Global IssuesECONOMY: Microlenders and Swazi Government: Untidy Divorce
When the Swazi government announced that it would no longer deduct loan repayments from the salaries of civil servants on behalf of microlenders, the sector was thrown into chaos.
In December 2008, government ordered microlenders to stop disbursing loans to civil servants until they found a new strategy to recover their monies. Microlenders were given up to June to collect debt through the government system.
The Swazi government, like major private sector employers, had entered into an agreement with four micro lenders - MP Swaziland, Select Management Services, Swaziland Finance Development Services and Blue Financial Services - to deduct monies owed to them by civil servants directly from the salaries of public servants, greatly reducing the recovery risk for the lenders.
However, this plan backfired because government soon found itself deducting 100 percent of the paycheques of some public servants, in violation of the Employment Act, which states that no more than a third of government employee's monthly wages may be attached. 'Government, through the treasury department, deducted down to zero for some civil servants in violation of the Employment Act, 1980,' said Ministry of Finance principal secretary Dumisani Masilela.
'And when a person nets nothing at the end of the month, productivity goes down,' he added wryly.
Masilela accuses microlenders of charging exorbitant interest rates and also pushing clients into greater indebtedness through unscrupulous means. He said some lenders packaged their loans with funeral and investment policies which then dug deeper into the pockets of the consumers. Yet microlenders have a powerful appeal to consumers because they run less stringent credit checks compared to banks. It is also easy for microlenders to disburse loans to people with whom they have signed agreements with their employers to deduct directly from the pay system.
MP Swaziland chief executive officer Vusi Dlamini conceded that Swaziland's 35,000 public servants are microlenders' main clients.
There are not many big employers in Swaziland, and, Dlamini explains, 'many people are employed in the textile and garments industry whose businesses close down all the time. But there is no way a government can discontinue its operations, which is why the risk of lending to civil servants is quite low.'
Dlamini argues that the interest rates charged by microlenders have to be higher than those charged by banks because microlenders borrow from banks to give loans to their clients. While banks charge an average annual interest of prime rate of 13.5 percent plus 10 percent, microlenders on the other hand charge an average annual interest of 30 percent.
Dlamini also alleged that some borrowers were dishonest in that they would not disclose all their debts when they go to borrow money.
But government’s move has forced micro lenders to spring into action. The microfinanciers have proposed the setting up of an agency which will regulate their operations with the possibility of also collecting debt on their behalf. Although negotiations in this regard have not been concluded yet, government seems to be in love with the idea.
'We want them (micro lenders) to demonstrate to us that they can lend money responsibly. This agency is going to be funded and monitored by them,' said Masilela.
Although Masilela acknowledged that microfinanciers were much more accessible to the thousands of Swazis who could not get loans from banks, the entrance of so many players in the field was giving government a headache. 'Now people borrow from more than one institution which is why they end up getting nothing at the end of the month,' said Masilela. 'With no regulatory mechanism in place, micro lenders seem to be relaxed about ensuring that people get loans are those who can afford to pay and still lead decent lives.'
But Masilela said microlenders are legitimate businesspeople who pay tax, employ Swazis and give small loans to Swazis and should not be put in the same boat with illegal loan sharks. He emphasised that government was helping civil servants to access loans through attaching their salaries because microlenders do not demand collateral.
'But when things started to get out of hand, government was forced to change policy which is why we had to end this relationship with microlenders,' said Masilela.
The Swaziland National Association of Civil Servants (SNACS) welcomed government’s decision to end its relationship with micro lenders as a way of easing the debt burden on public servants. SNACS secretary general Vincent Dlamini said last year the association initiated a meeting with Masilela and accountant general Khabonina Mabuza where they raised their concern over government's involvement in the business of microfinance. 'It's not the employer's responsibility to ensure that workers service their debts,' said SNACS' head Dlamini. That government deducts the loan instalments directly from the salaries of public servants has made the microlenders to target civil servants specifically. In this way, most of our members were sinking deeper and deeper into debt.'
SNACS' Dlamini said microlenders should not be treated differently from banks because it was the responsibility of every financial institution to devise its own strategies of collecting debt.
However government’s withdrawal from the deal does not entirely solve the problem because the debt will not be written off, instead microlenders have been thrown into the deep end because they have to find new ways of recovering their money.
'Banks use stop orders to get their money from their clients. They also go to the extent of taking defaulters to court, the same strategy that could be used by microlenders instead of conniving with our employer,' explained Dlamini.
Government's decision has come at a high price to micro financiers. Not only are they faced with the reality of scaling down their services or even closing down, some of their employees are already sitting at home anticipating their fate. 'Since January we haven't been issuing loans to public servants,' said MP Swaziland’s Dlamini.
He said January was supposed to be the busiest month in the microlending sector because a lot of people need money to pay school fees. Instead, as a result of the government's move, said Dlamini, MP Swaziland had to lay off 16 sales consultants because there was no work for them. 'The only people who remained are the collections team,' said Dlamini. Masilela said government was also piloting the Financial Services Regulation Authority Act which will further enhance the operation of micro lenders in the country. This piece of legislation is also going to address the debt problem at national level not only within the civil service. Through this piece of legislation, said Masilela, micro lenders would be compelled to conduct their business in a manner that would not leave Swazis impoverished.
© Inter Press Service (2009) — All Rights ReservedOriginal source: Inter Press Service