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BOJ says interest caps could hurt underserved borrowers

The Bank of Jamaica (BOJ), the regulatory authority under the Microcredit Act (2021), introduced new rules for the sector in a bid to reduce the possibility of money laundering and to minimise consumer-hostile practices such as loan sharking.

One of the aims at the outset was to reduce the exorbitant interest rate charged by the small lenders, which can be as much as 1.5 to two per cent per week.

However, the BOJ appears to have backpedalled on this goal, with smaller borrowers in mind.

“The imposition of caps on lending rates can have unintended consequences for lenders making business decisions to preserve the viability of their business models and deciding not to offer lending facilities to higher-risk segments of the market, leading to a larger group of underserved persons in the economy,” explained Dr Jide Lewis, deputy governor, Financial Institutions Supervisory Division.

“As such, the Microcredit Act does not dictate the level of interest rate charged on loans. Instead, Section 46 of the act requires lenders to be consistent in their calculation and to disclose rates in a way that allows customers to easily make comparisons across prospective lenders, thereby increasing competitiveness in the sector,” he added.

The BOJ disclosed that it is currently in receipt of 143 applications as at the end of November 17, which altogether reflect an aggregated loan balance of J$45.8 billion (approximately two per cent of GDP).

Approved companies include Kingston and St Andrew outfits A & N Loan Hub Limited, Access Financial Services Limited, AIM Financial Corporation Limited, Bluestart Capital (Jamaica) Limited, Cashbiz Finance Company Limited, Denjo Limited, Dolla Financial Services Limited, Eppley Consumer Finance limited, Envisage Financial Company Limited, Investment Options Un Limited, ISP Finance Services Limited, Kingston Finance Limited, Kris An Charles Investments Company Limited, LASCO Microfinance Limited, Lava Financing & Investments Company Limited, Nykhana Investment Company Limited, Regions Financial Services Jamaica Limited, Seed Investments Limited, Stewart Finance Jamaica Limited and Worldnet Microfinance Limited.

Other licensed microlenders are Awesome Financing Limited and Trublu Financial Services Limited in Portland, Blessed Loans Limited in St Catherine, Real Financing & Investment Hub Limited in Portmore, St Catherine, and The Central Cash Advance 2022 Limited in Manchester.

Lewis said that licences to date cover over 90 per cent of the aggregated loan balance (which is used as a proxy for market share), adding that the bank has provided 82 regulatory forbearance letters, which allow operators who applied before the end of the transition period (July 30, 2022) to continue operating until a decision is made to grant or not to grant a licence. Sixty-two of these remain in force.

He shared that in assessing applications, the BOJ identified information gaps which must be addressed in order for a decision to be taken. Material deficiencies identified include information on the ownership of applicants, source of funding and source of wealth, plus governance arrangements required for compliance with the laws of the country.

“BOJ has taken a bifurcated approach to licensing, which allows for some variation in requirements, based on the size and scope of the applicant’s operations, and the approval process is iterative, such that applicants are allowed the time to address any deficiencies identified during assessment,” Lewis explained.

The Microcredit Act indicates the Consumer Affairs Commission has been appointed to investigate complaints brought to it by borrowers from microlenders.

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