CIVIL SERVANTS RIPPED OFF WHILE GOVT. LOOKS ON

Government’s decision not to guarantee commercial bank loans for its workers has plunged civil servants into the jaws of aggressive lenders who, taking advantage, are charging them more than double the ruling market interest for personal loans.

 

The country’s central bank, the Reserve Bank of Malawi (RBM), while acknowledging that it currently has no powers to control such charges in a liberalized economy, has since described the rates as shocking. The revelations have also enraged rights groups who have since asked the RBM to intervene.

 

Investigations revealed this week that while commercial banks in the country charge annual interest of less than 25 percent, civil servants are charged more than 100 percent interest per year on loans taken from Blue Finance Company while Green Wing Capital slaps slightly over 50 percent interest annually.

 

The two new entrants—who base their charges using the simple interest formula instead of the widely accepted compound interest— exclusively offer their services to civil servants. Financial experts have condemned the use of simple interest on loans as wrong since, if we are to take the 50 percent interest, a borrower would have to pay 100 percent accumulated interest in two years.

 

According to a loan repayment schedule from Green Wing, a K100,000 loan will attract an interest of K152,000 if payable in 36 months, while for the same period a K200,000 loan would fetch K303,820 interest, a K300,000 loan K455,820 interest and K400,000 loan would have K607,640 as interest.

 

This means that a civil servant who has taken a K400,000 loan would have to repay interest and principal amounting to K1,007,640 after 36 months.

 

At Blue Finance, the loans are calculated at 15 percent interest per month using the simple interest formula. This means that a civil servant would cough a total of K2,160,000 in interest and principal on a K400,000 loan payable in 36 months.

 

The loans are payable in installments of six, twelve, 24 and 36 months depending on the amount of the loan and the income of the borrower.

 

Despite such interest charges and without clear conditions, a Nation on Sunday visit to both companies indicated that most civil servants are flocking to get what are being dubbed as ‘easy same day loans’ since they do not have much option on the back of mounting pressure to meet their financial requirements.

 

Blue Country Manager Brett Marshall admitted that their interest rates are usually more than 100 percent.

 

He, however, declined to confirm whether the rates at Blue are at 15 percent per month only saying that recently the rates were reduced by more than 40 percent.

 

Marshall said the major differences between micro-finance lending institutions like Blue and the commercial banks was that the latter raise their capital from the deposits from the public while the other institutions are privately funded.

 

“On top of that we don’t ask collateral which is a greater risk. When a company faces a greater risk it also expects high returns,” he said.

 

Marshall also said the interest rates are high because they are servicing a huge number of small loans as a result of the low income capacity of their clients which means a higher administrative cost.

 

Green Wing Managing Director in the country, who declined to give out his name, said their rates were high because they include an insurance known as credit life. He also said when a client dies they support the funeral with K20,000, a cost which he said is also factored into the interest.

 

He added that the interest covers a lot of risks since the loans have no security and collateral. The Green Wing chief also said differences in interest rates charged in the countries where the company gets funding through loans and the local ones also contribute to the high interest rates.

 

He explained that Green Wing rates are at almost 51 percent per year calculated using a simple interest formula.

 

“This rate is well below what a lot of lending institutions in the SADC region charge. If we take out all the elements that are factored into the interest you will see that our interest rate is at about 27 percent per annum,” he said.

 

In an interview, both Civil Servants Trade Unions (CSTU) and the Teachers Union of Malawi (TUM) acknowledged that the civil servants are being reaped off but said this was mainly so because most civil servants have no option after government stopped guaranteeing loans from the commercial banks.

 

“The situation is pathetic. The major problem is that government stopped guaranteeing loans and government itself cannot even give you a loan or an emergency one which means as civil servants we don’t have much option but to still go where we are being reaped off,” said CSTU General Secretary Pontius Kalichero.

 

Kalichero said even his union was surprised with the coming in of these  two lending institutions because he said during their discussions with government they have been planning to have an institution which will be giving out the loans on a “very modest” interest and not what is being charged.

