Following an outcry, the Ministry of Public Service is backtracking on the 2.5% commission that a South African company wants to earn from every installment paid by public servants who take loans from financial institutions. The Permanent Secretary in the ministry, Jimmy Lwamafa, has demanded that the rate be revised to at least 1%, noting that he has come under political pressure over the matter.
The Observer broke the story of the new loan payment system and its problems in its June 28-30 issue (see: Civil Servants to pay more on salary loans).
We reported that financial institutions were objecting to the 2.5% rate, saying it would financially cripple the borrowers who are already over-burdened by the high interest rates of about 26%.
Previously, the ministries of Public Service and Finance would work with lending banks to extend salary loans to public servants and deduct monthly installments accordingly, but last year a company named Payment Solutions Uganda was introduced into the system.
PSU, which is incorporated in South Africa, was permitted by the ministry of Public Service to act as a middleman in this salary loan business in return for a fee – 2.5% on each installment.
However, the 20 or so lenders disputed the rate, calling it prohibitive. According to the banks, the 2.5% is likely to be borne by the borrowers.
This stand off has delayed the implementation of the project, which was initially meant to start late last year. The new date is July 2010, but with haggling over the 2.5% rate still continuing, it is unlikely to take off smoothly.
According to our sources, the President’s Office is aware of the matter and was responsible for the ministry of Public Service’s change of heart.
In a letter dated June 17, Jimmy Lwamafa, the Permanent Secretary, “strongly advises” Goretti Ssedyona, an assistant commissioner directly in charge of the project, to revise PSU’s pricing.  
“This is becoming a political matter which may cause me unnecessary engagement as the accounting officer. I strongly advise that Payment Solutions Uganda Ltd revises its pricing from 2.5% to 1% per installment going forward,” Lwamafa wrote.
He also told Ssedyona to convene a meeting with PSU to discuss the new development and report to him.
Our sources have told us that President’s Office got interested in the matter after low cadre public servants such as teachers protested the likelihood of having to pay more for the loans.
The President’s aides apparently fear that the pricing of PSU services might be used against President Museveni in his bid for re-election next year.
“We already borrow at an average of 20% per annum. These unjustified new fees will translate into a colossal 31% p.a. This is a very disturbing development; that a ministry meant to protect its workers is handing us over to PSU extortionists,” said Rose Namirembe, a teacher in her July 5, 2010 petition to Parliament.
In June, Bosco Rutagarama, the PSU Managing Director, dismissed such claims as “hearsay.”
Details of this payroll deduction management system are contained in a February 2010 document titled, ‘Guidelines for the Processing of Payroll Deductions’ prepared by Lwamafa.
According to this document, the new system will ensure that civil servants don’t mortgage all their monthly pay by borrowing from more than one lender. They will also be restricted to borrow not more than 50% of their monthly gross salary.
In his document, Lwamafa also argues that PSU is necessary because of the high cost and other difficulties related to managing the estimated 3,500 payroll deductions per month.
But Namirembe argues in her petition to Parliament that the procurement of PSU by government was done without consulting stakeholders or following public procurement procedures.
However, Edgar Agaba, the Executive Director of the PPDA, earlier told The Observer that he never insisted on procurement regulations because the ministry of Public Service and PSU told him that the government and public servants would not incur any cost.
Earlier in April, Lwamafa wrote yet another letter putting the project on hold.
“Following numerous complaints on the implementation and pricing of the above (PSU), I am compelled to take an administrative decision to put it on hold,” he said in the April 16 letter.
Lwamafa then called for a meeting on April 21 to resolve the standoff, but he clearly didn’t succeed.
The PS couldn’t be reached for a comment, as he was reported out of the country.

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