait for a year to access savings, they stand to benefit from the government contributing to their pension pot.
“An added feature of the Hustler Fund Savings and Loan Product is that the Government of Kenya shall match the pension remittance of a customer who has not defaulted on a loan in the ratio of 2:1 such that for every Sh2 saved, the government shall add Sh1 to a maximum government contribution of Sh6,000 per annum,” the terms say.
It was not immediately clear at what point the State will match the contributions or determine the status of a borrower.
This is because short-term loans are likely to be taken at a high frequency, with a significant number of individuals switching from defaulters to good borrowers.
The Hustler Fund is in its first week and some of its features could be tweaked to address emerging challenges.
To address the risk of default, those who will be in default on day 30 shall not be eligible for loans from the fund until they fully settle all outstanding amounts.
The fund is a key policy pillar for President William Ruto’s administration. The new administration rode into power on promises to lift the economic welfare of those at the bottom of the pyramid.