Wanted: US$100 million for student loans

Kenya’s Higher Education Loans Board (HELB), the agency that disburses loans to university students for the government, is seeking a US$100 million syndicated loan from an international financier to boost its funding capacity amid growing demand for financial help.

The agency says discussions are at an advanced stage with the Kenyan National Treasury to secure the debt at a rate of 7% for onward lending to university students.

“We are looking at this opportunity and the national treasury has to give us the sovereign guarantee to be able to attract that funding,” said Charles Ringera, the chief executive officer at HELB, speaking in parliament on 21 March.

HELB said it was no longer able to meet the demand for loans due to constrained funding occasioned by lower-than-expected government capitalisation. Amid COVID-19’s economic impact, the fund, owed about US$500 million, is also experiencing an increase in defaulters.

The fund did not, however, disclose the name of the targeted lender or further details of the loan. In the past, it had indicated that it would tap development partners and global financial institutions.

Fund is shrinking

In its five-year strategic plan launched at the end of 2019, HELB said it would seek funds from organisations within and outside Kenya to enable it to become a fully fledged financial institution for student financing.

Additionally, the agency plans to float an education bond by next year, after seeking clearance from the Capital Markets Authority of Kenya and the Kenyan National Treasury.

HELB also plans to review interest on loans to match it to the Central Bank of Kenya’s base rate, meaning the rates will be hinged on the regulator’s base rate, currently at 4%.

This will make the loans more expensive for students, placing a bigger repayment burden on them after graduation and exposing HELB to higher credit risk.

Reeling from rising defaults

Five years ago, HELB said Kenya had signed a financing partnership with the French public financier Agence Française de Développement whereby the latter 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.

However, nothing much has been heard about this transaction since.

The new loan should help bolster HELB’s kitty, coming at a time when it is reeling from rising defaults and low repayment, as beneficiaries struggle to make ends meet due to the ongoing global COVID-19 pandemic.

Additionally, government funding, the main source of HELB’s budget, has not matched the growing demand for loans.

A reduction in loan interest rate?

The Kenyan National Treasury allocated US$160 million to the agency for the current financial year to finance its activities.

“HELB is not adequately funded to carry out its mandate of financing higher education as the number of students in the recent past continues to rise and [so has] the need for new students to acquire laptops to ensure they are able to undertake virtual learning.

“The committee observed that there is underfunding, which has inhibited service delivery in learning institutions and other critical institutions such as HELB,” said Kanini Kega, a legislator who chairs the budget appropriation committee in parliament.

The fund has a target of recovering US$50 million from beneficiaries this year, with data showing that at least 106,443 former university students have defaulted on their HELB loans in the wake of the pandemic.

HELB charges a levy of US$50 to all beneficiaries one year after leaving university, whether they are employed or not.

Parliament is pushing to have interest rates on students’ loans cut by one percentage point in changes which the agency has opposed, saying this will deny it of a substantial chunk of annual revenues, estimated at US$6.5 million.

Under proposed changes to the HELB Act, interest on the loans will fall to 3% from the current 4% and defaulters will be exempted from paying the US$50 fine.

Government plan needed

“When HELB was introduced, the problem was the inability of parents and their children to afford university education. Public funding of university education was underscored as an important national undertaking,” said Dr Collins Odote, a lecturer at the University of Nairobi, in a recent newspaper commentary.

“When students complain about not accessing the money, the implications are that they cannot pay for their hostels and buy food and other necessities so that they cannot focus on their university education.

“The larger question must be, therefore, about what the government policy for dealing with this problem is,” he said.

“On a larger scale, it is time for government to relook at the university funding model and address the perennial underfunding and resultant financial crisis that many of them are facing,” he added.

Increased university fees and cost of living has meant that the US$367 average loan the agency advances to individual students annually has not been adequate.

A study commissioned by HELB in 2018 showed that a student in a university required about US$1,212 per annum to study comfortably.

Loan recovery woes

By the end of last year, HELB statistics show that 438,247 loan accounts worth US$53 million had matured for repayment, while 386,091 loanees holding US$36 million had not matured.

A total of 213,193 loanees had cleared their loans worth US$20 million.

Further, a total of 156,961 accounts valued at US$23 million were repaying their loans, while 68,093 loanees holding US$65 million are in default. This means the loan portfolio is performing at 70%.

Over the past five years, HELB has sought several avenues to reduce the level of non-performing loans which have crippled its growth ambitions, with its financier, the government of Kenya, cutting its disbursements in the wake of the surging demand for loans.

Last year, HELB recovered more than US$5 million following a two-month amnesty issued by the government.

HELB is mandated to provide loans, bursaries and scholarships to Kenyan students pursuing higher education in recognised higher education institutions and to recover loans from the beneficiaries.

It is estimated that HELB is owed almost KES50 billion (almost US$500 million) by former university students and cannot trace 17,000 of its loan defaulters.