The Hustler Fund issued loans worth Sh465 million to 809,351 Kenyans who had not registered for the product, exposing flaws in the operations of a microcredit scheme targeting low-income groups.
Auditor General Nancy Gatongo revealed that people not included in the fund received cash during the first seven months of its operation even as defaulters rose to more than Sh8.2 billion by the end of June last year.
“It was noted that 808,047 people were issued initial loans worth Sh464,700,721 before they opted for the financial service or product,” Ms Gatongo revealed in a report on the fund’s operations up to June 2023.
“In these circumstances, it was not possible to confirm whether loan payments made to various clients complied with regulations and whether the loans were accurate and free from tampering,” Ms Gatongo adds in the report signed last month.
President William Ruto launched the fund in March 2023 as part of his election manifesto to support low-income groups.
The fund issues loans of between Sh500,000 and Sh50,000 to individuals for 14 days at an interest rate of eight percent per annum. For businesses, the fund distributes credit between Sh10,000 and Sh200,000 with individual owners paying an annual interest rate of seven percent.
The audit also inquires into the Fund's management's violation of the credit rating model as a basis for determining creditworthiness, finding it to have been lending excessive loans to the tune of Sh220 million given to over 5,000 people who did not qualify for such borrowing.
“However, an examination of loan records reveals that the Fund disbursed loans that exceeded the prescribed limits as follows; Loans were issued to 238,707 persons amounting to Sh420,312,323, which exceeded the initial loan limits by Sh219,615,242. The loans included 5,070 persons who were not eligible for on a loan,” the audit notes, with Hustler Fund’s system configured to ensure payments don’t exceed limits.
It also notes that Safaricom overcharged borrowers who defaulted or were in arrears amounting to Sh368 million, which is contrary to the law which sets interest and administrative fees at eight percent or 9.5 percent in the event of a borrower default.
This exposes the mobile network operator to legal action that could result in a fine of up to Sh10 million for violating the Financial Inclusion Fund Regulations 2022.
“The interest or administration fee payable by a beneficiary on a financial service or product provided under these Regulations shall be a maximum of eight per cent per annum on the reducing balance: Provided that, in the event of a default by the beneficiary, the interest or administration fee payable” shall be Nine and a half percent on the reducing balance,” the regulations state.
But the Auditor General points out that despite the legal requirements, Safaricom imposed fines on borrowers and renewal fees of up to 4.95% and 0.39% respectively.
“However, it was observed that Safaricom imposed extension fees at the rate of 0.195 to 0.392 percent and penalty fees at the rate of 0.13 to 4.95 percent on beneficiaries amounting to Sh368,760,229 in contravention of the provisions of the law and regulations.” Ms. Gatongo notes.
The review also questions the fund's failure to provide evidence of spending more than Sh450 million on goods and debt repayments, lending hundreds of millions of shillings to those who did not sign up to the fund, detaining clients who lacked ID cards, and making more loans before it did so. Payment of initial packages.
The government established the Hustler Fund in November 2022 and injected Sh12 billion in seed capital to lend to the target group. More than 17 million of the 21.28 million Kenyans who opted in had applied for and received loans worth Sh32 billion by the end of June 2023.
But the auditor points out that in the first seven months of the fund's operations, its management was already violating lending principles and could have sunk more than Sh8 billion in loans it defaulted on.
“Of the total loans disbursed, a balance of Sh10,950,075,614 had not been repaid as at June 30, 2023,” the Auditor-General notes, noting that Sh10.5 billion of the amount were unpaid principal loans.
Of the Sh10.5 billion loans, Sh8.2 billion defaulted because borrowers had not made any payments for more than three months. “In these circumstances, recovery of outstanding loans totaling Sh8,219,087,056 may result in loss of public funds,” Ms Gatongo noted.
But what led to the defaults was a host of failures by Hustler Fund management, including retaining clients who did not have a national ID card, the key identifier for all beneficiaries, and issuing loans worth Sh161.9 million to about 114,213 Kenyans before the loans were repaid. Previous and closed. 129,315 Loan accounts amounting to Sh81.6 million have not been repaid.
“However, their loan repayments cannot be traced.
“The management did not provide any proper explanation to explain why the loan accounts were closed before the loans were repaid,” the audit reveals.
The audit also reveals that about 2,701 loan accounts worth Sh2 million could not be traced despite being issued.
“Analysis of loan disbursement data at KCB Bank revealed that customer loans were uniquely identified by the loan ID number. However, it was found that there were loan ID numbers that were used to process more than one loan as 867 loan IDs were used to process 1,978 loans worth 477,928 Shilling adds that this is an indication that the loan management system is not configured properly.
Ms Gatongo registered for the fund an “opinion disclaimer”, meaning that its financial statements showed “serious and significant misstatements”, arising from insufficient information, limited scope, inadequate or lack of appropriate records “such that I was unable to form an opinion report”. in financial operations.”
She noted that after the Fund released its financial statements for audit on September 29, 2023, it later submitted its amended financial statements on May 3, 2024, just one day before she signed the report.
“However, source documents to support the financial statement balances such as cash books and general ledger were not made available for audit review. Therefore, it was not possible to confirm the source and authenticity of the balances in relation to the components contained in the trial balance and financial statements,” Ms Gatongo recalled, while noting He also noted that the data had glaring inconsistencies, including page numbering.
