Business

Taxpayers face billions in pension burden as uptake of hustler loans rise

Economy

Tuesday December 13 2022

hustler

President William Ruto and Prime Cabinet Secretary Musalia Mudavadi during the launch of the Hustler Fund at Green Park Terminus, Nairobi. PHOTO | NMG

Taxpayers are facing an escalation of the pensions bill running into billions of shillings following the government’s contribution to the mandatory long-term savings for borrowers on the Hustler Fund. 

Those saving on the Hustler Fund will see the State put in a shilling for every two put as pension remittance, up to a maximum government contribution of Sh6,000 per annum.

The State will require at least Sh1.7 billion annually for the matched pension savings, an additional burden given the more than Sh171.8 billion theState will require in the year to July to cater for retired civil servants.

Under the terms of the fund launched on December 1, a borrower receives 95 per cent of the amount applied for, while the remaining 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.

The Ministry of Co-operatives and MSMEs said less than a week after President William Ruto launched the fund—a total of Sh3.75 billion had been disbursed to borrowers on the fund, via 6.57 million transactions. 

Some 10.7 million Kenyans have already opted into the fund.

From these disbursements, some Sh187.6 million has gone into borrower savings, out of which Sh131.3 million (70 per cent) has been designated as pension remittance that requires Sh645.6 million in matching government contribution.

If this amount is borrowed and repaid afresh every 14 days, the government would need to pump in about Sh1.7 billion into matching borrower pensions for the next year, but the amount is likely to be much higher as the Fund grows its loan book.

This is because cheap, short-term loans (that have a 14-day term) are likely to be taken at a high frequency. The fund’s loans are pegged at a minimum of Sh500 and a maximum of Sh50,000.

The Sh50 billion Hustler Fund will, therefore, go through borrowing and repayment cycles that will effectively raise the total value of transactions beyond the fund size, with each new loan eligible for a pension boost from the State.

Mobile loans that have short repayment terms have tended to move large volumes due to the frequent repayment and borrowing cycles. 

Safaricom’s popular Fuliza overdraft facility which was launched in January 2019, in partnership with Commercial Bank of Africa (now merged into NCBA) and KCB has emerged as a leading mobile loan, disbursing Sh1.5 billion daily.

READ: Sh17m an hour welcome for Hustler Fund loans

By the end of last year, disclosures by NCBA showed, the facility had cumulatively transacted $9.12 billion (Sh1.12 trillion) in loans in its first two years.

Another Sh288 billion was borrowed through the facility in the six months to June this year.

Fuliza had attracted 31.9 million users by last December, pointing to the popularity of the easy-to-access short-term mobile credit facilities that will now include the Hustler Fund.

It also points to the potential of the fund to raise transactions worth tens of billions of shillings more in coming months, especially due to its friendly interest terms that will see borrowers pay an annualised interest rate of eight per cent, which translates to 0.3 per cent for a 14-day facility.

The Hustler Fund is a key policy pillar for President Ruto’s administration, which rode into power on promises to lift the economic welfare of those at the bottom of the economic pyramid.

While the current fund is targeting borrowers, who have been struggling to access credit from formal lenders who charge high interest on the perception that they carry a high risk of default.

This means that Hustler Fund is likely to find a steady stream of takers, reflected in the first week’s high registration and uptake rate.

The government will also be launching similar funds in the future targeting SMEs and start-ups and a facility to provide loans of up to Sh100 million to SACCOs.

ALSO READ: Hustler Fund defaulters given early access to savings

In the current fiscal year, the government has budgeted Sh171.83 billion in pension and gratuity payments — rising from Sh145.6 billion last year— on the back of a fast-ageing public service.

To address the strain of catering for retirees’ dues from tax revenue, the government last year rolled out the contributory Public Service Superannuation Scheme (PSSS), which saw civil servants join workers in the private sector in contributing to their pension.

The government matches the contributions with an amount equivalent to 15 per cent of every worker’s monthly salary.

The government had operated a non-contributory pension scheme since Independence, fully financed through the Exchequer.

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Jay Ndungu

Jay is a computer scientist and journalist with a passion for the intersection of technology and society. He has a background in computer science, developing a deep understanding of the technical aspects of the industry, including programming languages and software development methodologies. Currently, He writes for Nairobi Times, covering a wide range of topics including technology, politics, sports, and entertainment. With his unique combination of technical knowledge and journalistic experience, Jay brings a unique perspective to the stories he covers, able to explain complex technical concepts in an easy-to-understand manner. His work is dedicated to bridge the gap between technology and society, and to make people more aware of the potential of technology to make the world a better place.

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