Avia Collinder, Business Reporter
The Ministry of Finance last week revealed details of the proposed Micro Credit Act to regulate microfinanciers and protect their customers.
The bill will replace the Moneylending Act under which some micro lenders gain exemptions from the Ministry of Finance that allow them to retail short-term loans - also referred to as payday loans in some jurisdictions - at high rates.
The moneylending sector is said to have about 100 firms, with an average rate of two new firms emerging every month. The new legislation will make it mandatory to register, establish the qualifying criteria for registration and create a regulatory authority for the group.
The regulator, it is proposed, will be granted powers to issue directions or standards on transparent lending practices, credit administration and other matters relating to operational issues, and will determine whether to accept or reject and revoke registrations.
It will also publish the registry of approved lenders.
Currently, the Moneylending Act makes provisions for and regulates moneylending contracts and the enforceability of onerous loan arrangements. Some of those provisions cover the form of moneylending contracts, restrictions on interest rates and fees, prohibition of compound interest rates, moneylending advertisements, as well as penalties for false statements and representations.
The micro credit bill proposes to raise the standard of business practices by incorporating new provisions to deal with full disclosure of all rates, fees and charges on the principal debt.
It is also recommended that loan repayments should be stated in both percentage and dollar value so that borrowers can readily understand the required payments in each time period.
"The borrower should always be told precisely how much is to be paid and the time period within which the amount is due and should also be given a copy of the agreement," the policy proposal states.
One allowance is the acknowledgement that risk for the sector is higher and interest rates charged should, therefore, be in line with such risks.
The Moneylending Act currently imposes a maximum interest rate which a money lender can charge - a prescribed 40 per cent per annum.
But based on the applications for exemptions received by the finance ministry, most of the companies charge interest rates above the prescribed maximum - citing higher operating costs associated with processing the numerous small loans and the higher credit risk associated with lack of collateral.
"It is proposed that under the new enactment, moneylenders should have the flexibility to determine interest rates based on market forces and their risk assessment," said the policy.
The restriction on the charging of fees would also be lifted, but it maintains the prohibition of false or misleading advertisements, and will add a requirement for record-keeping.
For the purposes of policing the anti-money laundering laws, moneylenders will be redesignated as 'financial institutions' under the Proceeds of Crime Act.
Accordingly, it will become an offence under POCA to carry on the business of moneylending without a licence. And contracts by unlicensed moneylenders will not be enforceable.
The micro credit bill will not fully repeal the Moneylending Act. The latter will continue to exist to govern one-off transactions between private individuals.