Avia Collinder, Business Reporter
An Inter-American Development Bank (IDB) study, which identifies credit unions in Jamaica as the primary provider of microfinance, has suggested that regulations limiting unsecured loans to 10 per cent of assigned capital could harm what is the most lucrative income stream for many of the community-based lenders.
Jamaica's central bank estimates that unsecured loans in the credit- union sector amounted to 14 per cent of loans written in 2012. Such loans are usually priced higher than other products.
Total new loans written by the sector last year amounted to J$5.5 billion, which would place the unsecured portion at about J$770 million.
The 10 per cent limit proposed by the Bank of Jamaica (BOJ) is the same for commercial banks.
The issue remains one of the main sticking points between the central bank and the credit-union sector, which the BOJ will begin to regulate once the rules are finalised and legislation is promulgated.
The Jamaica Cooperative Credit Union League (JCCUL), the sector's umbrella representative, has proposed a different trigger, which it declined to disclose until talks are finalised with BOJ.
"While recognising that for practical reasons micro loans may not be secured (no formal collateral) the central bank is not considering any special limits for unsecured loans higher than the 10 per cent limit set for commercial banks," says the study, titled Financial Regulation in the English-Speaking Caribbean: Is it Helping or Hindering Micro-finance?, authored by Robert C. Vogel with Gerald Schulz and published by the IDB in 2011.
"Strongly opposed by the league, not only could this 10 per cent limit be problematic for microlending, but it could also be problematic for credit unions' widespread use of payroll deductions for repayment rather than formal collateral."
The authors of the report made no suggestion on what the ratio should be.
The report notes that while BOJ acknowledges that credit unions are a significant part of Jamaica's financial system, "the officials interviewed stated that they are unaware that credit unions are involved significantly in microfinance and, further, that as commercial banks are not involved in microfinance, the central bank does not have any special procedures to evaluate such lending and its risks."
The report states that Jamaica has the largest microfinancing sector within the Caribbean, with credit unions being the most significant lenders in the sector.
Loans up 13 per cent
Credit union loans grew by J$5.5 billion, or 13 per cent, last year to J$47.9 billion, according to central bank data. The year prior, loans grew by J$4.5 billion, or 12.5 per cent.
The major categories of loans, according to the BOJ, were mortgages which represented 39 per cent of the industry portfolio, and unsecured consumer lending, which accounted for 14 per cent.
Most of this growth occurred in the latter part of 2012.
JCCUL's 2012 records show that 26 per cent of loans among league members were for vacation, medical expenses, Christmas spending and other miscellaneous purposes; 21 per cent for motor vehicle repair and purchase; 18 per cent for mortgage, land and building purchase, repairs and acquisitions; 11 per cent for debt consolidation; nine per cent for education; eight per cent for personal expenses and bills; and five per cent for business.
The IDB discussion paper also highlights other contentious issues between JCCUL and the BOJ.
"Equally serious is the concern with minimum capital requirements, seen as potentially preventing the formation of new credit unions, and how the bank might measure capital, specifically members' shares, which bank officials think may or may not be permanent," the paper said.
"On the other hand," it adds, "the bank's policy of provisioning only after loans become 90 days delinquent is far too generous for micro loans."
BOJ has proposed minimum capital of J$5 million. JCCUL has made a counterproposal but, again, declined comment on it.
The league and the BOJ are expected back at the table this month to iron out the final areas of disagreement, General Manager Glenworth Francis told Wednesday Business.
The negotiations over regulation of the sector have been ongoing since 1999.