The Hustler Fund issued Sh465 million loans to 809,351 Kenyans who had not registered for the product, exposing flaws in the operations of the micro-credit scheme targeted at low-income groups.
Auditor-General Nancy Gathungu has revealed that persons not listed with the fund got cash within the first seven months of its operation even as defaulters surged to cross Sh8.2 billion by the end of June last year.
“It was observed that 808,047 persons were issued with initial loan disbursement amounting to Sh464,700,721 before they opted into the financial service or product,” Ms Gathungu reveals in a report on operations of the Fund until June 2023.
“In the circumstances, it was not possible to confirm if the loan disbursements made to various customers complied with the regulations and whether the loans were accurate and free from manipulation,” Ms Gathungu adds in the report signed last month.
President William Ruto launched the Fund in March 2023 as part of his election manifesto to uplift low-income groups.
The fund issues loans of between Sh500 and Sh50,000 to individuals for a tenure of 14 days at an interest rate of eight percent per annum. For businesses, the fund disburses credit of between Sh10,000 and Sh200,000 with individual owners charged a seven percent annual interest rate.
The audit also queries the Fund Management’s flouting of the credit scoring model as a basis for determining creditworthiness, seeing it lend excessive loans to the tune of Sh220 million given to more than 5,000 people who were not eligible for this borrowing.
“However, examination of loan records reveals that the Fund disbursed loans which exceeded the set limits as follows; 238,707 persons were issued loans amounting to Sh420,312,323, which exceeded the initial loan limits by Sh219,615,242. Included in the loans were 5,070 persons not eligible for a loan,” the audit notes, faulting the configuration of the Hustler Fund system, to ensure that the disbursements do not exceed the limits.
It also notes that Safaricom overcharged borrowers who defaulted or delayed repayments Sh368 million, contravening the law which caps interest and administrative fees at eight percent or 9.5 percent if a borrower defaults.
This exposes the mobile network operator to legal suits that could see it fined up to Sh10 million for flouting Financial Inclusion Fund Regulations, 2022.
“The interest or administrative fee payable by a beneficiary on a financial service or product advanced under these Regulations shall be at a maximum rate of eight per centum per annum on reducing balance: Provided that where a beneficiary defaults, the interest or administrative fee payable shall be nine and one half per centum on a reducing balance,” the regulations state.
But the Auditor-General notes that despite the legal requirement, Safaricom charged borrowers penalties and rollover fees to the tune of 4.95 percent and 0.39 percent, respectively.
“However, it was noted that Safaricom charged a rollover fee at the rate of 0.195 to 0.392 percent and a penalty fee at the rate of 0.13 to 4.95 percent to beneficiaries amounting to Sh368,760,229 contrary to the provisions of the law and regulations,” Ms Gathungu notes.
The audit also queries failure by the Fund to provide proof of spending more than Sh450 million on goods and debt repayment, lending hundreds of millions of shillings to those who had not opted into the Fund, holding customers lacking identity cards, and extending more loans before repayment of initial packages.
The government set up the Hustler Fund in November 2022 and injected Sh12 billion in seed capital for lending to the target group. More than 17 million of the 21.28 million Kenyans who opted in applied for and got Sh32 billion loans by the end of June 2023.
But the Auditor notes that in the first seven months of the Fund’s operations, its management was already flouting lending principles and could have sunk more than Sh8 billion in loans that had been defaulted upon.
“Out of the total loans disbursed, a balance of Sh10,950,075,614 had not been repaid as of June 30, 2023,” the Auditor-General notes, indicating that of the amount, Sh10.5 billion was unpaid principal loans.
Of the Sh10.5 billion loans, Sh8.2 billion had been defaulted on since borrowers had not made any payments for more than three months. “In the circumstances, the recoverability of outstanding loans totalling Sh8,219,087,056 could result in loss of public funds,” Ms Gathungu noted.
But leading to the defaults was a cocktail of failures by the Hustler Fund management, including holding customers who had no national identity card, the key identifier for all beneficiaries, issuing Sh161.9 million loans to some 114,213 Kenyans before repayment of previous loans and closing 129,315 loan accounts with Sh81.6 million that had not been repaid.
“However, their loan repayments could not be traced.
“No proper explanation was provided by Management to explain why the loan accounts were closed before the repayment of the loans,” the audit reveals.
The audit also reveals that some 2,701 loan accounts amounting to Sh2 million could not be traced despite being issued.
“Data analysis for loan disbursements at KCB revealed that customer loans were uniquely identified through a Loan Identity Number. However, it was identified that there are Loan Identity Numbers that were used to process more than one loan whereby 867 loan IDs were used to process 1,978 loans amounting to Sh477,928. This is an indication that the loan management system is not properly configured,” the audit adds.
Ms Gathungu scored the Fund ‘a disclaimer of opinion’, meaning its financial statements showed “serious and significant misstatements,” arising from inadequate information, limitation of scope, inadequacy, or lack of proper records “such that I was not able to form an opinion on the financial operations.”
She noted that after the Fund released its financial statements for audit on September 29, 2023, it later submitted amended financial statements on May 3, 2024, just a day before she signed the report.
“However, the source documents to support the financial statement balances such as cashbooks and general ledger were not provided for audit review. It was, therefore, not possible to confirm the source and authenticity of the balances in respect of the components reflected in the Trial Balance and the financial statements,” Ms Gathungu states, while also noting that the statements had glaring inconsistencies, including pagination.
