Student loan scheme seeks fresh funds in new plan

The Higher Education Loans Board (HELB), the agency that disburses loans to students on behalf of the Kenyan government, launched a five-year strategic plan recently aimed at increasing loan allocations, easing the loan application process, improving the loan allocation criteria to capture the neediest cases and ensuring timely disbursements.

HELB plans to review interest on loans to the Central Bank of Kenya base lending rate +1 within four years. The loans currently attract an interest rate of 4% while the cost of funds is about 8%, which means that in the long run the fund is shrinking without a matching government capitation. This will make the loans more expensive for students, placing a bigger repayment burden on them after graduation and exposing HELB to a higher credit risk.

Loan defaults have been one of the biggest challenges for the agency, which has nearly crippled its lending capacity at a time when there are more students seeking loans than ever before.

Due to the high level of unemployment and migration of beneficiaries to the diaspora seeking greener pastures, the number of defaulting borrowers has continued to increase and currently stands at 61,700 beneficiaries holding a total of KES6.5 billion (US$65 million). This is a default rate of over 30%, nearly thrice Kenya’s financial sector percentage of non-performing loans which stands at around 12%.

“The board will step up efforts to recover the loans from the defaulters by increasingly engaging beneficiaries who have migrated to the diaspora, tracing and bringing into the repaying brackets borrowers working in the informal sector, engaging strategic partners for support in recoveries and compliance,” said HELB Chief Executive Officer Charles Ringera.

Extending HELB’s reach

HELB plans to annually increase the student loan allocation by 5%. It will also raise the number of beneficiaries covered under the scheme from the current 282,113 students to 394,789 in the next five years.

To achieve this, HELB hopes to increase the available lending portfolio by 100%, to KES2.6 billion from the current KES1.2 billion. Effectively, the minimum loan allocation per student will increase from KES36,780 to KES46,721, while the maximum will be raised from KES59,644 to KES75,549.

The agency said it will also seek to establish links with other organisations within and outside Kenya for funding to enable it to become a fully-fledged financial institution for student financing. This will see it attract syndicated funds from development partners and global financial institutions. Additionally, this will see the agency float an education bond by 2022, after seeking clearance from the Capital Markets Authority and the National Treasury.

Financing options

To address the issue of over-reliance on the treasury for funding, HELB said it will centralise higher education financing using the already elaborate system on applicant’s needs identification, disbursement and recovery of mature loans. This will ensure that no beneficiary is over-funded and higher education financing is sustainable through the establishment of a National Higher Education Revolving Fund.

“There are several models for higher education financing revolving funds across the globe with a diverse mix of pure social funds and also revolving funds. Benchmarking on the best models globally needs to be pursued,” said HELB in the strategic plan.

HELB hopes to raise an estimated KES8.9 billion over the next five years for lending, both from the government and alternative sources. Additionally, the agency 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 KES795 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. The initiative was to include tailored credit lines, other tools such as risk-sharing and technical and institutional support, and would help set investment incentives and reduce barriers to scaling up investment in higher education.

Investing surplus funds

HELB said in the new plan that it will seek to invest any surplus funds not currently required for the operations. This will see it tap into low-risk investment options like treasury bills and treasury bonds, an avenue it was not previously investing in.

As part of the new efforts to 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’s HELB loan repayment status and remit their staff loan repayments online.

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

Increased university fees and cost of living has meant that the KES36,780 average loan the agency advances to individual students annually has not been adequate. A study commissioned by HELB last year showed that a student in a university required about KES121,277 per annum to study comfortably.

But HELB has not been able to meet this demand due to constrained funding occasioned by lower than expected government capitation.

New policy constraints

Last year, the students funding budget was at US$110 million, which is about 60% of the envisaged US$190 million that the agency had sought. And the state of affairs has been worsening under a new policy regime.

In October 2016 and February 2017, Kenya’s President Uhuru Kenyatta gave an executive directive for HELB to fund Kenyan students in foreign universities. The agency is calling for a review of the directive, to consider what is required to realise the directive.

“Loan recovery strategies need to be enhanced to cater for increased mature loans and the increased number of graduates migrating to the diaspora,” said HELB in the strategy.

As at the end of last month, 438,247 loan accounts worth KES5.3 billion had matured for repayment, while 386,091 loanees holding KES3.6 billion had not matured. A total of 213,193 loanees had cleared their loans worth KES2 billion. Further, a total of 156,961 accounts valued at KES2.3 billion were repaying their loans, while 68,093 loanees holding KES6.5 billion are in default. This means the loan portfolio is performing at 70%.

HELB Chairman Ekwee Ethuro said: “We think HELB is better positioned to centralise distribution of all funding to students in institutions of higher learning. Funding, whether in form of grants, National Government CDF/county bursaries, scholarships or even corporates who fund students in institutions of higher learning as part of their corporate social responsibility, should be channelled through a centralised mechanism such as HELB that is experienced and has infrastructure built over 24 years.”