Microloans to be tied to Treasury rates - New bill seeks to end predatory payday lending practices, license operators
The microfinancing bill that will bring small lenders under the regulatory umbrella of the Bank of Jamaica has been tabled in Parliament by Minister of Finance Dr Nigel Clarke, who says it’s meant to bring order to the market and constrain the predatory lending practices employed by some.
The legislation covers micro lenders that provide loans to individuals and small institutions whose sales range up to $425 million.
The bill does not identify BOJ as the regulator – it speaks only of a ‘supervisor’ – but the central bank confirmed Thursday that it was the intended oversight authority.
In his statement accompanying the tabling of the bill, called the Micro Credit Act, Clarke said there has been a proliferation of microlenders since 2003, many of which “charge excessive interest rates and engage in predatory lending practices”.
Industry representatives were still reviewing the legislation this week to understand its full ramifications. Reactions were promised for later.
Microlenders, which are also referred to as payday lenders, are known to charge interest rates ranging from around 40 per cent upwards, but they are reports that some charge rates of up to 70 per cent and beyond.
The new bill proposes to reign in that practice by tagging microloan rates to the Government of Jamaica’s Treasury bill rates, taking into consideration “cost of funds, profit margins, borrowers’ credit risk, administrative costs and other loan-related costs”. And the companies will have to seek a licence from the supervising authority to issue loans when the law and its regulations come its force.
Treasury bill rates are currently yielding below three per cent interest per annum, which offers a signal that the Government is looking for deep adjustments to the loan rates.
Those firms that lend without a licence will not be able to enforce their loan contracts with borrowers. And only registered companies with proper articles of incorporation, financial records, a board of directors, and office and branch locations can qualify for a licence.
The legislation is still to be debated in Parliament, which will determine the final contours of the proposals that are enacted into law.
The bill makes stipulations about information that must be reported by the microfinance companies to the supervising authority, including new physical locations, changes in the officer corps, and any acquisition of 10 per cent shareholding or more in the company, and thereafter, any subsequent increment of five per cent or more.
Breaches may be punished by a revocation or suspension of the company’s licence, fines ranging from $50,000 to $2 million, and prison terms ranging from six months to one year, depending on the infraction. And depending on the offence, both fines and jail terms may apply.
Companies are required to do an annual audit to international accounting standards, done by a professional not employed to the company. The bill also gives the supervising authority the power to order its own audit.
As for the operations of the micro-lenders, they cannot lend in foreign currency without permission from the Bank of Jamaica, and the loan terms offered to borrowers must be stated in simple language and include the method of calculation of the rate of interest and penalties, in case of default. In case of default, interest must be calculated on the outstanding amount owed and not the original principal sum.
Lending will only be permissible to individuals and MSMEs, including micro enterprises which employ five or less and do no more than $15 million of sales annually; small companies employing six to 20 persons with sales of $25 million to $50 million annually; and medium-sized companies which employ 25-50 persons with sales of $75 million to $425 million annually.
The proposed Micro Lending Act excludes building societies, friendly societies, co-operative societies and money-lenders that are not in the business of lending on a daily basis, from the new licensing requirements.
The bill also seeks to amend the Credit Reporting Act to designate the new licensees as credit information providers; amends the Money Lending Act to exempt the licensees; and amends the Proceeds of Crime Act, the Terrorism Prevention Act and the United Nations Security Council Resolution Implementation Act to designate the licensees as financial institutions.