Business

Tuesday October 13, 2009

Give civil servants a better deal

Comment By Risen Jayaseelan


IT is high time that the protected and captive market of lending money to government servants using direct-salary-deduction is revamped and fully liberalised.

There is no reason why government servants should not be provided with the best service levels that competition will bring about.

By some estimates, commercial banks should be able to at least halve the interest rate levels that are being offered now if they were to be allowed to participate on equal footing with the existing players. Furthermore, innovative products and schemes will be introduced.

To recap, at present only 450-odd credit cooperatives and a handful of government financial institutions are allowed to make automatic salary deduction from their government servant borrowers. The government has now given that access to local commercial banks. (See StarBiz, Oct 12)

These banks would naturally be able to offer better terms and services, considering their lower cost of funds and the fact that lending to this segment is virtually risk free.

There are, however, a section of people who are opposed to the government’s decision. They are primarily those who run the umbrella cooperative – National Cooperative Organisation of Malaysia (Angkasa) – and the 450-odd credit cooperatives. (Angkasa is the sole body which has an interface with the Attorney General’s office that facilitates the salary deductions.) Their rationale is that the monies earned from playing the middleman role is channelled back for the benefit of government employees through training schemes, among other things.

The effectiveness of such benefits, however, cannot be verified. Perhaps a study should be done to find out if these schemes are of any value. My money is on the belief that government employees would rather have lower interest rates and better services and products than anything else.

There is really no conceivable reason why they should not be given such. They play such a key role in running the country and yet they are subject to an unfair system with regard to borrowing.

In fact, one wonders why the system wasn’t revamped earlier? Industry sources tell StarBiz that all sorts of unsavoury practices are taking place. For example, some of the credit cooperatives have been set up solely for the purpose of enjoying the financial benefits from acting as a conduit between the financial institutions and government employees. Then there is also concern that some cooperatives could be sourcing their capital from unlicensed money lenders. The many layers involved is the main reason why the current players will not be able to match the interest rates that commercial banks can offer if allowed into the game.

The existing Angkasa way of lending to government employees has similarities to the problematic approved permit (AP) system. APs were introduced in the 1970s as a means to provide opportunities for bumiputra entrepreneurs, only to see it morphing into a means for rewarding political allies.

There is likely to be – and should be – much debate about Angkasa and its practices in the weeks to come. To be sure, this is not the first attempt at prying open Angkasa’s monopoly. Another company had been given the right to build a parallel system a few years ago but after raising funds for that purpose, that company seems to have faded into the night. That’s another story for another time.

For now, here’s yet another argument for opening up the current system: at present, the government doesn’t charge Angkasa any transaction fees for deductions made. But the new plan for having a parallel system entails a small transaction fee that will go directly to the government’s coffers and paid for by the respective banks.

That money in turn could be channelled back for the benefit of civil servants. And that in turn easily counters the argument that civil servants stand to lose benefits that their cooperatives provide if the current system is liberalised.

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