 

TUM General Secretary Davis Kalekeni said teachers are the most victimized in the whole set up. He, however, said Blue and Green Wing were not to blame since he said the two are here to do business and make profits.

 

“The issue is that there is no facility for teachers to access loans, the only form of loan is at regional level when your relative dies, as a teacher you are given a letter to get a coffin whose cost is then deducted from your salary.

 

“It is such a situation that has created problems whereby teachers are desperate and go wherever they can to get a loan at whatever cost because they have no option. The teachers are trying hard to get ways they can survive,” said Kalekeni.

 

The TUM General Secretary said although government stopped guaranteeing loans the decision was made without any consultations with the unions.

 

“It seems government is running away from its obligations to its own  employees. However, I don’t think as government it should do that, it has to come up with a solution to the situation,” he added.

 

Malawi Economic Justice Network (MEJN) called on both government and the Reserve Bank of Malawi (RBM) to intervene and stop the ‘exploitation’.

 

MEJN Executive Director Andrew Kumbatira said although the country’s economy is liberalized, government still has an obligation to protect its citizens especially the civil service.

 

“Liberalisation has to be managed and not to have the weak exploited. Technically speaking, in a liberalised economy, there is no limit to how much interest an institution can charge but every situation has to be managed to avoid pushing people to exploitation,” he said.

 

He added: “Government, especially the Reserve Bank need to do something to make sure that these lending institutions are not being turned into modern day katapila (usury). We appeal that they have to come in and check the situation.”

 

Director of Centre for Social Concern (CFSC) Joseph Kuppens said it was not the two institutions at fault but that government should have found a way of assisting civil servants who he said most of them already  have a burden of having salaries below the basic needs basket.

 

“In principle, you will need to expect that financial institutions will want to cover themselves if there is no guarantee (for loans) at all, by way of collateral. Therefore if government refuses to guarantee loans, it is to be expected that the service provider does charge more by way of interest,” he said.

 

Kuppens said if government can not increase salaries of civil servants to a comfortable level it would be only prudent for it to guarantee commercial bank loans so as to give civil servants access to credit to offset their poor salaries.

 

He said to assist in the situation government could be creative and since it would want to support the private sector, it can arrange some private sector to handle the loans or encourage banks who he said some of  them are already willing to make an extra step to make finance accessible to those who are less well off.

 

Kuppens said demanding “impossible interests is a formula for disaster” for those who are the beneficiaries of the loans because, he said while they are pushed into debt because of urgent needs, the civil servants may end up loosing everything when they are unable to pay back.

 

“In principle, the burden of lending and borrowing should be shared by both the lender and the borrower. But here profit has become the main and often only motive in any bussiness and this makes our society all the poorer,” he added.

 

However, RBM said it was powerless to intervene on the situation in the absence of an enabling law while ministry of finance said it would not be correct to push the problem to them since at no time has government guaranteed loans for individuals.

 

RBM spokesperson Mirriam Wemba, who sounded shocked with the figures when presented to her, agreed that the Central Bank was supposed to be supervising these micro-lending institutions but said at the moment there was no enabling law for RBM to do that.

 

“RBM only supervise banks, however, soon we will also be looking at such institutions. All we are waiting for is the enactment of the law,” she said.

 

Wemba said the drafting of the law was already finalized and it was only remaining with one or two steps before enactment. Secretary to the Treasury Landson Mwadiwa said in the civil service there has never been a provision whereby government would guarantee loans for its employees.

 

“If people were doing that, it was illegal. It is not normal for government to guarantee loans for individuals,” he said.

 

Mwadiwa explained that it would require an approval of Parliament for government to guarantee a loan for any individual.

 

He, however, said government has a provision to give loans to individuals but that “the demand for such loans has been too high and with the amount of finances available, the loans can not reach out to everyone.”

 

Mwadiwa could not be drawn to comment on the plight of the civil servants at the two lending institutions saying that is the responsibility of the Reserve Bank.