G. Keith Summers | What should regulations really accomplish?
Small and medium-size enterprise (SME) operators in Jamaica will tell you every time that the single biggest challenge in developing and operating their business is access to finance. In fact, this refrain can be echoed by most of the borrowing public.
Data suggests (The Report on the Jamaica Survey of Establishments 2018, Table 19 – STATIN) that the primary lending agencies, commercial banks and other licensed and regulated lenders, meet only about 32 per cent of the demand for access to financing.
In a scenario like this, there is a natural spillover of the demand to other entities. These other entities account for another 13 per cent penetration into the demand for access to financing. Overall, the data suggests that less than 50 per cent of the demand for access to financing is met.
In this overflow category, there are three sectors: informal lenders, partners, and family and friends. Aside from the informal lenders, this overflow category captures the people with whom the borrower can reach out and touch, those they have a personal relationship with. It is the classic seed capital source for businesses. Interestingly, it accounts for 12 per cent penetration, almost as much as the ‘other licensed and regulated lenders’ (excluding commercial banks) earlier referred to. The remaining one per cent is accounted for by informal lenders loosely identified as microcredit lenders.
These microcredit lenders are the ultimate overflow bucket of financing needs. If you do not qualify with the regulated lenders, then you go to partners and family and friends. When none of these work, you go to the microcredit lenders. That these leaders have it has flourished. They came into play to fill a huge vacuum. There is nothing wrong with that. It is how some of our biggest and best enterprises have flourished in Jamaica – meeting unmet demand.
Clearly, the regulated lenders have hit a glass ceiling, whether as a result of self-imposed institutional credit-quality factors or by legislative constraints for any number of reasons. Nothing wrong with that. Partners, family, and friends are constrained by the individual borrower’s sphere of influence. These have their own individual glass ceiling as we are not all blessed with family and friends capable of helping. It seems to me that the microcredit sector is the best available are to make a difference in this market.
Nothing is wrong with regulating this sector, but first, you have to justify the time, effort, and mechanism to write legislation for a group that has only one per cent penetration into the market it operates in. It seems to me that just regulating is not enough unless the exercise makes an impact on the people who need financing and cannot get it.
I have read the bill entitled the Microcredit Act, 2019. It does not seem overly burdensome to me in terms of its impact on the players in that sector. It does call for more transparency, but that is as it should be in any industry. Regulation provides more protection to consumers. No one can complain about that.
It doesn’t seem to influence the regimen and operating pattern of microcredit lenders except to bring the weight of the law to disclose how much they are lending and the terms, conditions, and costs of the transaction.
If all we do is regulate, then we end up with the same level of unmet demand, just now nicely packaged and regulated. It seems like a huge exercise to lavish on such a small component, unless the regulation does something about expanding the access to financing for the forgotten borrowers out there.
Has this sector been particularly rogue or bullying? It does not appear so. Not if you judge by the history of complaints received by the Consumer Affairs Commission (CAC). Over the past three years, ending March 2019, there have been 77 complaints against microcredit lenders. The number of complaints has reduced consistently from 30 in 2016-17 to 20 in 2018-19. That volume accounts for 1.8 per cent of the total complaints received by the CAC.
A FEW IDEAS
The regulations, if and when promulgated, should try to do something, directly or indirectly, about addressing the unmet demand for access to financing.
Here are a few ideas.
1. Regulate them, list them, and rate them. This way, the population has an excellent frame of reference to help in making an informed decision about which microcredit lender to approach. It legitimises the sector as an acceptable lending source that is substantially more transparent than it has been up to now. Furthermore, it provides some very helpful free advertising. All this is helpful to the microcredit lenders.
2. Focused and programmed lending makes sense if you choose a particular loan programme that is relevant to the borrowing public. That applies to all lenders. Commercial banks have taken this idea to very high levels, as reflected in their lending activity in the personal (local resident) loan category (read: car loans).
Statistics reveal that about 49 per cent of all loans by commercial banks fell under this category for the year ending March 2019. This pattern has been consistent for the past four years. It is the principle I am proffering, not the category itself.
3. Make a determination as to which lending programme has appeal to the borrowing public, as an example, accounts receivable financing. If this is a relevant and appealing loan programme to borrowers, the regulations should encourage or require that the portfolio of loans by the regulated entities achieves a given percentage to this programme. If the entity achieves this, it will improve the quality of its ranking.
4. Take this thought a step further. If the entity achieves the required level of lending to the selected programme, the net income from that programme will be given a tax break. We do it for tourism and the junior stock market. Why not here? The justification is noble, the sector gets a boost, and the public gets a benefit. It could have the consequence of lowering interest rates in the microcredit sector for this programme.
The sector will be encouraged to be competitive as to interest rates since the tax break gives it a little more yield on the portfolio than previously. Let the leaders battle for customers based on interest rates. Lending goes up, rates go down. What more could you ask for?
I admit that these suggestions may not fall within the ambit of regulations, but that does not prevent them from happening. Just give it some thought. If it can make a difference, it is worth a try.
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