Author: CoreNews Africa

It’s two years since Kenyan president William Ruto, in what seemed like a political gamble, rolled out a government-run microcredit scheme popularised as the Hustler Fund. Worth 50 billion shillings (US$409 million) a year over a five-year period, the low-interest loans were touted as the “magic formula” to start or grow micro, small and medium businesses. Now the fund faces an uncertain future owing to a high default rate. Eric Magale, who studies the complex relationship between finance, livelihoods and development, explains what went wrong.

What is the Hustler Fund?

Kenya’s 2022 general election campaigns were held amid a severe cost of living crisis and deepening poverty levels. The two leading candidates proposed two distinct economic strategies.

The Azimio coalition led by Raila Odinga proposed a monthly cash transfer for 2 million poor families.

But it was the proposal of the winning Kenya Kwanza coalition led by Ruto that saw the light of day. The coalition campaign self-identified as the “hustler movement” to appeal to people who were struggling economically. Ruto pledged a Hustlers’ Fund which would dispense microloans straight to mobile phones “at single-digit interest”. The intention was that the loans would be used to start businesses and help “hustlers” make their way out of poverty. They were primarily aimed at women and young people.

To qualify for a loan, all the applicant requires is a valid national identity document and a registered mobile number. A person can borrow a small amount (500-50,000 shillings or roughly US$4-400) for 14 days. The loans are given and repaid through the M-Pesa platform.

Unlike traditional loans offered by banks, loans offered under the scheme don’t require collateral. Instead, it makes use of credit scores to assess potential borrowers. The hope is that access to financial services will lift people out of poverty.

The significance of the Hustler Fund was that the government became a micro-lender. This controversial new role was applauded by the financial inclusion lobby as a way to correct failures in the credit market.

What was the background to the fund?

Digital lending entails offering loans though digital channels such as mobile applications or websites. These are integrated with a borrower’s mobile money account, through which they receive and repay their loan. As opposed to the traditional, in-person way of giving secured loans, digital lending is impersonal, given that it uses credit scores to instantaneously assess a loan application. Digital loans are also unsecured – they dispense with the need for collateral. They are often used for short-term purposes because they are small amounts with a short loan tenure.

Digital lending in Kenya started in 2012 with the launch of M-shwari. The digital lending industry grew fast while remaining unregulated. At the time of my doctoral research on the digital lending industry in 2021 and 2022, there were a few hundred digital lenders in the market. But the industry was dogged by high interest rates, stiff penalties for default and hidden fees.

Ruto’s initiative came at a time when the digital credit industry was at its peak and when the Central Bank of Kenya started to regulate it in a bid to root out unethical practices. By October 2024, regulation efforts had seen the number of licensed digital lenders reduce to 85.

Digital loans are more expensive than other formal sources of credit in Kenya. A 2020 study found that many lenders charged annual interest upwards of 300%. In some cases it was impossible to tell what the credit cost amounted to. High interest was intertwined with overly aggressive debt collection strategies and misuse of personal data. Lenders sometimes threatened to shame defaulters by revealing how much they owed.

The key difference between the loan offered under Ruto’s scheme and other digital loans was the low interest rate, set at 8%. Other digital loans charge interest of between 20% and 30% for a 30-day loan.

After its launch in November 2022, Kenyans took up the hustler loan in large numbers. As at August 2024, there were roughly 21 million borrowers. The Hustler Fund has the most active loans in the market, taking a 45% share of the active loans in the digital lending industry. M-Shwari has 28% of all active loans.

What’s gone wrong?

Most borrowers haven’t repaid their loans. The government reported that 19 million of the 21 million Kenyans who took the hustler loan have defaulted. This has left only 2 million borrowers who continue to borrow regularly.

In absolute terms, the loan defaulted amount as at October 2023 stood at 10 billion shillings, representing roughly 27% of all disbursements. This represents a significantly higher default rate than that of other formal credit providers, which stood at roughly 15%. This is high. Other non-bank digital lenders such as Tala report default rates of as low as 5%.

