Civil servants to benefit from car loans at 3 per cent

Treasury secretary Henry Rotich has published fresh regulations unlocking Sh1 billion to finance a motor vehicle purchase scheme for civil servants.

Publication of the regulations paves the way for the Treasury to establish the State Officers and Public Officers Car Loan Scheme Fund and recruit staff to run it.

The fund will receive car loan applications from civil servants and process them according to set guidelines that prescribe the maximum amounts available for workers across the various cadres.

The regulations also provide for procurement of a financial institution that will disburse the car loans to civil servants once they are approved by the fund.

The car loan scheme, which was announced in 2014 together with a mortgage scheme, will enable government workers borrow money at interest rates of three per cent – way below the 15-20 per cent average commercial banks are charging.

“The initial capital of the Fund shall be Sh1 billion appropriated by Parliament in the financial year 2014/15 and additional capital of the Fund shall be made in the subsequent financial years’ budgets,” Mr Rotich said.

The 2015/16 budget did not make any extra allocations for the car loan scheme.

The regulations say that the loans will be provided on a first-come first-served basis meaning that the Sh1 billion could run out in months.

The car loan and mortgage schemes are seen as sweeteners that should add to the allure of public service. The Civil Service has in recent years competed with the private sector for top talent.

“It is expected that implementation of the benefits will motivate public officers and immensely contribute towards attraction and retention of requisite skills in the public service,” Sarah Serem, the chair of the Salaries and Remuneration Commission, said earlier in the year.

The regulations have set out a schedule of how much officers in each grade can apply for. The amounts range from Sh600,000 to Sh10 million.
Cabinet secretaries, the Attorney General, Secretary to the Cabinet and Auditor-General are entitled to a maximum of Sh10 million car loan.

Principal secretaries, chair and members of independent commissions and the Controller of Budget will get up to Sh8 million while the Director of Public Prosecutions will get up to Sh6 million.

The Registrar of Political Parties, secretaries of independent constitutional commissions, chief executive officers of government agencies will get up to Sh5 million while civil servant in grades S, T and U will be entitled to Sh4 million.

Those in grades P, Q and R will be entitled to Sh3 million while those in grades K, L, M and N will receive a maximum loan of Sh1.5 million.

Civil servants in job groups G, H and J will get up to Sh800,000 while those in A, B, C, D, E and F will be limited to a maximum of Sh600,000.

Publication of the regulations comes at a time when the cost of popular imported used vehicles is rising rapidly with the depreciation of the shilling against the US dollar.

Besides, many dealers – especially of new vehicles – are now quoting their prices in dollars to cushion themselves against the shilling’s volatility.

The loan amounts, especially for the lower cadre government employees, make it impossible for them to afford new cars and they will be forced to resort to second-hand vehicles.

Toyotsu Automart, a second-hand car dealer, for example, quotes the price of a Toyota Vitz at Sh790,000; a Mazda Demio at Sh770,000 and a Toyota Axio at Sh1.29 million.

READ: Pay blocks most civil servants from car, home loans

The Toyota Harrier, a sports utility vehicle, is priced at Sh2.8 million while a new Hyundai Accent goes for $23,500 (Sh2.46 million).

Financial experts reckon that those below job group H will find it difficult to access the loans and meet a lending rule that requires them to retain at least one third of their pay after taxes and other deductions.

Thousands of civil servants in job groups A, B, C and D, who earn an average of between Sh11,420 and Sh15,670 per month are technically locked out of the scheme.

A car loan of 600,000 would require a monthly deduction of Sh10,781 over the five years that the regulations have provided for payment.

The government workers will not be allowed to take more than one car loan in five years.

Besides the three per cent interest rate, which shall be on a reducing balance, the fund is allowed to charge up to two per cent of the value of the loan to cover management costs.

If the fund opts to charge the maximum two per cent, this will effectively push the total cost to five per cent of the value of the loan.

The Rotich regulations require applicants to fill an application form, attach a copy of their national identity card, certified copies of their payslips for the preceding three months, a copy of the sale agreement, a Sh1,000 application fee and a valuation report of the car.

The value of a new car shall be as quoted in the invoice but for a second-hand vehicle, the buyer will have to obtain a valuation report from a certified automobile valuer registered in Kenya.

Defaulters

Once the loan has been processed, the money will be sent directly to the account of the seller or supplier of the vehicle.

The vehicles to be purchased must not be more than eight- years- old from the date of manufacture.

The regulations also add that the vehicle will not be used for commercial purposes and will have a comprehensive insurance cover.

The repayment of the loan will be via a check-off system. Defaulters will be given a three-month grace period before the car is repossessed and auctioned off.

The fund administering the scheme will be allowed to spend up to five per cent of the budgeted amount to cover its expenses.

This means that for the first year, the fund will be allowed to use Sh50 million leaving Sh950 million for the civil servants.