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Microfin loans a $40b market

As the Bank of Jamaica combs through the applications for microcredit licences, a clearer picture of the dispersed sector that has now fallen under its regulatory umbrella is emerging.

Only 13 firms have been licensed to date, at last report, with more than 100 more under review, but the BOJ says that based on the applications received to date, it has estimated the loan market in the microlending sector at around $40 billion at least.

Comparatively, that’s around 36 per cent of the business done by the credit union sector, comprising 25 community banks that up to February were managing loans totalling $110 billion.

Microfinancing firms typically lend in small amounts, with micro entrepreneurs and consumers as their main target markets.

As regulated entities, the BOJ said it would split the group into two categories, based on the size of their loan portfolios, and apply a bifurcated approach to their supervision.

The microcredit institutions, or MCIs, of which they are said to be around 200 in total, will be required to separate – both physically and from an accounting standpoint – their microlending operations from any other business the owner might otherwise be engaged in.

The firms will have to do proper recordkeeping, disclose the loan terms and conditions to consumers, and implement procedures to handle complaints.

For the more informal operations, the reforms required will be fundamental.

“Some microcredit operators have found it necessary to reorganise their operations for the type of governance arrangements required of regulated financial institutions,” said BOJ Deputy Governor for the Financial Institutions Supervisory Division, Dr Jide Lewis.

For some, it includes the establishment of a board of directors, and implementing policies and procedures to comply with anti-money laundering laws and guidelines, such as the Proceeds of Crime Act, the Terrorism Prevention Act, and the United Nations Security Council Resolution Implementation Act.

In its assessment of the microlending sector, the central bank is not yet targeting solvency issues, said Lewis. It’s more immediate focus is on safeguards against illicit money, and protections for consumers in a market that prior to their regulation issued loans at interest rates of up to 70 per cent, and in some cases over 100 per cent.

New hires have been added to companies that have completed or are engaged in the licensing application process, particularly compliance officers; and although not mandatory, a few entities have sought to establish separate legal vehicles to carry out their microcredit business as well, the central banker said.

“Even as MCIs seek to restructure, BOJ has implemented a bifurcated approach to the assessment of corporate governance frameworks, which sees MCIs being classified into two tiers, so as to ensure that the requirements are not burdensome for smaller MCIs,” said Lewis.

Tier 1 deals with microcredit institutions with a gross loan portfolio of less than $75 million.

“The expectation is that these smaller entities will have boards comprised of at least three members. Operationally, the mandatory compliance function may be merged with that of internal audit,” he said.

Tier 2 MCIs with gross loans of $75 million and over are expected to have boards comprised of at least five directors.

“Also, the compliance and internal audit functions must be separated for these larger operators,” said Lewis. “In both circumstances, one-third of the board members are required to be independent.”

The new Microcredit Act that established the Bank of Jamaica as regulator of the sector was passed in 2021.

Asked for an update on how long the BOJ would give all sector members to regularise their operations, the central bank indicated leniency.

The deadline for application for licensing has passed, but BOJ said it was still open to new applications.

“Microcredit operators had 12 months from the commencement date of July 30, 2021, to submit their applications for licensing under the act, or to cease operating,” said Lewis.

“Existing operators at the time of the transition who made an application under the Microcredit Act have been contacted and arrangements made for their continued operation until a decision has been made on their application for licensing. Notwithstanding, the microcredit licensing process is ongoing, and applications may be submitted by new operators at any point in time,” Lewis added.

Of the estimated 200 individual operators in the microlending sector, 60 are registered with two representative bodies, namely, Jamaica Association for Micro-Financing and the Jamaica Micro Financing Association, better known, respectively, as JamFin and JaMFA.

The Government of Jamaica introduced regulation of the sector aiming to reduce the possibility of money laundering and consumer-hostile practices. Under the new law, Consumer Affairs Commission was appointed to investigate consumer complaints regarding predatory lending practices brought to it by a consumer.

Microlenders, in the wake of the new regime, complained of audit and compliance costs they were faced with in their quest to be licensed by the BOJ.

“Most MFIs do not have policies and procedures, systems and tools in place to address the requirements related to corporate governance; human resource management; operations, including risk, compliance, and information technology; sales, marketing, corporate communications, business development; and finance and accounting,” said sector consultant and former banker Courtney Lodge.

He and others estimated the cost of restructuring and repositioning to be in the region of $1 million per firm.

Last year, JamFin, which is led by Dr Blossom O’Meally-Nelson, reached out to help the firms with their organisational review and audits.

In an update on how firms were faring under the licensing process, O’Meally-Nelson said on Monday that members of the association were “hanging tough and waiting their turn”.

“They have applied, and they have been given a letter of authorisation to continue operating until a decision is made,” she said.

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