Banks and saccos are counting on Monday’s presidential directive for teachers to be paid their full salaries to save them from massive loan defaults.
The Teachers Service Commission (TSC) released the tutors’ pay on Saturday, in which a section of primary school teachers were only paid for the 10 days they worked in July.
This saw the lowest paid public primary school teacher get about Sh6,500 which would have been deducted to settle loans and advances.
If the balance of the cash is not paid immediately and has to wait for the next payslip, saccos are staring at short-term liquidity problems and depressed interest income from the check-off loan schemes.
Metropolitan Teachers Sacco confirmed that it had only recovered 60 per cent of total monthly loan repayments after processing July salaries for its members on Monday.
“Our cashflow will be greatly affected and this will have an adverse effect on our operations,” Benson Ng’ang’a, finance manager at Metropolitan Sacco told the Business Daily.
“We will make internal arrangements to reschedule the loans, but the delayed interest income will have revenue implications for us.”
The magnitude of the salary deductions is highlighted by the fact that primary school teachers make up roughly two thirds of Kenya’s public teachers workforce totalling 278,000 tutors.
Furthermore, teachers’ saccos had advanced loans worth more than Sh100 billion as at the end of last year, data from the Sacco Societies Regulatory Authority shows.
Metropolitan Sacco’s loan book stood at Sh3.8 billion as at June lent out to its 40,000-strong membership made up mostly of public school teachers.
Mr Ng’ang’a said that the Sacco was only able to recover Sh60.6 million out of the expected Sh100 million.
The Teachers Service Commission ignored the one-third rule in making the payments, allowing financial institutions to raid teachers’ payslips, leaving some with a take-home of as low as Sh60.
The Employment Act provides that total deductions from a worker’s salary and wages must not exceed two-thirds of one’s total pay.
This means that the teachers are entitled to receive at least a third of their salary regardless of whether they had taken up loans, advances, medical schemes and private pension plans.
The teachers’ pay was dispatched as President Uhuru Kenyatta met Kenya National Union of Teachers officials and promised them tutors would be paid their salaries in full.
Secondary school teachers and those in public colleges were spared of the deductions because the Kenya Union of Post Primary Education Teachers (Kuppet) called off its strike and engaged TSC in negotiations.
The Kenya Bankers Association said that lenders are yet to evaluate the possible effects of the salary deductions on loans and advances.
“We have not compiled data on teachers’ loans. This is a matter that is a decision of individual banks,” said chief executive Habil Olaka.
The giant Mwalimu Sacco with a membership base of 52,664 and a loan book of Sh18.9 billion is set to be hardest hit.
“The loans will be rescheduled and we’ll recover them over a longer period,” said Mwalimu Sacco chief executive Joshua Ojall.
“Giving out more loans will be a challenge as our cash flow will be affected,” he said before the president ordered the release of the cash.
Public servants such as teachers have been a prized target for banks and saccos — wooing them with cheaper loans, salary advances and top-ups — due to the security of tenure they enjoy.
Most banks have developed special packages for teachers in the form of unsecured loans. For example, Family Bank offers unsecured loans of up to Sh3 million repayable in 72 months to civil servants through the check-off system.
Saccos allow members to borrow as much as three times their deposits and offer interest rates as low as one per cent per month.
“Our members who suffered the effects of the high commercial bank interest rates in 2011 returned to the sacco to sell off the bank loans,” said Mr Ojall.
The unprecedented move by the TSC to deduct teachers’ pay raises serious questions on the security of giving loans to civil servants.
Metropolitan said the defaults would have forced saccos to make higher provisions for loan losses this year, eating into their surplus earnings.