Chairman and Board of Directors, Minister for Samoa National Provident Fund, Samoa National Provident Fund.

 Afioga e, re: Proposed Policy Changes to Small Loans and Short-Term Loans. 

 The proposed changes to small loans and short-term loans scheme would do more harm than good to both the members of the Fund and the Fund. Your comments Mr Chairman given to the Samoa Observer and published by the paper two weeks ago where you mentioned that the loan schemes have been ‘greatly abused’ show that you are concerned about the amount of borrowing that members do automatically on the S.N.P.F Portal. People will always loan! 

Whether they do it online or in person the fact is the faalavelave fa'asamoa and activities of everyday living means people always seek financial help. Is that abuse? Even if the Act says members can borrow? If the reason for your proposal to stop the small loan scheme is based on your concern about the ‘great abuse’ of the online service and the accumulation of loan amounts that will run down the net withdrawals when members reach 55 years then you are wrong and mistaken.

This is a common misunderstanding that most people have; that loans are bad and that the accumulation of loans will lead to a diminishing of the net withdrawal amount. Not correct! That thinking does not apply to the S.N.P.F loan system. That view is correct if we are talking about borrowing from banks and other small lending businesses. The case of the S.N.P.F. is different: the net withdrawal amount increases over time even if members continue to borrow up until they reach retirement age! Sounds weird? I humbly ask that your Board clearly understands this because your proposal will ruin something that works just fine.

Important points to consider:

1. The small loan and the STL schemes are high-demand product that almost all members of the Fund have been depending on for close to 30 years now, it is earning the Fund 9.5% and 12% respectively and these interests contribute to the annual dividend; members are not abusing the online system, they are entitled to borrow; it is the Samoan pride when doing the faalavelaves that is abusing the members and that is why the members borrow most of the time; be kind to the members and don’t abuse your power! 

2. Ceasing the small loan scheme will cost the Fund forgone interests and will impose non-monetary costs on members in terms of inconvenience, shoe-leather costs of seeking financial assistance elsewhere as well as paying higher interests elsewhere.

3. Ultimately, the funds belong to the members! If the law allows them to borrow as often as they want and as much as they want then let them borrow. The duty of the Board and S.N.P.F management is to provide the necessary information on the consequences and costs of borrowing to the members for them to make their own decisions on whether or not to borrow. It is ok to borrow! Still, sounds weird? Don’t just dwell on general knowledge and a basic understanding of accounting and economic theories. Go further and thoroughly analyse the mechanics of borrowing and compound interests and construct retirement models to confirm for yourself that when considering all factors it is ok to borrow.

4. You are concerned over a misconception about borrowing! Net withdrawals do not diminish if interests and loan amounts rise. Net withdrawals rise with total contributions and loan amounts. People always look at the interest that is charged monthly onto the existing loan balances. However, interest received (dividend) is credited once a year on the total contribution balances hence the impression that loan amounts are growing and the total contributions are not or the thinking that loan balances are accumulating faster than total contribution. That thinking is wrong because the interests paid are charged on half the contribution balance while interests earned are calculated based on the total contribution balances so it is impossible for the interests paid to be more than the interests received. Another error that most people make is comparing the interest rate on loans with the interest rate on the contribution. Since the interest rate on loans of 9.5% is more than the interest rate of the dividend which is an average of around 7.9% in the last 16 years then they claim the loan balances will be more than the net withdrawal.  It is wrong to compare the interest rates because they are calculated on different bases, interest received is based on the total contribution whereas interest paid is calculated on half of the contribution balance.

5. Members are accustomed to coming to utilise the small loans scheme. They are used to accommodating their entitlements when doing their planning and budgets. This is a daily activity that generates economic transactions which benefit the wider community and help economic growth. With the current high rate of inflation, your proposed changes are not helping the members and the economy.

6. Small loans and STL are risk-free loans and these are secured sources of revenues for the Fund! What are the plans for the increase in lendable funds that will pile up in the bank accounts? Term deposits only earn a maximum of 5% so that is not a good consideration. Where are you going to invest the money or who are you going to give this money to?

7. The Fund will lose revenue if these changes go ahead. The loss in revenue due to the dropping of the interest rates on existing small loan balances from 9.5% to 5% will be more than the gain from increasing the STL to 30% of the total contribution. This will jeopardize the ability of the Fund to continue to pay higher rates of dividends.

Recommendations:

1. Keep the current small loan and STL schemes for the existing members.

2. Introduce the new proposal to new members. For all new members, allow them to borrow only up to 50% of the total contribution for the STL and small loans. That is STL – 15%, SMALL LOAN – 35%. New members will still enjoy the benefits of the two schemes as the current members do, only that they are using 50% of their total contribution instead of 65% at the moment.

3. Cease writing off of unpaid small loan balances when preparing to pay the dividend. This is the harshest thing that is done to the members! And please stop saying that the logic for doing write-offs is to stop the loan balance from getting out of control. Again let me reiterate this important point: when total contribution grows members will borrow more so their loan balances grow; however, the growth in loan balances does not lead to a diminishing net withdrawal. Loan balances and net withdrawals grow simply because total contribution keeps increasing. 

4. Stop doing cash payouts, pay all dividends on top of members’ account balances.

5. Board and Management to maintain a dividend of 7% MINIMUM. Why a minimum of 7%? The average for the last 16 years is 7.9%. Based on a minimum of 7%, given the new graduate-level salary in the new financial year of $27,507, this graduate is looking at a net withdrawal when retiring of a minimum of $750,000 based on the conservative assumptions that s/he remains at this salary until retirement, all dividends are paid on top of contribution balances and no dividend cash payouts, s/he borrows until retirement.

6. Changes are made if the benefits outweigh the costs. The current system is just fine! We just have to make sure that we are fine with our understanding of the mechanics of retirement savings schemes. 

Peniamina Muliaina