Banks stare at massive loan defaults as uncertainty rocks teaching fraternity

Banks and other lenders are on the front-line in the salary crisis between teachers and their employer, through billions of shillings in outstanding loans now at risk of default.

Although the Employment and Labour Relations Court yesterday ordered teachers to suspend the ongoing strike for 90 days to give room for negotiations, unions insist the strike is still on. Teachers Service Commission warns there shall be no pay for no work done.

An estimated Sh2 billion is paid to lenders every month by the TSC to lenders as loan repayment for facilities taken by its employees. But a drastic decision taken last week locking striking teachers out of the payroll will precipitate widespread defaults on loan servicing, while there is no guarantee when the impasse would be resolved.

Bankers’ lobby Chief Executive Officer Habil Olaka said there are ‘very significant’ concerns presented by the impending defaults that cannot be underestimated. “It is obviously a huge concern for our members when the loan repayments are not received,” said Olaka, referring to confirmation that most teachers won’t have a salary this month.

“We do not know how much longer it could take to have the matter resolved but hope that the standoff would be resolved and have teachers reinstated on the payroll.”

KCB Group Chief Executive Joshua Oigara said he was looking forward to receiving loan repayments due at the end of September and it is after that date passes and the amounts not remitted would he be concerned. Loans are classified to have been default after 90 days of non-payment, he added.

TSC spokesman Kihumba Kamotho said the bulk of the loan repayment could be payable to Saccos but could not immediately confirm the exact amounts due for remittance this month. “It is a very significant amount,” Mr Kamotho said on phone, promising to follow up on the specific amounts that would be due to third parties in the absence of the strike.

Commission boss Nancy Macharia confirmed that teachers who have loan obligations would likely be in default since her office ‘would not be paying any money for no work done’. Teachers form the single largest profession in the country, employing more than 288,000 in the public sector.

Loss provisions

Top officials of the Kenya National Union of Teachers have already claimed that the TSC is holding onto Sh8 billion in amounts deducted from the tutors’ pay but not remitted to third parties including banks and Saccos.

 

In a circular dated September 23 and addressed to all members, Mwalimu Sacco warned that it had suspended salary advances to teachers. The Sacco said its 57,277 members will not get salary advances from this month until further notice due to the current standoff between Teachers Service Commission and its employees.

The Sacco also said that it had stopped processing of long term loans or BOSA but will continue to give emergency, normal and Wezesha loans to its members. “The changes will enable the society meet its recurrent obligations,” said Mwalimu Sacco Chief Executive Officer Robert Shibutse. However, Shibutse said the position will be reviewed once the situation normalises.

He however, believes banks will be the most hit. He would be more concerned if he were a banker in the present circumstances. “You would be surprised that banks actually lend more to teachers than Saccos, and any risk of default would mean adjusting loss provisions,” said Mr Shibuste, also a former boss of a commercial bank.

He confirmed that the member deductions for August had not been received from the TSC, but said that there was a one-month lag till the funds are received. Mwalimu Sacco has about 65,000 members, predominantly secondary schoolteachers, and is the biggest in Kenya by the value of assets.

Lending rules in the Sacco movement limits members to borrow a maximum of three times their savings. Banks however only consider the ability to service loans when appraising applicants. In Kenya, a borrower is allowed to service a loan with upto a third of their gross salaries.

Household budgets

Shibutse added that members actually owned the Saccos to significantly depress any potential losses. A more immediate and much bigger concern is expected in the individual households where the teachers are the breadwinners.

More sectors of the economy including rental housing will also be exposed after the State stopped the September salaries of the tutors following the month-long strike and the subsequent decision to shut down schools indefinitely.

TSC spends about Sh14.5 billion a month to pay salaries and allowances, to form the single largest payout by the State. The unprecedented withdrawal of salaries would create a huge hole in the economy through the various sectors that depend on the teachers’ earnings as reflected on their respective household budgets. Among the biggest items of many households in the middle and low-income bands are rents and shopping for foodstuff.

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