As recent as 29^th November 2022, the Government rolled out the much-touted Hustler Fund, which was first mooted during the campaign period.

The Hustler Fund is established pursuant to the Public Finance (Financial Inclusion Fund) Regulations 2022 (herein after referred to as the Regulations), which were gazetted on the 23^rd November 2022 vide Legal Notice No 213 under Legislative Supplement No 91 and Kenya Gazette Supplement No 190.

This paper will critically look at the Regulations and tease out the issues worth looking into even as the Fund is administered and implemented.

 a) Legal basis for the Hustler Fund
Section 24(4) of the Public Finance Management Act (PFMA) allows the Cabinet Secretary (CS) responsible for finance to establish a national government fund with the approval of the National Assembly. The Hustler Fund is said to be established pursuant to this provision and the Regulations. The Regulations were approved by the Committee on Delegated Legislation in their report of 29^th November 2022.

b) Public participation in enactment of the Regulations
Public participation is a constitutional principle under Article 10 of the Constitution and section 5 of the Statutory Instruments Act (SIA). This is particularly so as the SIA provides that where the statutory instrument is likely to have direct and substantial effect on business, consultations with the persons likely to be affected is a requirement.

It is not in doubt that the Hustler Fund will have an impact on the business environment. It offers competition to other lending institutions and programs such as Fuliza, KCB-Mpesa, M-shwari among the many other digital lenders. It is, however, not evident if consultations with these institutions was mandatory and if so, whether it was carried out prior to the Regulations. What is clear is that there was a publication of a regulatory impact assessment inviting public participation vide the publication of 12^th November 2022.

Prior to passing of the Regulation and after the public participation exercise, some substantive clauses were amended. An example is that whereas in the draft regulations Parliament could only approve the upper limit of the Fund at Kshs. 50 billion, the regulations as promulgated give Parliament total discretion on the determination of the limit (Regulation 6).

Parliament called for public participation vide its notice of 12^th November 2022. The amendment before enactment means that the public was not afforded an opportunity to comment on the amended provisions. However, this does not render the Regulation irregular as the Court of Appeal in Pevans East Africa Limited & Another v Chairman, Betting Control & Licensing Board & 7 others Civil Appeal No. 11 of 2018 was of the view that amendments brought after public participation do not have to themselves be subjected to public participation. Therefore, the Regulations have satisfied the requirement of public participation.

c) Unconstitutional provisions: Powers of the PSC vis a vis the CS on creation and appointment of public officers
The PSC is mandated by Article 234 of the Constitution and part IV of the Public Service Commission Act (PSC Act) to establish offices. This establishment may be on PSC’s own motion (section 29 of the PSC Act) or on request from authorized officer (section 27 PSC Act) or even on request from the President (section 30 of the PSC Act). The bottom line is that PSC has to be involved in the creation of these offices. The Regulations seem to establish several public offices and bestows on the CS responsible for Micro, Small and Medium enterprises (hereafter MSMEs) the power to appoint public officers to these offices. The offices created include the Board of the Hustler Fund (Regulation 10), the office of the Chief Executive Officer (Regulation 14) and the secretariat (Regulation 16).

These are offices that were not in existence prior to the promulgation of the Regulations. They are therefore “created” through the Regulations. By dint of Article 260 of the Constitution, these are public offices which only the PSC has the power and authority to establish under Article 234 of the Constitution and part IV of the PSC Act. Cognizant of this, the Public Finance Management Act (PFMA) at section 24 provides that the CS responsible for finance has power to establish a national government and fund and to designate a person to administer the fund, such as the Hustler Fund. It does not recognize his power to create offices. Where the CS is to create an office, section 27(1) of the PSC Act provides for the requisite steps to be followed, with a request made to the PSC.

