The government will tighten the collateral rules for the cheap loans provided to young people amid a spike in defaults that has seen the Youth Enterprise and Development Fund (YEDF) lose billions of taxpayers' cash.
In a new report published by the National Treasury, the government has disclosed a plan to abandon or tweak the current collateral arrangement for the loans offered through the Sh4.8 billion YEDF, a move that could herald the end of easy cash given by the State to help young people grow their businesses and reduce unemployment.
For personal loans of less than Sh100,000, the fund accepts chattels, stock and business assets as security.
For group loans, the members co-guarantee each other to cushion default on loans.
"The fund shall review its loan collateral requirements and adopt alternative loan security options and credit scoring to substitute and/or complement conventional securities e.g. use of savings," said the State Department for Youth Affairs and Creative Economy, under which the fund falls.
The lack of a credit scoring mechanism has also been the Achilles heel of another State loan programme, the Financial Inclusion Fund, popularly known as the Hustler Fund.
Just as in the YEDF, the State has struggled to recover micro-loans running into billions that it has provided to the low-income earners through their mobile phones.
Loans given by the YEDF attract an interest of six percent and a one-off management fee of one percent deducted from the loan at disbursement, which is way more affordable than the cost of money from commercial banks, whose loans are usually priced at double-digit rates.
However, like other State loans, the fund has been bogged down by low repayment rates, of around 70 percent, according to official data, an indicator that the State is having difficulties recovering the loans.
It is not clear from the report when the switch to alternative security options would take place. Moreover, there were no details on the exact credit-scoring tool that would be adopted by the fund, though most financial institutions prefer to use the risk profiles provided by the credit reference bureaus (CRBs).
The fund had indicated before that it plans to register with CRBs, a move that would see it list defaulters under the CRB regulations.
In the Treasury report, the State Department for Youth Affairs says during the financial year ending June last year, youth businesses experienced effects of low economic performance, which in turn affected loan recoveries, revolving fund kitty and loan disbursement.
The estimated cost of the kitty is Sh9.5 billion with the Treasury having disbursed Sh4.88 billion by the end of June last year.
Launched on July 1, 2007, to provide affordable loans to youth enterprises, the fund says it has disbursed loans valued at Sh4.732 billion to over two million businesses.
This is after government grants of Sh5.95 billion were pumped into the revolving kitty since its launch by the administration of the late President Mwai Kibaki.
As one of Vision 2030 projects, the country’s long-term development blueprint, the fund still has five years to run its course. The project’s estimated cost is Sh9.503 billion.
In the financial year ending June 2024, Sh324.5 million loans were disbursed under the fund, less than half of the target of Sh655 million.
Only 11,386 beneficiaries received the loans against a target of 20,391.
Besides difficulties in loan recovery, the fund has also been dogged by reports of embezzlement in its 17 years of operation with allocation to the revolving kitty dwindling.
An audit revealed that in 2016, about Sh180 million were stolen from the fund and used to purchase luxury homes, pay debts, and line the pockets of powerful individuals, law firms and companies. Senior officials of the State agency have since been interdicted over the embezzlement.
Plans to merge the revolving fund with other kitties such as the Women's Enterprise Fund and Uwezo Fund started with the administration of retired President Uhuru Kenyatta.
However, President William Ruto’s administration has not warmed up to the project.
The State Department for Youth Affairs says there are plans to revamp the fund by re-engineering its “loan products to bring forth more variety in the form of value-chained focused products powered by technology.”
“An array of digital loan products will be unveiled to enhance financial inclusion. The fund will adopt a niche lending approach to ensure that there is high impact and penetration in the target markets,” added the State Department.
