Teachers face bigger salary cuts  for check-off loans

Teachers who are currently servicing loans should brace themselves for higher monthly deductions after their employer refused to review its decision to increase the fees it charges for processing repayments on behalf of lenders.

Citing increasing costs in administration of the check-off system, the Teachers Service Commission in October, last year, issued a circular to the financial institutions saying it would increase the processing fees from the current Sh20 per transaction to Sh100.

The plan to impose a 400 per cent increase of the fees was vehemently opposed by both teachers and financial institutions, saying it would result in higher interest rates and longer repayment periods of loans.

In January, the commission agreed to postpone the implementation of the new rates to April.

The idea was to use the three-month delay to negotiate with the parties involved.

However, Smart Company has now learnt that planned talks between the commission, which administers teachers’ salaries, and lenders are yet to take place with less than a week to the end of April, when the TSC had proposed to start implementing the increment.

Sources said efforts by commercial banks, microfinance institutions and Saccos to bring the TSC to the negotiating table have failed.

POTENTIAL CHAOS

Critics say the teachers’ employer is looking at the check-off system as a revenue stream and it is banking on the revised rates to drive up income.

Currently, banks, Saccos and micro-financiers absorb the Sh20 charge per transaction by TSC.

The lenders have, however, made it clear that any increase of the fee would be passed on to teachers in the form of higher and longer repayment period for their loans.

Those in the know say that banks had offered to take in the cost if TSC increased the fee by 50 per cent to Sh30 as opposed to its proposed Sh100, but the commission has remained adamant.

In a confidential letter written to bankers and copied to microfinance institutions and hire purchase companies in January, the commission said that it would start implementing the Sh100 charge this month, having postponed its planned roll out in January.

“In the interest of reaching an agreement, KBA proposed to increase the charge that its members are able to absorb by 50 per cent from the current rate of Sh20 per transaction.

The TSC on its part is insisting on a charge of Sh100 per transaction effective April,” Kenya Bankers Association chief executive officer Habil Olaka told Smart Company.

The banking industry lobby said that it plans to involve the Ministry of Education to try and resolve what it terms as a move that would potentially cause chaos in the running of the teacher’s check-off loan system.

“The engagement has been broadened to include other stakeholders, notably the Ministry of Education Science and Technology,” said Mr Olaka through an email.

NOT FRUITFUL

Attempts to get TSC’s stand on the impasse were not fruitful with the commission’s communication head Kamotho Kihumba asking for more time to consult the officials in charge at TSC.

Association of micro-finance  boss Benson Nkangi said like bankers, the teachers’ employer had not held any negotiations with them although no decision had been arrived at by the association.

“Individual members will make a decision on what to do if and when the rates are revised upwards as proposed by TSC,” said Mr Nkangi by phone.

A breakdown seen by Smart Company indicates that about 1.5 million check-off transactions are handled by the TSC every month at a cost of Sh1.8 million in terms of staff complements, consumables and other costs.

Bankers had previously suggested that the transaction fee be increased to Sh25 from the current Sh20, an amount they were willing to absorb but TSC is understood to have termed the increase insignificant to cover the ever-rising cost of administering the check-off system.

“At Sh25 per transaction, the average revenue for TSC per month will total to Sh37.5 million, which is more than adequate to cover the indicated salary,” said Mr Olaka in a letter to TSC in December, last year.

At that time, TSC had proposed to raise the fee to Sh150 per transaction before coming down to the impending Sh100 that is to be implemented at the end of this month.

COST OF CREDIT

“The commission therefore wishes to give a figure of Sh150 per transaction as a reasonable amount to cover the above costs and which should not be passed on to the teachers or affect the cost of credit,” TSC boss Gabriel Lengoiboni said in a correspondence to KBA dated October 6, 2014.

Should the TSC have its way, its revenue from administering the check-off system would shoot up four-fold to Sh150 million a month from the current Sh30 million. This is on account of an estimated 1.5 million transactions per month as at December, last year.

It is not the first time that the teachers’ employer is locking horns with the third parties over the fees it charges on deductions, having tried to implement a revised fee last year before reverting to the current figure that is under contention.

In August, last year, an attempt by the TSC to have all teachers pay it a blanket three per cent service fee, on top of the interest that banks charge, was objected by both tutors and bankers.

The commission was forced to retract the proposal and refund the amount charged on August salaries, opting instead to charge Sh150 on every transaction.

In December last year, the TSC did not respond to a request to meet bankers in a last-ditch attempt to find a solution to the issue that according to bankers, threatens to wipe out the privileges enjoyed by teachers under the check-off system.

Bankers had also offered to help TSC procure computers and train staff managing the check-off system.

The plan was aimed at minimising the administrative cost as the banks sought to cushion themselves from a potential backlash from teachers due to the increased charges.

Employees earning monthly salaries such as teachers and civil servants usually apply for loans to be repaid through check-off, which is administered through their employers. They usually get cheaper loan rates as they are considered less risky.

The combative Kenya National Union of Teachers has said it will oppose any plan by TSC that would result in overburdening an already ‘underpaid’ teacher.

In a telephone interview, Knut chairman Mudzo Nzili questioned why an entity such as the TSC, which is funded by the exchequer, is seeking to raise so much revenue from teachers.

“Any such move by the TSC is unfair and we would protest in the strongest manner possible. I hope you know what we are capable of when we mean business,” he said.

BENEFIT

Why check-off loans are a boon to teachers

Teachers and civil servants are the only category of employees who expressly enjoy access to check-off loans. Check-off loans are given to workers whose employers have signed an agreement with a lending institution.

The employer — in this case, the Teachers Service Commission — will process and remit loan repayments directly to the lending institution. Such credit usually does not require any security and  is therefore processed quickly.

This is unlike conventional loans that require rigorous background checks by lenders to determine the credit-worthiness of a borrower.

Another benefit of the check-off loan is that in most cases, the repayment terms are more flexible because they are secured.

The Teachers Service Commission thus runs the risk of rendering the programme unattractive to teachers should its standoff with banks result in an increase in interest rates for check-off loans.

 Kenya Bankers Association says lenders currently charge a 15 per cent per annum interest on check-off loans for teachers. This translates to 1.2 per cent per month.

The average lending rate by commercial banks currently stands at 15.94, according to the Central Bank of Kenya. There are concerted efforts to bring down the cost of borrowing in the country.

Conservative estimates put the overall loan portfolio by teachers in banks and Saccos at Sh3 billion, underlining the popularity of the check-off system and Saccos as sources of credit for teachers.