Government employees can now benefit from a new system of tailor-made soft loans. Nesma Nowar investigates the pros and cons In a bid to give cash-strapped government employees liquidity, the Ministry of Finance recently launched an initiative titled "Achieve Your Dreams", which offers soft term loans. The initiative benefits millions of employees by offering them the opportunity to borrow from banks at a reduced interest rate of 5.7 per cent, to be paid through a period of five to seven years, and guaranteed by their salaries. The ministry has stipulated several conditions for access to such loans. Most notably, the loan's monthly instalments cannot exceed 30 per cent of the borrower's monthly salary, while the employee's salary should not be lower than LE358 to start with. Further, he or she should be employed with a permanent contract. Moreover, the loan will be backed by a life insurance policy, paid by the employee in small instalments, enabling the bank to retrieve the loan if the borrower dies. According to Minister of Finance Youssef Boutros Ghali, the main aim of the initiative is to ignite a spending stimulus, which in turn will boost growth rates by seven to eight per cent. Ghali added that the loans will help citizens solve their financial problems and invest in small projects. He expects the initiative to offer some LE10 billion through these loans by June 2011, and a total of LE15 billion over the coming two years. Deputy Director of Research at the Economic Centre for Economic Studies Omnia Helmi believes that this initiative will act as a tool that will help government employees to meet their immediate consumption needs and their other, more long-term demands. Helmi added that the initiative's greatest advantage is that it offers loans at a reduced interest rate, thus enabling government employees to actually pay back. However, Helmi is concerned that employees may also use these loans to cover unnecessary consumption demands, rather than encourage investment and other long- term benefits. "Egyptians are well known for their consumption habits," Helmi told Al-Ahram Weekly. "I am afraid that these loans will push people towards greater immediate consumption." Helmi believes that the interest rates should have been differentiated according to the purpose of the loan. She explained that if the borrower is going to use the loan to provide his children with a better education, he should be considered to be investing in human resources and be charged a lower interest rate than, say, someone who uses the loan to buy luxury consumer goods. "I think that by using these differentiated interest rates, we could prevent people from using the money for unnecessary consumption needs and thereby increasing their indebtedness," Helmi said. The Ministry of Finance is working alongside five banks to offer these loans, namely Nasser Social Bank, Banque du Caire, Bank of Alexandria, Banque Misr and Misr-Iran Development Bank. Other banks refused to join the initiative. Helmi said banks have cash liquidity, and by joining this initiative, this cash will be invested and operated in such a way that will help flourish the market and investment. As for the banks that refused to join the initiative, Helmi said each bank has its own policy, and that some banks might not consider this project profitable. "At the end of the day, banks are profit-making institutions that seek profits," she said. A source at one of the banks taking part in the initiative, who asked that both his and his bank's name be withheld, told the Weekly that the profits in joining such a project are small. However, his bank is taking part because the programme will benefit the whole economy through the stimulus it will provide to the market, by boosting demand and meeting citizens' needs. The source added that the bank will also benefit from investing in loans guaranteed by the government. He added that his bank is now ready to receive loan applications, and that he expects a huge demand. Omar Mohamed, a 35-year-old state employee, said he believes that this initiative will be very useful for employees whose salaries are low. It will help them meet their basic needs, while creating demand in the local market and in turn increasing production and investment. "As long as the employee does not borrow unless he really needs it, then there's no problem especially that the monthly instalments paid for the loan will not exceed 30 per cent of his salary," Mohamed said, adding that he will definitely use this loan if the situation requires it.