The government has ramped up debt tracing measures, including a proposal to raid the M-Pesa accounts of defaulters. This is a last-gasp attempt to sustain the fund, which was designed to operate as a revolving fund. In other words, repaying the loan would make money available to lend to someone else.

There is one chief reason why the fund faces a sustainability crisis. The loans dispensed are largely used for day-to-day household consumption rather than income-generating purposes. Nearly 70% of small business owners who tapped the fund’s microloans in 2023 used it for household expenses. Only 18.1% applied it to their businesses.

As I found in my research, most of the 21 million loan applicants would only qualify for the minimum amount, between 500 and 1,000 shillings. This is hardly enough to start up or working capital even for small enterprise.

Far from building up capital, the loans just get people into worse debt. This was evidenced in my previous research as well as the work of several other scholars. Its dangers and extent have recently been documented in the media.

What lessons can be drawn, and what next?

Proponents of financial inclusion assert that digital loans can be used as a springboard to entrepreneurship. This narrative has been carried by the powerful financial inclusion lobby and has been bought up by the political class. However, it simply does not work in practice.

As I argued on the basis of my research in Kenya, financial inclusion doesn’t mean borrowing for convenience. It must be designed so it doesn’t worsen poverty and inequality.

The challenges are not unique to Kenya. The microcredit model has permeated the global south since the 1990s with the backing of the international development community. They say extending credit alleviates poverty, in spite of evidence to the contrary.

The moral justification to refuse to pay debt has been highlighted by anthropologists Jean-Pierre Olivier de Sardan and David Graeber, who argue that refusing to pay a loan can be considered legitimate action in an immoral, corrupt or unjust society. In his book Weapons of the Weak, American political scientist and anthropologist
James C Scott views this as a new form of peasant resistance. That is, the ability of people to redefine and subvert policies and strategies of the elite.

It is unclear what the Hustler Fund’s failure and imminent collapse will mean for politics of the day. But the time is ripe for a rethink of the fund.

Turmoil following presidential and parliamentary elections in Mozambique has been severe. Preliminary official results from the 2024 elections indicated a landslide win by the ruling party, Frelimo. These results are widely contested, with various reports of irregularities.

Post-election squabbles are not new to the country. But this time feels different.

The current protests have been more sustained and widespread than ever before. A week-long paralysis of economic activity called by Venâncio Mondlane, one of the opposition presidential candidates, has received widespread support, especially in the capital city, Maputo.

Virtually all socioeconomic strata have participated, with up-market neighbourhoods adopting the panelaço, a coordinated banging of pots and pans, to show their discontent.

At times, protests have flared into violence and looting, leading to the temporary closure of the country’s main land border with South Africa. For the first time, internet access has been curtailed.

But the unrest is not only about contested election results. It reflects widespread disenchantment with the status quo, including limited social mobility for many. For some scholars, the emergence of Islamic terrorism in the north of the country since 2017 is another symptom of growing inequalities and unfulfilled expectations from natural resource extraction, amid rapid population growth.

Despite calls for dialogue, including a citizen manifesto prepared by leading academics, a political compromise does not appear to be in sight. Regardless of what political settlement emerges, though, the new government faces stark economic policy challenges. These will only become more acute if instability and violence continue.

Drawing on a range of evidence and based on years of academic research in the country, I suggest that current political unrest reflects discontent with the socioeconomic status quo, including limited opportunities for advancement. To put Mozambique on a pathway to development and poverty reduction, I propose priorities and actions for a new government to consider.

Precursors

The current crisis arose from various long-running economic and institutional challenges. Key among these is the “hidden-debt crisis” that came to light in 2014, involving billion-dollar commercial loans guaranteed by the government to set up a tuna fishing fleet. When these debts became known to the public, Mozambique saw a sharp contraction of official development assistance to the government, rapid exchange rate depreciation, and high consumer price inflation.

Research suggests these dynamics have contributed to substantial increases in poverty in the country. The government’s recent National Development Strategy acknowledged that nearly two-thirds of the country’s population of 30 million live below the national poverty line. This is up from just under 50% ten years ago.

