Finance minister sued over payroll deductions

The microlending company Entrépo Finance is suing the minister of finance, the prime minister and various other parties in an attempt to stop a plan to discontinue the government’s payroll deductions management system.

In an urgent case filed at the Windhoek High Court yesterday, Entrépo Finance is asking the court to direct the finance minister not to interfere with the loading of new deductions on the Ministry of Finance’s payroll deductions management system, and also not to issue instructions that no new deductions may be loaded on the system.

Entrépo is also asking the court to authorise the continued operation of the payroll deductions management system with effect from 29 August, until an application to review finance minister Ericah Shafudah’s decision to discontinue the system from the end of November and to stop the loading of all new deductions on the system has been decided by the court.

The discontinuation of deduction codes on the system is “irrational, irregular and reviewable”, and also unreasonable and disproportionate, Entrépo group chief executive Leonard Louw claims in a sworn statement filed at the court.

The deduction codes that are being discontinued allow microlenders like Entrépo to have repayments of loans granted by them deducted directly from the salaries of government employees and paid to the lenders.

According to Louw, Entrépo, other holders of deduction codes, trade unions representing government employees and public service staff members themselves were not given an opportunity to make representations to the finance minister before a decision to discontinue the payroll deductions management system was taken.

This means that vested interests – including government employees’ ability to access microfinance – have been abolished by a ministerial decision without giving parties with an interest in the decision a chance to be heard beforehand, Louw says.

The payroll deductions management system has been operated since 2003, and Entrépo has been holding a deduction code on the system since 2013, Louw recounts in his statement.

He argues in his affidavit that it is in the public interest to maintain the payroll deductions management system, and that it is also in the interest of the Namibian economy to retain “cost-effective, reliable and essential infrastructure facilitating microfinance”.

About the current system, Louw says: “It creates a critical centralised control function for the government payroll, which ensures that sufficient take-home salaries for government employees remain after all deductions had been made to an employee’s salary.”

Deductions that can be made on the system include payments for insurance, small loans, education loans, home loans and union membership fees, Louw says.

AFFORDABILITY

The system is meant to ensure that the finance ministry’s guidelines for payroll deductions are adhered to and that loans taken by government employees are affordable, Louw says as well.

The guidelines include a stipulation that government staff members’ salaries after all deductions had been made from their pay should not be less than 35% of their basic monthly salary, or N$1 200, whichever amount is higher.

If a government employee’s take-home salary after deductions would be less than the minimum under the guidelines, the system automatically rejects a new loan or insurance policy and accompanying instalment loaded onto the system, Louw says.

In his words, the “system provides an automated affordability check” and protects government employees against over-indebtedness.

Because of the use of the system, government staff members can get access to loans provided by microlenders at more favourable interest rates than those charged by loan sharks, according to Louw.

Whereas other lenders who do not have deduction codes on the system charge an interest rate of up to two times the prime lending rate, and up to 30% annually for short-term loans, code holders like Entrépo charge an annual interest rate of 16.5% or lower, Louw says.

Without the system in place, it would be possible for lenders to deduct as much as 100% of a government employee’s net earnings monthly through debit orders, Louw warns.

Arguing the merits of microcredit, Louw says: “Microfinance is, it is well-established, a formidable tool for financial inclusion. It provides consumers with a lifeline to obtain basic household finance which would otherwise be unavailable from commercial banks.

“In turn, it reduces poverty among the poorest of the poor, by providing people with access to credit which increases their income and promotes productivity.”

Louw also says: “Microfinance has been used successfully throughout the world to assist families to escape poverty, and studies have confirmed that between 5% and 50% of microcredit borrowers transcend the poverty annually.”

Microfinance gives government employees access to emergency credit facilities to afford unexpected expenditure such as medical treatment for a dependent relative, and protects them from loan sharks, Louw says as well.

Over the last year and a half, about 47% of the value of all microloans provided by Entrépo was used for education, 12% was used for housing, 11% for business and about 5% for medical expenditure, according to figures cited by Louw.

The payroll deductions management system must remain operational to enable Entrépo to continue to provide microfinance to government employees, and an immediate halt of the system would cause harm to the employees, the public and deduction code holders like Entrépo, Louw argues.

The urgent application is scheduled to be heard in court on 17 October.

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