The-Accountant-Sep-Oct-2017-Final

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COVER STORY PURGING PREDATORY LENDERS How employers can protect their staff By Isaiah Opiyo After the interest capping on bank loans that came into effect in September 2016, a number of non-regulated microfinance institutions seem to have sprouted and are already finding their way to work places and targeting vulnerable staff writhing from financial distress. The stiff loan requirement set by local commercial banks as a consequence of the interest capping has only provided fodder for the non-regulated microfinance institutions. Interestingly, getting a long term loan facility has not only become difficult but the requirement for the same has become numerous. Faced with the risk of default from the growing loan 10 september - october 2017
COVER STORY applicants, some of these non-regulated microfinance are resorting to work with employers to lend to their staff on checkoff arrangements. Whilst this offers an option to employees with financial distress, most of the non-regulated microfinance institutions are taking advantage of the situation to exploit employees. Some of the lending behaviors exhibited by these lenders are predatory in nature. These range from offering loan facilities in form of salary advances, personal loans and emergency loans at exorbitant rates. Some of the loans offered either have penalties for premature repayment or early repayment or are granted without regard of the employees’ take-home pay. The situation is even worse for employees who opt either to switch jobs or resign from their previous employers as the rate and penalties will be over-inflated. But one would ask; what would motivate an employer to condone or work with a lender with predatory lending tendencies the plight of their staff? The incentives are numerous; first, the lending business has become attractive in the Kenyan market after the sport betting business and the returns are eye-catching. As a result, some of these predatory lenders are owned and operated by some of these employers as associate ventures or companies. Lending out the employees provides an opportunity to grow their group bottom-lines. Secondly, most of the predatory lenders are always willing to share part of their interest income with the lenders as commission for the business generated. The incentives are usually paid to executives as direct incomes to those who control the pay rolls or are in charge of staff matters. With the interest rate capping, even business are not spared from the liquidity crunch. Most of these predatory lenders usually set as part of their pre-conditions for lending to these businesses for working capital, often insist on a checkoff arrangement facility for staff as a trade-off. This trade-off often leaves the employers with no option but to pursue their interest. But how can employers safeguard their employees from predatory lenders? Whereas majority of human resource practitioners have always argued that personal financial matters relating to employees should be left untouched, various research studies have shown that employees’ financial welfare has an impact on their productivity. Subsequently if not controlled, predatory lenders can cause overindebtedness of employees at the workplace as they can encourage irresponsible borrowing; predatory and reckless spending. Certainly an over-indebted employee is a high-risk employee for any organization. It is therefore in their best interest to keep predatory lenders from their workplace if they have to retain their employees as well as safeguard their financial wellbeing. To begin with, employers must start by shelving their interest of pursuing credit facilities for their working capital from these predatory lenders at the behest of their employees’ financial welfare. This implies that any requirement for such credit facilities offered by these predatory lenders should not be tied to such conditions as setting a check off system to lend to employees. While in cognizance of the fact that partnering with a financial institution to offer cheap and affordable credit facility is laudable, to allow any lender to provide a check-off loan to employees, employers should not only undertake due diligence on the background of such lenders but should invite some competitive bidding to be able to get the best offers for their employees. Although not a must, an element of operation under some regulations by the lender should be a key criteria for such selection. Sometimes getting a suitable lender with cheaper offers may not tame irresponsible borrowing or even reckless lending to staff. Such a situation would require an employer to set in the preconditions and limits for a check-off loans. These conditions would range from setting the maximum amount of loan an employee can borrow pegged on their incomes, the repayment period and the frequency of take up by the employees. This should then be coupled with a third rule which restricts employees from committing more than two thirds of their basic salaries on loans and other forms of borrowing. This will not only ensure that staff go home with at least a third of their salaries to cater for living expenses but will limit any predatory lender from engaging in any reckless lending. The approval process should be part of the employer’s human resource functions to tame any attempt by employees to engage in any credit abuse for impulse spending. Lastly, it is certain that most employees have cheated the third rule in many workplaces where such measures have been put by taking up loans and setting up standing orders from their bank accounts towards repayment of extra loans. Consequently, it is imperative to equip employees with basic money management skills that would enable them to take control of their financial welfare even beyond the workplace. This can be done by holding frequent training sessions on personal financial management that would touch on areas such as budgeting, spending, saving and investing and debt management. Such trainings undertaken at opportune times such as after salary increments to employees have been found to be effective as employees are trained on how to plan their finances to mop the extra incomes from the raise. isaopiyo@gmail.com september - october 2017 11
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