But crises rarely have only one cause. Deeper issues include distortions due to organised crime and perceptions of elite capture. There is a widely held view that government contracts and mining concessions are tightly controlled to the benefit of political insiders. These insiders often act as gate-keepers to external private investors.

On top of this, the country has faced recurring shocks, such as COVID-19 and major climate events.

Management of public finances has added fuel to this smouldering fire. Long hoped-for windfalls from natural resource extraction, including coal and natural gas, remain distant.

Over the last decade, public investment has fallen dramatically and lending by local banks to the government has soared. Government spending has been squeezed as most tax revenues now go to pay public sector wages, service debts and maintain a bare minimum of public services.

Economic policy priorities

The political legitimacy of the new government will turn on its ability to make genuine improvements within a reasonable time.

With severe resource constraints and only crude economic policy levers, careful reflection and debate is required to identify what to do first and how to deliver results.

In my view, five priorities should guide the economic policy focus of a new government:

• Strengthen macroeconomic stability through prudent public finances. Make fiscal space by managing the wage bill and internal debt.

• Establish a new social contract. Public expenditure must focus on critical public services, address regional inequalities and support the most vulnerable. The new government needs to inspire the younger generation that they can expect a better life than their parents.

• Undertake large-scale investments in economic infrastructure, to adapt to climate shocks and longer-run climate change. This will be critical to stimulate and sustain economic growth.

• Actively support (green) export sectors as drivers of growth and job creation, particularly in agriculture, where the majority of workers and the poor are found, as well as related agro-industries.

• Upskill the civil service, promoting professionalism, technical competence, non-partisanship, integrity, transparency and accountability.

Concrete actions now

Of course, setting priorities is the easier part. More difficult is to identify feasible means to achieve them. I put forward some ideas for immediate concrete actions:

• Place a temporary freeze on government salary expenditures and acquisition of non-critical new equipment.

• Smartly repackage public debt, if necessary through renegotiation with major creditors.

• Set out a clear pathway towards a more competitive real exchange rate. This should recognise that moderate and managed inflation can reduce the real cost of government wages and certain debt obligations. And that a more competitive and stable exchange rate should boost export sectors.

• Reform and expand social protection programmes. This needs to be done urgently. The aim would be to get money flowing through the wider economy (especially beyond urban centres) and to support the most vulnerable. The country’s largest social protection scheme, a social pension for the elderly, has made virtually no transfers since 2023.

• Try offering smallholder farmers a minimum price for selected agricultural products, to promote income stability and stimulate agricultural value-chains.

• Base policy on high-quality evidence and deliberation.

Lastly, the government should consider measures to raise additional resources for investment and social protection. These could include:

• Making the case for fast-track access to global funds for climate adaptation and mitigation. This requires upfront investment in diplomacy, technical expertise and project development across government.

• Reclaiming a share of ill-gotten assets. This could be done, for example, by reconciliation agreements. At a minimum, public registers of assets held by politically exposed persons, whether at home or abroad, should be established.

This is an ambitious agenda, but there are no simple fixes. The incoming government must not ignore the gravity of the economic challenges facing the country. And it would be unwise to adopt purely ideological, populist or untested reforms.

Placing Mozambique on a path that provides younger generations with opportunities for social mobility is essential.

Brics+ countries are exploring how they can foster greater use of local currencies in their trade, instead of relying on a handful of major currencies, primarily the US dollar and the euro.

The forum for cooperation among nine leading emerging economies – Brazil, China, Egypt, Ethiopia, India, Iran, Russian Federation, South Africa, United Arab Emirates – emphasised this determination at their 16th summit in October 2024.

Economist Lauren Johnston recently wrote a paper on this development. The Conversation Africa asked her for her insights.

Why do Brics+ countries want to trade in local currencies?

There are economic and political reasons to use local currencies.

Using local currencies to trade among themselves will lower the transaction costs and reduce these countries’ dependence on foreign currencies.