Further, in creating these offices, public service participation is paramount (see Okoiti & Another V Public Service Commission & 73 Others; Law Society Of Kenya & Another (Interested Parties) (Petition 33 & 42 Of [2018] (Consolidated)) [2021] KEHC 464 (KLR) (Constitutional And Human Rights) (20 April 2021 (Judgement)). On what authority did the CS finance therefore establish these offices under the Regulations? Was the PSC consulted before the establishment of these offices? Under the Regulations, the CS responsible for MSMEs is to appoint persons into the created offices (Regulations 10(e), 14 and 16). Nowhere do the Regulations speak of consultation with the PSC in the appointment of these public officers. Are the Regulations disregarding the constitutional office that is the PSC?

d) On governance structure
The Hustler Fund was rolled out with pomp and excitement. However, of concern is how the Fund is operating without relevant officers. Have there been advertisements for the positions created by the Regulations (CEO, secretariat and the three members of the Board who arefrom the public)? If not, how is the Fund operating without a Board and a CEO? If there is a Board and a CEO, how were they appointed? In the absence of a Board and a CEO, how is the fund functioning/operating and who is to be held accountable? Has the secretariat been appointed? If not, has the relevant CS seconded public officers to perform the relevant functions in accordance with Regulation 16(3) of the Regulations? Is the secondment available to the public?

In the absence of appointments, and therefore in the absence of an accounting officer for the Hustler Fund, is the CS finance in breach of section 67(3) of the PFMA requiring the CS to ensure a national government entity has an accounting officer at any time? And by starting operations before appointments, is the CS in contravention of section 24(5) of the PFMA requiring the CS for finance to designate a person to administer the Fund? The Regulations provide that the CEO of the Hustler Fund, who is appointed by the CS for MSMEs is to administer the Fund (Regulations 14 and 17). Section 24 of the PFMA provide that it is the CS for finance who is to designate the administrator of a public fund. Are the Regulations contradicting the statute? Can the subsidiary regulation override the parent statute in light of section 31(b) of the Interpretation and General Provisions Act that subsidiary legislation is not to be inconsistent with the parent statute?

e) On vague provisions, contradictions and gaps
Under Regulation 10(4), the Regulations provide that the Board will be quorate on simple majority of the members. But what is simple majority? The term simple majority has diverse meanings and has received different interpretations depending on its use. Consider the following references to simple majority by way of example:

a) A majority in which the highest number for any one candidate, issue, or item exceeds the second-highest number, while not constituting an absolute majority;
b) Where the winning candidate has more votes than the candidate in second place though not necessarily more than half the total number of votes;
c) A majority of more than 50% of the members present;
d) More than halfof the total number;
e) Less than half of the total but more than the minimum

With all these conflicting definitions of simple majority, wouldn’t it have been easier for the drafters to simply use a definite figure? Say two-thirds or expressly provide for a definite number like 4 as forming quorum?

At Regulation 20, the import is that other intermediaries are free to borrow from the Hustler Fund and on-lend to the public. However, there is nothing providing for the interest rate the intermediary will impose upon on-lending. Nothing prevents the intermediary from mopping out the cheap loans from the Hustler Fund and seeking exorbitant interests from the public. This will defeat the purpose for which the Hustler Fund was created as it will make credit access expensive.

In the event of winding up of the Fund as posited under Regulation 32, there are no steps to ensure accountability. No reports are required to be submitted either to the National Treasury, Auditor General or National Assembly.

Equally, the Hustler Fund does not make any provisions as to how its accounts are to be operated (whether it is by one signatory and if so, who).

f) Of probable illegalities
Under Regulation 25, administrative costs are to be met through appropriations by the State Department responsible for MSMEs. This is contrary to Regulation 207 (1)(d) Public Finance Management (National Government Regulation) 2015 requiring a limit of 3% of approved budget as the maximum administration costs.

It is provided under Regulation 26 that the existing financial and procurement regulations are to apply. Under section 53 of the Public Procurement and Asset Disposal Act (PPADA), it is a requirement that procurement plans are prepared by accounting officers and submitted to respective CS in charge of state department or function annually and before expenses are incurred. Does the Hustler Fund have a procurement plan? If so, who prepared it noting that there is no designated accounting officer? Have there been assets procured on behalf of the Fund? If so, how were they done? If not, again how is the Fund operational?

