By Amb. Emmanuel Mwamba
Government has announced an exciting initiative to get Civil Servants out of the debt trap that they have found themselves in.
In 2004, Government introduced financial sector reform strategy through the Financial Sector Development Plan (FSDP) as a mechanism.
The FSDP identified a range of areas for improvement in the financial sector including:
(i) levels of financial
(ii) credit culture in the market; (iii) the role of the Government in the financial sector;
(iv) the regulatory framework for Non-Bank Financial Institutions (NBFIs), insurance and pension funds;
(v) the development of the capital market;
(vi) long term development and housing finance; and
(vii) monetary policy instruments.
RISE IN PAYROLL CREDIT
Following the financial reforms, there emerged a rise in payroll based credit.
A payroll loan is a general purpose loan, widely referred to as a personal or a consumer loan in which the access to credit is provided.
This is provided by both banking and non-banking financial institutions.
The loans tend to be short-term loans repaid over 1-3 months.
The loan could also be long-term with some institutions offering loans with recoveries spread to 48 or 60 month, especially for relatively large amounts.
The security undertaking is assured by the future income of the borrower hence they are granted on the basis that the borrower can prove that they will be in employment and will remain so for the foreseeable future covering the duration of the loan, hence civil servants who have security of tenure for periods considered for the loans.
The loans are used for a variety of activities, from home/land purchase to home repair, to purchasing large moveable assets such as a car to meeting daily needs as well as life-cycle expenditures such as school fees and funeral costs.
These reforms brought about the rise in payroll-based lenders in the market targeting employees in the formal sector.
Current estimates indicate that the total number of formally employed persons in Zambia is approximately 900,000, of which 500,000 work in the private sector and 270,000 work for Central or Local Government.
An additional 60,000 work for parastatals, with the remaining 70,000 working for non-governmental organisations (NGOs) or other entities.
A plethora of micro-finance institutions emerged relying heavily on civil servants’ loans and the security of recoveries done centrally through the PMEC Payroll system.
The Payroll Management and Establishment Control (PMEC) is a payroll system established to monitor and control expenditures on personal emoluments in the Public Service.
Microfinance institutions lend at higher rates of around 50-60 per cent and has led to civil servants and other workers trapped in a vicious debt cycle.
GETTING CIVIL SERVANTS OUT OF THE DEBT TRAP
The processes being employed to help the civil servants out of a debt trap are several and include.
1. DEBT SWAP
Here, a Civil Servant owes government and the government owes the civil servant.
The two parties cancel each other’s debt. If one of the party owes more, then the one who owes more settles the difference.
2. DEBT DISMANTLING
Here, Government owes a civil servant a debt for example accruing from terms of employment such as Settling Allowance, Leave Pay, Long-service bonus etc.
In this regard, Government has already started to dismantle this debt by paying out actual cash to employees who are owed. In June 2021, Government released over K200 million for this particular purpose.
3. DEBT RESTRUCTURING
In this case, Government will pay off the debt which Civil Servants owe third-party financial institutions.
Government will transfer the loans to the newly created Public Service Micro-Finance Company.
This is a Government owned micro-finance company. In this case Government will restructure the loans by lengthening the repayment period and lowering the interest rates.
Government has since frozen any loan recoveries for a period of three months as the process is undertaken.
The sum total of these measures will result in improved take-home pay for the civil servants and a path out of debt.
Payroll lending especially predatory lending perpetuated by micro-finance institutions requires regulation which should limit debt repayments and debt deductions.
But overall, the solution lie in the recovery of the economy from recession that has been pummeled by the Covid-19 pandemic and by earlier factors such as disasters, floods, droughts, energy shortage, and local and foreign debt.
What is your view?