Over the past few centuries, the world’s economy has developed in a way that makes certain currencies more valuable and widely trusted for international trade. These include the US dollar, the euro, the Japanese yen and the British pound. These currencies hold value around the world because they come from countries with strong economies and a long history of trading globally.

Read more:
Foreign exchange: several African countries have a shortage of US dollars – why this happens and how to fix it

When people or countries trade using these currencies and end up collecting or holding them, they consider it “safe” because the value of these currencies remains stable and they can be easily used or exchanged anywhere in the world.

But for countries in the global south, like Ethiopia, whose currency (the birr) isn’t widely accepted outside its borders, trading is far more difficult. Yet these countries struggle to earn enough of the major currencies through exports to buy what they need on international markets and to repay their debts (which tend to be in those currencies). In turn, the necessity of trading in major currencies, or the inability to trade in them, can create challenges that slow down economic growth and development.

Therefore, even some trade in local currencies between Brics+ members will support growth and development.

Oil exporter Russia is a unique case. Though there are fewer foreign currency constraints overall, Russia faces extensive financial sanctions for its war of aggression against Ukraine. Using a variety of currencies in its foreign transactions may make it easier to get around these sanctions.

Politically, the reasons for using other currencies primarily relates to freedom from sanctions.

One of the tools for making sanctions work is an international payments systems known as Swift (Society for Worldwide Interbank Financial Telecommunication). Swift was founded in 1973 and is based in Belgium. It enables secure and standardised communication between financial institutions for international payments and transactions. And it’s almost the only way to do this.

It was first used to impose financial sanctions on Iran in 2012, and has since been used to impose sanctions on Russia and North Korea.

If a country is cut off from Swift, it faces disruptions in international trade and financial transactions, as banks struggle to process payments. This can lead to economic isolation and challenges in accessing global markets.

The reality, and possibility, of exclusion from Swift’s payments system is one of the factors galvanising momentum towards a new payments system that also relies less on the currencies of the countries that govern Swift – like the euro, Japanese yen, British pound and US dollar.

What are the likely challenges they will face?

The Brics+ plan to use local currencies faces some hurdles.

The central problem is the lack of demand for most currencies internationally. And it’s hard to supplant the international role of existing major currencies.

If, for example, India accumulates Ethiopian birr, it can mainly only use them in trade with Ethiopia, and nowhere else. Or, if Russia allows India to buy oil in rupees, what will it do with those rupees?

Since most countries seeking alternatives to dollar dependence tend to sell more than they buy from other countries, or are lower-income importers, they must consider what currencies to accumulate via trade.

When it comes to payment systems, at least, alternatives are emerging.

Brics+ is creating its own, Brics+ Clear. Some 160 countries have signed up to using the system. China also has its own, Cross-border Inter-bank Payment System, which broadly works the same way as Swift.

There’s a risk, though, that these payment methods could merely fragment the system and make it even more costly and less efficient.

Has trading in local currencies been done elsewhere?

Not all trade is done in major western currencies.

For example, in southern Africa, within the Southern African Customs Union, the South African rand plays a relatively important role in cross-border trade and finance. Just as in south-east Asia the currencies of Singapore and Thailand compete to be the dominant currency in the sub-region.

China – the world’s biggest exporter and producer of industrialised goods – is also signing bilateral currency swap agreements with countries. The goal is greater use of the renminbi in the world.

As a means of circumventing sanctions, India and Russia recently trialled using the rupee to trade. Russia’s oil exports to and through India have risen strongly since the Ukraine war and some 90% of that bilateral trade takes place in the rupee and rouble. This leaves Russia with a challenge – what to do with all the rupees it has accumulated. These deposits are sitting in Indian banks and being invested in local shares and other assets.

Another example of efforts to side-step major international currencies is China’s model of “barter trade”. The model works like this: China exports, for instance, agricultural machinery to an African country and receives payment in that country’s currency. China then uses that currency to buy goods from the same country, which are then imported back to China. After these goods are sold in China, the Chinese trader is paid in renminbi.