Regulation 207 (1) of the Public Finance Management (National Government) Regulations sets certain minimum requirements before establishment of a public fund. This include initiation through the CS under which the fund will fall and approval by the CS for finance, justification by the CS under which the fund will fall on why a fund structure is deemed appropriate for improved service delivery in light of the legislative and policy mandate of the national government entity, demonstration of how the activities of the proposed public fund shall fit in the overall Medium-Term Plan and Budget Policy Statement among others. From the context of the Hustler Fund Regulations, the Fund is domiciled with the CS for MSMEs. It is yet to be seen whether the CS for MSMEs initiated the proposal to create the Hustler Fund and whether the other requirements of its justification were met. Whether these are technical or substantive requirements is for the courts to determine and will revolve around the use of the phrase “shall” as under the Regulation.

There are other interesting questions to ponder. We highlight a few below;

Who is the digital credit provider in this instance? In its briefing, the public was notified that the Hustler Fund will employ the available digital service providers to dispatch the funds. If it is the Hustler Fund itself, is it required to take out a license in accordance with the Central Bank of Kenya (Digital Credit Providers) Regulations, 2022? Is it exempt from such requirements by reason of it being an establishment of a regulation? Should the institutions exempted under Regulation 2 of the Digital Credit Providers Regulations be expanded to include the Hustler Fund?

Does the Hustler Fund have an anti-money laundering policy? As a ‘financial institution’ as per the definition under section 2 of the Proceeds of Crime and Anti-Money Laundering Act (POCAMLA), should it be a reporting institution and required to report to the Financial Reporting Centre (FRC)?

In addition, is the Hustler Fund obligated to comply with data protection requirements? Being that they are liaising with other digital service providers, is the Hustler Fund a data controller or data processor? Is it registered as such? Was there need for a data impact assessment before the roll-out of the Hustler Fund, in line with section 31 of the Data Protection Act?

Why are the terms and conditions only available upon registration? Isn’t this contrary to the Consumer Protection Act on remote agreements?

Comparison with some Funds established under the PFMA
i) National Affirmative Action Fund
Established under the Public Finance Management (National Government Affirmative Action Fund) Regulations 2016. Regulation 10 provides for initial capital of 2B and 30 million as opposed to the open-ended provision under the Hustler Fund. Regulation 15 is to the effect that the accounting officer of the State Department responsible for gender affairs is the administrator of the Fund. It differentiates the administrator of the Fund with the CEO, and makes provision for appointment of the CEO under Regulation 17.

The CEO is appointed by the Board through competitive process in consultation with the PSC, which is not the case with the Hustler Fund. Regulation 24 provides that the signatories of the account is CEO and two other persons designated by the Board, with at least two signatories at any time. There is no provision of signatories in the Hustler Fund. Is the lacuna in the Hustler Fund cured by the provision of Regulation 85 of the Public Finance Management (National Government) Regulations 2015 in light of the provision of Regulation 22 of the Hustler Fund Regulation? It is debatable. The quorum of Board meetings is specified as 5.

ii) Sports Arts and Social Development Fund
This Fund is established by the the Public Finance Management (Sports, Arts and Social Development Fund) Regulations, 2018. The quorum for Board meetings is succinctly specified as four (Regulation 8(8)). Under Regulation 11, the administrator is the accounting officer of department dealing with sports or appointee of CS for finance. It is not the CEO. The appointment of CEO and secretariat involves consultation with the PSC (Regulation 12). This is not so with the Hustler Fund. Upon winding up, the administrator is to prepare account statements within 6 months (Regulation 23). There is no such requirement under the Hustler Fund. As with the Hustler Fund, it does not provide for signatories.

iii) Uwezo Fund
It is established by the Public Finance Management (Uwezo Fund) Regulation 2014. Regulation 11 designates the administrator of the Fund as the accounting officer of the Ministry for the time being responsible for the matters relating to youth and women. It is not the CEO. Under Regulation 17, the banks of the Fund are to be operated by a minimum of 2 signatories.

iv) Biashara Kenya Fund

This Fund is/was established through the Public Finance Management (Biashara Kenya Fund) Regulations 2019 and then 2021. The position of this fund is a bit untidy owing to the fact that Parliament annulled the 2021 Regulations but not the 2019 Regulations. The conundrum is further exacerbated by the fact that the 2021 Regulations did not make provisions outrightly repealing the 2019 Regulations.

