Gov't stops guaranteeing bank loans

Publish Date: Jul 05, 2014

By John Semakula & John Masaba
The finance ministry has stopped undertaking salary loan guarantees for public servants.
The ministry’s spokesperson, Jim Mugunga, told Saturday Vision that public officers who
wanted loans would have to deal directly with financial institutions.
Civil servants had been using their salaries as security to access loans. Lending institutions
found the arrangement convenient, because it enabled them recover their money at the source,
before it reached the bank account of the borrower.
With such an arrangement, it was difficult to default on payment.
Saturday Vision has learnt that the current salary deductions will continue till the loans are
cleared, but no new guarantees will be made.
“The Government has stopped making monthly loan deductions on salaries of public servants,
effective July 1. It has withdrawn loan codes from its payroll,” says the letter from the finance
The ministry says the policy shift was due to the misuse of the codes by financial institutions.
The ministry has been coding public officers’ accounts whenever they secured salary loans.
These codes could be used during the automatic monthly deductions, under the supervision of
the finance ministry.
The automatic deductions were made on the public officers’ salaries before the balances were
wired to their respective bank accounts.
In the communication, the finance ministry noted that there had been complaints of deductions

going beyond the agreed amounts and double deductions on the salaries.
“Some financial institutions even made deductions on accounts of public officers who did not
have loan obligations,” the document read, without naming the institutions involved.
“The ministry does not want to be associated with this fraud.”
Some civil servants Saturday Vision talked to expressed fear that while the move was intended
to fight fraud, it would make it hard to access loans because many of them do not have
collateral like land.
However, for fear of victimisation, they declined to comment on record.
Bankers say the new policy will increase the risk of lending. The previous arrangement
prevented borrowers from diverting their salaries before meeting their monthly loan obligations.
Now, public officers will have to present collateral, like land titles to back up their loan
The spokesperson of Uganda National Teachers Union (UNATU), James Tweheyo, said their
members would have to rely on the mercy of chief administrative officers (CAOs) to recommend
them for salary loans.
While the ministry’s policy is silent on the role CAOs can play in helping public officers secure
salary loans, a source told Saturday Vision that CAOs and managers of financial institutions
could privately work out an arrangement to help public officers secure loans by offering the
guarantee on the civil servant’s salary.
The CAOs are currently in charge of the government payroll after the ministry decentralised the
payment system recently.
Tweheyo, however, noted that the assistance of the CAOs would not be effective for teachers
because they often get transferred from one district to another, without consultation.
It also makes the borrower vulnerable to exploitation by unscrupulous CAOs.
The policy shift mainly affects public servants who have been receiving salaries through
Savings and Credit Cooperatives (SACCOs) and microfinance institutions.

Some SACCOs had worked out an arrangement with public servants to deduct members’
monthly contributions at the source to ensure compliance.
Kalungu West MP Joseph Sewungu, a former teacher and a teachers’ rights activist, said the
new policy would adversely affect the teachers.
“A teacher’s salary is the only security he has to secure a loan. But if they are denied this
security, it will be bad for them,” the legislator said.
Sewungu added that the ministry could have abandoned the idea of guaranteeing salary loans
because it was not paying salaries of public servants on time.
Workers’ MP Arinaitwe Rwakajara wondered why any employer could refuse to guarantee an
employee for a salary loan.
Daniel Nsibambi, the former Stanbic Bank spokesperson and now a financial consultant, said
the policy would not only affect civil servants, but also the country’s economy.
“If the rate of getting loans reduces, economic activities slow down and the economy suffers.
The Government is the leading employer. I hope bankers find a way to continue giving out
salary loans,” Nsibambi said.
He noted that under the new arrangement, banks will have to scrutinize each salary loan
application a little more than they had been doing in the past.
Nsibambi noted that public servants would have to look for other forms of security to back their
salary loan applications.
“They will find it hard to secure loans since they have to produce evidence and assurance that
they will be able to pay back the money,” he said.
The finance ministry explained that it would stop guaranteeing loans because the coding system
which enabled financial institutions deduct loan repayments at source was fraudulently

Confession: How our mischief killed a public servant
A former employee of a microfinance institution shared with Saturday Vision how they misused

the salary-coding system. He said although the coding made it difficult for borrowers to default
on their payment, it was subject to abuse.
“It is good business for the lender because defaults are minimized since Government is the
guarantor. However, some financial institutions abuse it regularly.”
He said they would beat the code system to sell as many loans as possible to stay in business.
“The pressure was too much. We started using underhand methods to survive,” he said.
He revealed that some of the methods included deliberately misguiding potential loan
“All you had to do was get the computer number of a public officer and our managers would
work them out,” he said.
This involved forging a potential borrower’s details, such as signatures, which they did with the
knowledge of some people with access to the system. The finance ministry hired Payment
Solution Uganda (PSU) to carry out automatic loan deductions on its behalf.
“A public officer would wake up one day and find a lot of money on his bank account. Most of
the victims spent the money lavishly,” he said.
“Several months later, one would realize deductions on their salaries, after getting the ‘loan’
which they never asked for,” he said.
He added that some of the things they did threw families in debt and caused families to break
He says one of the victims, a prison warder in Koboko district, committed suicide after finding
out that there was no money on his account because he ‘had applied for a loan’.
“I feel guilty because my actions resulted into one of the victims taking his life,” he says.
The finance manager of the Mukono- Kayunga Teachers’ SAACO, Nelson Mulyanga, says
many times, public officers complained of irregular deductions because they had multiple loans,
which they would forget to pay.

