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Approved microlenders face higher taxes

The Microcredit Act was passed in January 2021 with the aim of licensing and regulating microcredit institutions (MCIs) that provide financing to individuals as well as micro, small and medium-sized enterprises. The regime came into effect in mid-2022 with the Bank of Jamaica (BOJ) as the new sector supervisor.

However, Access Financial Services Limited (AFS), one of the 26 companies approved to date, has indicated that a surprise is awaiting those who are approved.

Brian Salmon, vice-president of finance and chief financial officer, told Wednesday Business this week that “Under the new regulations, microcredit institutions now pay a higher tax rate on profits after tax, which went to 33.3 per cent, up from 25 per cent as per the Microcredit Act.

“This is further exacerbated by the imposition of asset tax, which has no bearing on profitability of the underlying assets, but the assets on the books.”

The asset tax is 0.25 per cent of the value of the assets.

Salmon stated that economic conditions – factors such as GDP growth, inflation rates, migration in key sectors, and employment levels – are directly related to the performance of MCIs.

“The impact of the elevated inflation and the interest rate environment significantly impacts the demand for credit, while simultaneously increasing funding costs. … To stem rising inflation, from June 2022 to June 2023, the BOJ raised interest rates by 150 basis points (bps) to seven per cent. This has resulted in higher funding costs, further eroding profitability. Migration in some sectors has also impacted asset quality and has driven up non-performing loan ratios.

“The health of key industries, like tourism and agriculture, significantly impact income levels of borrowers and their ability to repay loans, affecting the portfolio quality. This was evident during COVID, resulting in higher provisioning and write-offs.”

Salmon, from Access, a listed company, shared, “For the six-month-period to September 2023, AFS total income increased to $1.1 billion on account of a 17.4 per cent increase in net interest Income (NII) to J$883 million. The growth in NII was due to a 20 per cent increase in interest income to $1.1 billion, which outweighed the 34.3 per cent growth in interest expense to $173 million. The increase in interest income was driven by an increase in interest income from loans, which was underpinned by a 12.5 per cent increase in net loans and advances to $5.4 billion.

He stated, “The increase in loan disbursements follows the continued recovery of the Jamaican economy and AFS’s ongoing marketing efforts. “

Meanwhile, individual members note that one benefit of approval is access to a wider market, including civil servants. Denisher Forbes, managing director at E-Loan Micro Financing Limited in Montego Bay, St James, told Wednesday Business that being unlicensed to date, “there are other limitations, such as the Government not giving us approval to lend to public-sector works. And [there are] other private-sector companies that will not allow you on their payroll”.

Forbes continued: “Whenever I ask how to get on the government-approved list of microlenders for salary deduction loans, the Ministry of Finance says ‘Contact BOJ (Bank of Jamaica).’ Then the BOJ says to contact the Ministry of Finance. I am patiently waiting on the micro-credit licence to see if I can attack them again on gaining access to lend to civil servants. Your hands are tied without the licence.”

Salmon said that, on the positive side, “the Government of Jamaica and Bank of Jamaica have been creating an enabling environment for microfinance institutions. These regulations are to ensure consumer protection, fair lending practices, and the sustainability of microcredit operations. Access Financial Services was the first MCI to be approved by the BOJ in July 2022.”

He also said, “There’s a growing emphasis on the social impact of microcredit. Lenders are increasingly concerned not just with financial returns, but also with the positive effects of microcredit on poverty alleviation, women’s empowerment, and community development.”

He said that this year, Access Financial Services launched ‘Access-Ability’, a poverty stoplight programme, in collaboration with global organisation Fundación Paraguay, “to help our customers to create their own path out of poverty, with support from a network of solutions providers”.

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