Githae law requires all workers to open salary accounts
Workers during Labour Day celebrations in Mombasa. The Ministry of Finance is drafting a law that will ensure all employers pay staff through banks. Photo/Gideon Maundu
The Ministry of Finance is drafting a law that will make it mandatory for all employers to pay their staff through bank accounts, in a bid to widen the tax payers’ net and deepen the reach of financial service providers.
Minister Njeru Githae said the law will be introduced in this year’s Finance Bill, even as employers questioned its practicability.
“The law will promote financial inclusivity,” said Mr Githae, adding that access to minimum banking services would boost economic activity by availing more money to finance entrepreneurs.
But the Federation of Kenya Employers (FKE) said the rule may not be practical in some situations.
FKE said in a statement that employers are usually forced to pay in cash where employment is of a short-term nature, or the employee does not have a bank account or where employees are paid small amounts and cannot afford to maintain a bank account.
Employers may also pay in cash at the request of an employee or where the only bank is too far and would require one to spend a lot of time and money to reach the bank.
The use of bank accounts would allow employees to borrow loans for investment purposes, while also encouraging them to grow their savings. While saying the minister’s intentions are good, Nikhail Hira, a tax partner at Deloitte & Touche, questioned how this was to be attained in areas where banks were not present.
“That will bring people in the tax net, but what of areas without bank branches and what of persons without documentation required,” said Mr Hira.
FKE said it would be against such a law as a large part of the Kenyan economy is run in the informal sector where the mode of transaction is cash.
“Such a law is unnecessary as it would limit the right of an employee to dispose of his salary without restriction as envisaged in the Act. Most banks require a minimum deposit or charge fees which some employees cannot afford. It is not clear what the intention of such law is,” added the federation in an e-mail statement.
Banks charge a salary processing fee ranging between Sh100 and Sh500 and further a withdrawal commission charged on each transaction.
The federation said it was also concerned with the cost of supervising enforcement, which it said was likely to be high given that the Ministry of Labour charged with implementation of the Employment Act is understaffed.
The employers body hinted that the law was meant to handle tax evasion, stating that “employers need to be clear on what mischief the proposed law seeks to cure then discuss and get an agreement on how best to address the issue.”
Mr Hira pointed out that most people who are paid in cash fall below the minimum tax bracket of Sh11,135.
Mr Githae, however, believes that the agency banking model and shortened branch opening approval process will increase access to banking facilities. The model allows accredited ordinary business outlets to be used to offer basic financial services.
“We have eased the process of opening bank branches. Initially it used to take up to two years as the bank had to apply to the Central Bank which had to forward the application to the Treasury.
“We have changed that so that all that is needed is the minister’s approval,” said Mr Githae.
As at end of 2010, there were 1,063 bank branches in the country, with North Eastern having 18 and the populous Western Kenya having 48 branches.
If enacted, the law would raise competition for mobile money transfer service providers which have been pushing for staff salary disbursement contracts.