Ghana is one country involved in this barter model. Challenges facing the model include the digitisation of payments and trade, and trust – high levels are needed to establish and maintain relationships between trading parties as individuals and as businesses. It also requires some level of centralisation and coordination, but lacks strong laws, regulations and industry standards. This means that different platforms and enterprises may not be compatible, which can add to transaction time and costs.

Another example is when Chinese investors in Ethiopia make profits in birr. They use these birr to buy Ethiopian goods, like coffee, and export the goods to China. In China, when they sell these goods, they receive renminbi. So they transfer their profits from Ethiopia to China by increasing Ethiopia’s exports to China.

Anecdotal reports suggest this is feasible at a small scale but has relatively high coordination costs.

There could be other challenges. For example, if Chinese buyers pay Ethiopian coffee farmers in their local currency, instead of US dollars, it could lead to fewer dollars being available overall. Some international transactions still rely heavily on dollars.

How should Brics+ nations structure their arrangement?

There is no simple, or easily scalable, solution to moving past the reliance on major international currencies or circumventing Swift.

A fast, digital payment system is needed. This system would calculate and balance currency demand efficiently. It must also be reliable, replace parts of the current system, and not create extra costs for countries that aren’t using it yet.

Although some Brics+ members, like Russia, may have more interest in fast-tracking change, this may be less in the interest of other Brics+ members. A move away from Swift, for instance, requires buy-in from local financial institutions, and those in African countries may not be under pressure to shift to a new lesser-known platform.

Given these challenges, I argue that Brics+ should progress incrementally. What can happen soon, though, is to conduct some trade in local currency.

South Africa’s unemployment rate stands at a staggering 33.5%, one of the highest in the world. Coupled with an alarming poverty rate – where more than half of the population lives on less than R1,558 (about US$88) a month – the socioeconomic landscape is dire.

The country’s social assistance system has been a critical tool in the fight against poverty and unemployment. In fact, South Africa has one of the largest cash transfers programmes in Africa. More than 19 million grants are paid out every month. These are the Care Dependency Grant, Child Support Grant, Disability Grant, Foster Child Grant, Grant in Aid, Old Age Grant and War Veteran Grant.

During the COVID pandemic a new grant was added to the mix – the Social Relief of Distress grant. (It’s known as the R350 grant; equal to about US$20.) This was added because the pandemic worsened the country’s socioeconomic ills.

Initially, the grant targeted unemployed South Africans who had zero income, were not receiving any social grant, were not a resident in a government-funded or subsidised institution, and did not qualify for the Unemployment Insurance Fund. The grant was intended to last for six months.

The grant has since been extended and increased. The most significant change came in April 2022 when the bank means test – verifying an applicant’s monthly income against monthly inflows into their bank account – was introduced to test eligibility. This halved the number of approved applications. Then, recently, the grant was extended to March 2025 and increased from R350 to R370 (about US$21).

A qualitative report by the Black Sash, a South African human rights organisation, highlights the impact of the Social Relief of Distress grant. It underscores that the grant provides individuals with a sense of dignity, allowing them to support their families’ livelihoods without having to rely on begging or borrowing money.

It has also helped individuals to search for a job or start a small business.

We believe there is an urgent need to reevaluate its design to make it more effective. In our study we modelled several design options. We simulated their effects on poverty levels, the number of individuals who receive the grant and the expense to the public budget.

Our simulations suggest that increasing both the income eligibility threshold and grant size leads to a significant decrease in extreme poverty.

Given the country’s fiscal constraints, we further compared the impact of only increasing one of the aforementioned variables. We found that increasing the size of the grant was more effective at reducing extreme poverty than raising the income eligibility threshold.

More specifically, increasing the grant size from R370 (US$21) to R430 (US$24) or R530 (US$30) decreases poverty more than increasing the income threshold from R760 (US$43) to R1,058 (US$60) or R1,558 (US$88). This simply suggests that if the government can’t afford to increase both the grant size and the income threshold, it should prioritise increasing the grant.

Positive effects

In the past year the Social Relief of Distress grant has supported more than 8.5 million individuals. We estimate that the grant reduced the number of individuals living in extreme poverty by roughly 4 million. Moreover, the grant has been found to enable recipients to search for work or start small businesses.

