Student loan body overhaul aimed at stemming defaults

Kenya is planning to overhaul the Higher Education Loans Board (HELB) – the agency that disburses loans to students on behalf of the government – and convert it into a funding corporation.

This will see the body fashioned around a government-owned commercial bank that will be mandated to provide credit for the sole purpose of developing the higher education sector.

Once reformed, the agency will be called the Tertiary Education Funding Corporation and will be weaned off government funding and permitted to roll out market-driven income-generating initiatives.

This is among the strategic measures announced recently by Kenya’s Education Cabinet Secretary Ambassador Amina Mohamed in a bid to boost the institution’s funding capacity, effectively stemming a worsening financial crunch.

Non-performing loans

The government has warned that as currently constituted, HELB will be unable to meet the demand for university loans in the coming two years. The agency, which relies on government funding, is grappling with over US$80 million in non-performing loans, while the state has not provided capitation to meet current loan demand fuelled by increased enrolments in universities.

“As the government continues to increase capitation from the exchequer, HELB must review its capacity and capability to finance the increasing number of students in institutions of higher learning. We must explore other resource mobilisation strategies to achieve 100% universal higher education financing,” said the cabinet secretary.

“The board has to think of and advise the ministry on other alternative ways of broadening, rationalising and deepening financing of higher education in a more sustainable manner,” she said.

As part of the new efforts to, among other things, reduce the level of non-performing loans, the funder has introduced an employers’ portal – an online platform designed to make it easier for employers to check on their staff HELB loan repayment status and remit their staff loan repayment online.

HELB has apportioned part of the blame for the huge loan-defaulting problem to employers, who are currently required to effect repayment deductions from the salaries of all former beneficiaries of HELB loans.

Since the beginning of last year it has also become mandatory for all graduates to seek clearance from the loan agency before they can secure a job, as part of efforts to curb loan defaulting.

Repayment conditions

HELB requires that all beneficiaries start repaying their loans at least one year after clearing their university studies, based on the assumption that they secure jobs immediately.

To drive up repayments, the government has granted a 100% penalty waiver to all defaulters who repay their loans in one lump sum between 13 May 2018 and 30 June 2018.

Latest government data show that since its inception in 1974, the university loan scheme has supported over 645,000 Kenyans pursuing higher education at a total cost of US$720 million. At least 90% of this funding is from the government’s exchequer as well as loan repayments from past beneficiaries.

During the period, at least 396,680 loan accounts worth US$470 million have matured for repayment; while 264,000 loan accounts holding US$240 million have not matured. Of the 396,680 loan accounts, a total of 175,003 beneficiaries have completed their loan repayment valued at US$167 million.

Last year, HELB recovered US$40 million which accounted for 40% of the student financing budget of US$102 million for the year. Despite tremendous efforts by HELB to boost recoveries, out of the 396,680 loan accounts that have matured, 81,994 of these accounts worth US$80 million are not repaying their loans.

Kenya estimates that the number of first-time applicants seeking loans will grow nearly five-fold from this year’s 32,776 to 147,687 in 2018. This is because of growing student numbers and the expansion of loans to students in colleges and private institutions.

The government said it is tightening the noose on Kenyans living in the diaspora who are not repaying their loans and is seeking to sign appropriate memoranda of understanding with governments across the globe to boost recoveries. Such deals will also open an avenue for Kenya’s students in foreign universities who will now access the relatively cheap university loans.

Smart card system

All universities will also be expected to adopt the HELB smart card system with immediate effect, to accelerate the remittance process by removing the physical contact of university deans and student ledgers, which often causes delays in disbursement of funds to students.

HELB has been working on a range of fundraising options aimed at reducing its reliance on state funding. Through HELB’s initiative, various corporates, foundations, trusts, NGOs and counties have come on board and supported over 20,000 students with over US$8 million.

These external resources have helped in bridging the gap arising from insufficient funding from the national treasury. Top of the list is USAID’s support in the training of over 5,500 middle-level health workers; and Barclays Bank of Kenya which is supporting over 470 orphans and vulnerable students through scholarships.

However, a financing partnership agreed between Kenya and French public financier Agence Française de Développement (AFD) four years ago is yet to gain any traction. Under the deal, AFD was to extend credit lines to fund university expansion and student loans through private Kenyan banks.

In addition, partner banks will be legally entitled to take loans in foreign currency and will be subject to an in-house risk review by the AFD, as the credit lines will not be covered by state guarantees. The initiative will include tailored credit lines, other tools such as risk-sharing and technical and institutional support, and will help set investment incentives and reduce barriers to scaling up investment in higher education.

As reported earlier by University World News, HELB’s financial status has been worsened by a shortfall of US$4 million which is currently held as deposits by one of the local banks – Chase Bank – that was placed under receivership in April 2016 by the Central Bank of Kenya. Of this, US$1 million was in short term investments, while the balance was held in deposits. Chase Bank suffered operational challenges after the regulator unearthed a scam which could have led to the loss of millions of dollars in depositors’ funds, a matter still under investigation.