The Ministry of Finance has announced the discontinuation of all discretionary payroll deductions for government employees, with its Payroll Deductions Management System (PDMS) scheduled to shut down on 30 November.
The ministry said some microlenders rely too heavily on payroll safeguards rather than conducting affordability checks as required by the Microlending Act (2018).
The legislation amendments affect industry players like insurance companies, trade unions, Agribank, and commercial banks, and have reportedly caused panic among some microlenders.
Entrepo Finance, the microlending arm of the Capricorn Group, came out with all guns blazing, and filed an urgent court case in the Windhoek High Court on 30 September.
They are suing the minister of finance and related parties in an attempt to stop the plan to discontinue the payroll deduction management system.
The new legislation also affects clients who will pay a few more basis points in interest rates and bank charges because of debit orders.
Some government employees will be pushed to borrow from cashloan and payday lenders that charge 30% interest compared to the 17% of microlenders. The struggle continues.
CREDIT RISK
Amid all the panic lies the question of responsible lending, credit risk management, the quality of loan books and the sustainability of our financial institutions.
It is understandable that some people’s salaries are genuinely not sufficient to meet their basic needs and thus resort to borrowing.
One cannot rule out that some micro lenders have allegedly engaged in reckless lending and are extracting profits because of the financial illiteracy and ignorance of many Namibians.
They have no appropriate strategy. Their only strategy is the deduction code.
Credit risk management can make or break any lending institution.
The success of any lending institution lies in the combination two things: The quality of loan underwriting and an effective collection strategy.
It’s a combination of both. Choosing one over the other has a detrimental effect on both the lender and the borrower.
American business professional John Stumpf reminds us that “in the financial services, if you want to be the best in the industry, you first have to be the best in risk management and credit quality. It’s the foundation of every other success. There is almost no room for error.”
Credit risk refers to potential losses arising from the borrower’s inability to repay a loan.
Credit risk analysis and underwriting is assessing the probability that the borrower will default on a payment before the lender grants the loan.
DUTIES AND DEMANDS
Among others, the 2008 global financial crisis was a result of:
- Inadequate Risk Assessments: Financial institutions extended a large number of loans to borrowers who couldn’t afford those loans, leading to serious defaults.
- Flawed regulations that allowed financial institutions to engage in risky practices.
While commercial banks are stringent and a single missed/late payment can brand you as a high-risk client, most microlender clients generally don’t have as informed a view about money as they should have.
Many microlender borrowers have dreams and wishes and want funding for them.
It’s for this reason that financial institutions are given a duty to lend responsibly and to not overstate a borrower’s capacity to repay a loan.
As required by law, financial institutions also have a duty to protect clients against themselves.
HUMAN ELEMENT
In order to build a sustainable credit system that will achieve better outcomes for both lenders and borrowers, financial institutions have to strike a balance between business growth and the quality of loan books while simultaneously considering the human element.
Risk-based regulation and financial literacy training are also vital.
- Hilma Amukwiyu is a credit risk management professional. She writes in her personal capacity and can be reached on: shatiamukwiyu@gmail.com
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