The Retirement Benefits Sector Liberalization Bill 2011 is
winding its way through the arduous journey of becoming law.
Among the proposals in the bill are that if contributors
have saved for ten years will have access to 30% of their savings to leverage
to buy homes.
So if after ten years of work one has saved sh10m, the sh3m
can be used to put a downpayment on a mortgage.
This and proposals to lift the NSSF monopoly for mandatory
savings are part of long overdue initiatives that will go some way to raising
the saving rates in the country and growing the pool of long term funds needed
to fund development projects.
As it is now workers in companies that have more than five
employees are mandated to contribute five percent of their salary with the
employer contributing twice as much into NSSF. While not discouraged few
employers have an additional providence scheme for their workers because of the
costs of doing it.
Under the new proposed law employees will still be mandated
to save for their retirement but not necessarily with NSSF.
The introduction of competition in any sector is always a
welcome thing – there is more incentive to innovate which increases efficiencies,
pushes down prices and boosts up take of the product or service.
Uganda badly needs to build up its savings rate which is
less than ten percent of GDP. Beyond providing long term savings, one can
expect the high lending rates we have become accustomed to, to come under
pressure.
The logic is simple if we raised national savings the banks
which hold this money would be under pressure to on lend it to their clients.
Good banks make their money from lending, in the absence of the credible
lenders they lend to government. Government while being the safest borrower,
offers lower interest than the private sector and also has finite appetite. If
government options are exhausted banks will have to find other ways of lending
more to the public.
It is not by mistake for instance that in the last ten years
there has been an explosion of lending to individuals, increased savings
deposits in the bank have a lot to do with it.
The proposal to allow a portion of workers’ contributions as
down payment for mortgages could act as an incentive to spur savings. Government
could go even further by allowing such savings to be tax exempt and giving
waivers for additional savings beyond the mandatory requirement up to a limit.
In addition this one initiative can spur a housing
construction boom as the demand for house can be expected to jump progressively
over the years.
It seems like a no-brainer. Increase savings and hence
available capital for industry, production is boosted and more taxes are
collected.
Beyond that, the economy has an urgent need to bridge the
gap in power generation, transport and communication networks. These gaps are
holding back continued economic growth. To finance these we need long term
financing the type of which around the world is financed largely by pension
funds.
It really isn’t nanotechnology, what would need a rocket
scientist to decipher is why it is taking us so long to get this piece of
legislation out of the way.
Economics aside, as a guarantor of national stability
nothing beats a property owning population. With a long term stake in the
economy, property owners are like to resort to more peaceful means of conflict
resolution than war, looting and wanton destruction.
Of course regulators will have to ensure that a lot of our
savings are not expatriated but are mostly used to finance domestic projects.
However it might turn out to be a disincentive if you tie the investors’ hands
with such provisions when there are no local investable projects.
The challenge then for our business is to be set to absorb
this money when it comes.
It is hard to overemphasize the need for long term funds in
the economy and how crucial a more efficient pensions sector would be in
attaining this goal, but the ball is clearly in our hands for us to run with it or drop it.
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