Therefore, for purposes only of comparison with the Hustler Fund, the 2019 Regulations will be considered. The Fund targeted SMEs, which is what the Hustler Fund is targeting. In this manner, the two funds are similar. Regulation 6 provides for initial capital of 2B as opposed to the open-ended capital provided under the Hustler Fund.

The Board of the Biashara Fund is more inclusive as it comprises of representatives of youths, women and persons with disabilities which are the categories considered likely to be in the SMEs. This may be because the Biashara Fund sought to collapse three funds into one (Uwezo Fund, Youth Enterprise Fund and Women Enterprise Fund).

The CS for finance responsible for designating the administrator of the Fund, if the administrator is not the PS for gender (Regulation 11). The CEO and administrator of the fund are prima facie different persons, compared with the Hustler Fund where the CEO is the administrator.

At Regulation 12, the CEO and secretariat to be appointed competitively and with consultation of the PSC. The Hustler Fund, as already pointed out, has no provision which requires consultation with the PSC in the appointment of the CEO and secretariat.

Regulations 20 (2) and (3) and 23 addresses what the Hustler Fund seems to have overlooked with regard to advancing funds to intermediaries for onward lending. They provide that the intermediary will not receive more than of twenty-five per cent of the Fund value and the Administrator of the Fund will not advance more than three percent of the Fund value to a financial intermediary. In addition, the interest rate to be imposed by the intermediary is capped at 10% on reducing basis. This interest rate defeats the purpose of the Fund as it makes credit access expensive. The Hustler Fund may suffer the same fate of making credit expensive if the interest rate for on-lending is left open to the intermediaries.

Conclusion
Access to credit is at the root of economic development. The Government is to be lauded for this effort of providing access to credit to the members of the public who were otherwise left in the cold. It is a noble venture with is extolled and should be encouraged by all. However, the provision of this credit access should be done in accordance with the law to avoid challenges in its roll-out.

From the foregoing excerpt, it is evident that the roll-out of the Hustler Fund was done in a hurry. The Regulations were drafted and passed in a hurry. Serious governance issues may arise if the Hustler Fund is implemented in the manner proposed. There are also legal headwinds that need to be addressed with the implementation of the Hustler Fund.

Wisdom may have informed the separation of the offices of administrator of a public fund with the office of the CEO. The same wisdom may also have informed the requirements that there be at least two signatories to the accounts of the funds. This wisdom may have been due to governance requirements and accountability purposes. This wisdom seems to lack in the Hustler Fund, whether intentional or otherwise.

Starting off the roll-out without the proper governance structure was also ill-advised. There is no one to be held accountable in the interim and pending the appointment and designation of the Board and secretariat.

Further, the Constitution established the office of the PSC for a reason. The fact that the Hustler Fund does not recognize this office in the appointment of its officers is regrettable.

Allowing intermediaries to access the funds from the Hustler Fund and on-lend at undisclosed interest rates will defeat the purpose of the Hustler Fund. Credit will be expensive and out of reach to the people who are targeted by the Fund. There is need to prescribe the maximum sums available to the intermediaries and also the interest rate these intermediaries are to impose.

A need to go back to the drawing board and make the requisite amendments to ensure the Fund complies with the Constitution and the law is therefore necessary. The inconsistencies and outright illegalities need to be relooked. The gaps equally need to be addressed. This will ensure the smooth roll-out and running of the Hustler Fund.