More specifically, studies revealed that the grant increases the probability of searching for a job by 25%, for example, by allowing grant beneficiaries to pay for transport costs associated with a job search.

It’s also been shown to increase the possibility of people starting small businesses or investing in assets to make their businesses more productive.

But we believe the impact could be even greater with some adjustments.

Variations on the theme

We updated the 2014/15 Living Conditions Survey conducted by Statistics South Africa to simulate the present-day South African economy and demographics. This data was then used to model various grant design options. The results may slightly underestimate the actual cost and slightly overestimate the impact on poverty reduction.

Our simulations explored the impact of maintaining the current monthly grant amount (R370, US$20.96) at different poverty lines: the 2023 food poverty line (R760, US$43,), lower bound poverty line (R1,058, US$60), upper bound poverty line (R1,558, US$88.26) and national minimum wage (R4,744, US$270.84). The food poverty line, also referred to as the extreme poverty line, is the amount of money that one needs to afford minimum required daily energy intake – approximately 2,000 kilocalories per day. The upper-bound and lower-bound poverty lines both include basic non-food items, however, at varying degrees.

At the food poverty line, the total annual cost of the R370 (US$20) grant was R30.9 billion (about US$1.7 billion), slightly below the current budget allocation. We found a 6 percentage point reduction in extreme poverty for roughly 4 million recipients (Figure 1).

Raising the income eligibility threshold – the level at which people would qualify for the grant – to the lower bound poverty line increased the total cost of the grant to R41.6 billion (US$2.3 billion), suggesting the current R34 billion budget is insufficient. Alternatively, increasing the grant amount to R430 (the original grant adjusted for inflation), or R530 (current Child Support Grant value) raised the total cost of the grant to R35.9 billion and R44.3 billion, respectively.

Our simulations suggest that increasing the size of the grant is significantly more effective at reducing the incidence of extreme poverty compared to raising the eligibility threshold.

For example, raising the threshold to the lower bound poverty line without raising the grant size reduces extreme poverty by 0.2 percentage points compared to the 1.0 percentage point reduction achieved by increasing the size of the grant to R430 (US$24).

Therefore, if fiscal constraints force trade-offs to be made, we recommend increasing the grant size over the eligibility threshold.

What would happen if both the grant size and eligibility threshold were raised?

Raising the eligibility ceiling expands coverage and includes those who are now excluded from the grant due to faults in the method of means testing. Leaving the current eligibility criteria unchanged, except for the income threshold, South Africa could expand support to all those living below the upper-bound poverty line with a budget of R55.5 billion (about US$3.14 billion).

This would support individuals living in poverty even if the grant size were not large enough to take them out of poverty at the national poverty lines. To have a bigger impact on the poverty headcount, both the amount of the grant and the eligibility threshold need to be increased.

Further tweaks

The grant can be improved over and above this with the following two modifications.

First, dropping the Unemployment Insurance Fund benefits as a criterion for exclusion (this has been done).

Second, assessing an individual’s income as an aggregate over six months rather than the most recent.

The Unemployment Insurance Fund exclusion criterion likely omits many eligible beneficiaries as data for the fund is updated infrequently and often inaccurately. Further, the exclusion criterion may discourage individuals from registering for the Unemployment Insurance Fund.

Averaging income over six months prevents individuals from being excluded if they receive a windfall, such as severance pay, but nonetheless remain poor over time. These modifications do not lead to drastic increases in beneficiary numbers or the total cost of the grant but limit the extent of unfair exclusions.

We also propose moving away from the current banking means test in favour of self-reported income. Since April 2022, eligibility for the grant has been determined by analysis of total monthly inflows into an applicant’s bank account. But total inflows sometimes include household transfers and loans, which often leads to overestimates that disqualify those who should qualify.

Finally, we suggest offering grant recipients additional active labour market services, such as job training and linking job seekers and employers, with any add-ons rigorously evaluated and phased in based on available evidence and costs.