Bank managers react
The shift in policy has stirred mixed reactions from managers of financial institutions.
The spokesperson of Diamond Trust Bank, Samuel Matekha, said his bank had not been
involved in the salary loan business so they were not affected and neither was Opportunity
Bank, according to Andre Lalumiere, the chief executive officer.
The sales and marketing manager of Crane Bank, Puneet Swarnakar, said they would first halt
the salary loans and find mitigation measures. “This is a big issue which we need to study
critically,” Puneet said.
Fred Mugisha, the communication manager of Stanbic Bank, said the new policy would affect
microfinance institutions more because they do not have transaction accounts, like commercial
“Microfinance institutions will now be at the mercy of the employees being truthful,” he said.
Mugisha added that their bank would continue lending to public officers using salaries as
Asked whether unscrupulous public officers would not secure salary loans and shift their
accounts to other banks, Mugisha noted that even under the previous arrangement, some civil
servants had been misbehaving.
He said financial institutions would lend to civil servants with cleaner records of managing bank
loans. Mugisha added that some banks would have to increase the cost for risks on the loans.

Civil servants tell how they lost their money
Saturday Vision has learnt that the fraud cases have been wide spread. Luke Kutobola, a
teacher at Bubulo SS in Manafwa district, said three years ago, after securing a sh4.5m salary
loan through Stanbic Bank in Mbale, there were irregular deductions made on his monthly
He said instead of the sh160,000 the bank was to deduct from his account every month, it would
deduct more, sometimes twice the amount.

“I have been receiving different salaries every month. I actually don’t know how much I should
get. I have complained to the bank manager, in vain,” he said.
Kutobola said he knew many teachers facing the same dilemma. Jane, a nurse at Mulago
Hospital, told Saturday Vision that she recently had to pay a salary loan long after the payment
period had expired.
“There is no month I defaulted on servicing the loan. When I cleared it, the bank stopped the
deductions. However, three months later, the deductions resumed,” she said.
Jane said despite reporting the matter to the bank, she was not helped. “Unfortunately, I did not
know where to run for help. I have now given up on bank loans,” she said.
It is because of cases like Jane’s that the finance ministry has changed the policy.

Could this be the solution?
Finance ministry spokesperson Jim Mugunga said the change in policy will check civil servants
who borrow too much and disenfranchise their families.
“We don’t want SACCOs to lose loans because they are government institutions, but they
should find a way of working with individual public officers. We want them to be in charge of
their salaries,” Mugunga said.
The document was circulated to all financial institutions, chief administrative officers and
permanent secretaries, who were tasked to inform public officers.
Managers of Mukono-Kayunga Teachers’ SACCO last month petitioned President Yoweri
Museveni, who had gone to commission the SACCO’s office in Mukono town, to block the
The SACCO manager, Fred Kaganga, said if adopted, their members would be required to
present security in form of land titles, which they did not have. He also feared that the change in
policy would kill SAACOs and the culture of saving, which teachers had embraced. The SACCO
has 4,000 members.
Teachers have been receiving their salaries through the SACCO, but with the new policy,
salaries will only be sent to individuals’ accounts in commercial banks. Yusufu Giduno, the

spokesperson of the Microfinance Support Centre, declined to comment on the new policy.
The Mityana district CAO, Anthony Iga, noted that under the new arrangement, accounting
officers would still help public officers to secure loans.
“Accounting officers will make a decision on what to do with public officers who want loans,” he
The Mukono district CAO, Luke Lokuda, said before the finance ministry centralised
management of the payroll, CAOs were in charge of managing civil servants’ loans and that
senior accounting officers had experience in those matters.
Lokuda added that accounting officers had started engaging some financial institutions about
loan acquisitions.
But Mulyanga noted that many accounting officers had not mastered the new payroll system
and that SACCOs had not been receiving monthly loan deductions.
He said in Luwero, Mukono and Masaka districts, teachers’ SACCOs had not received loan
remittances for two to three months.
According to the website of Payment Solution Uganda (PSU), a company contracted by the
finance ministry to carry out automatic loan deductions on its behalf, by deducting the loan
remittances from the centre, the Government had ensured access to credit by public servants.
“This service is considered important to the social economic development of Uganda and the
wellbeing of public servants,” the website reads.