Mon | Jun 14, 2021

Microfins putting out M&A feelers

Published:Sunday | February 14, 2021 | 12:19 AMKarena Bennett - Business Reporter
Dr Blossom O’Meally-Nelson, chairman of JamFin.
Dr Blossom O’Meally-Nelson, chairman of JamFin.
Raymond Gabbidon, executive director of JamFA.
Raymond Gabbidon, executive director of JamFA.
Dr Blossom O’Meally-Nelson, chairman of JamFin.
Dr Blossom O’Meally-Nelson, chairman of JamFin.
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The associations that speak for payday lenders, Jamaica Micro Financing Association, or JamFA, and the Jamaica Association for Micro Financing, known as JamFin, are heading into more talks this week to reinforce their message to members – that some...

The associations that speak for payday lenders, Jamaica Micro Financing Association, or JamFA, and the Jamaica Association for Micro Financing, known as JamFin, are heading into more talks this week to reinforce their message to members – that some of them may have to merge to survive.

With the passage of the Micro Credit Act, MCA, in January, the microfinanciers will now fall under central bank regulation, and soon won’t be allowed to operate without permit from the Bank of Jamaica.

The push for the entities to do tie-ups would replicate the strategy utilised by credit unions whose members executed a series of mergers – with mostly the larger operators gobbling their peers – in order to strengthen their capital bases, in preparation for BOJ oversight. That sector went from 43 community banks to around 26 now.

The micro credit law aims to root out predatory lending practices, threats, and intimidation, discourage microcredit institutions from lending money at excessive interest rates that are not justified by the risk. Under central bank oversight, the authorities can also police against the sector being used to facilitate money laundering,

The estimated 200 payday or microlenders will be forced to comply with requirements for marketing and advertising, and loan generation, disbursement and recovery, and will need to prepare for registration and operation under the law within a year.

But the association’s heads say the drastic changes and financing needed to get the businesses ready may prove to be just too much for the companies, many of which are themselves micro operators with limited capital.

“What we need to consider is acquisition and mergers among our members. We have at least one company lined up that wants to finance these activities. If our members are thinking about doing sort of consolidation, we would like them to tell us,” chairman of JamFin, Dr Blossom O’Meally-Nelson, told the Financial Gleaner.

JamFA executive director Raymond Gabbidon says talks are ongoing with the association’s members for the merging of small entities as well as sourcing of funds for business continuity.

“We are concerned and there’s also the fact that whenever you have the imposition of regulations in a sector that has never been regulated before, there is the risk of fallout. But we encourage our members to stay the course if they can, and we are engaging those who can look at merging with other companies to think about that,” said Gabbidon.

“We are even looking at internal lending. Although the bill doesn’t speak to capital adequacy, from an operational standpoint, if the microfinance companies don’t have the funds to lend, then it wouldn’t make sense that they undertake this massive expense,” he said.

Microlenders finance their loan operations from personal funds or cash flow, and Development Bank of Jamaica funding. Over a decade to 2019, the DBJ is reported to have disbursed nearly $11 billion to microfinance institutions for on-lending to entrepreneurs.

Before the Micro Credit Act, microlenders operated under the Moneylending Act, which the new law will repeal, but were basically only required to register their venture. Still, fewer than 100 of the estimated 200 lenders are on the list, which means most of them have been operating below the radar, and are likely reliant on personal savings.

The first sign of M&A movement, post the passage of the MCA, came just over a week ago. Big gaming company Supreme Ventures Limited, SVL, acquired 51 per cent of microlender McKayla Financial Services, which has a network of seven offices and a customer base of a little over 3,000.

From SVL’s injection, McKayla expects to have a larger pool of funds for on-lending through both its network as well as SVL’s 1,250 agents across the country.

Amid the outreach and guidance to small players, the two microfinancing associations are positioning themselves to offer consultancy and training services to medium-sized and larger firms within the sector.

JamFin, through the Caribbean Institute of Microfinance and Business, is collaborating with an international company, Sure Profits Academy, to offer consultancy and training services to companies individually and in groups.

Gabbidon said JamFA is making its outreach to firms at two levels: their board of directors and their general councils. The latter is comprised of two representatives from each of the member companies.

“We are seeking to mandate the secretariat to put in place various strategies that will be required to facilitate our members and prepare them for the new regulations. We also want to speak about risk mitigation methods, compliance and especially how the small microfinance company will survive,” he said.

Discussions are otherwise ongoing with the BOJ regarding the preparatory steps towards their regulation.

The associations were encouraged that the efforts to link microloan rates to the Treasury bill rate was eventually stripped from the MCA, among other adjustments, after their objections – the bill passed with 12 amendments – but said again last week that they still fear the legislation as a whole would lead to a contraction of the sector.

Concerns have been raised by both JamFA and JamFin over the role given to the Consumer Affairs Commission, CAC, and the number of criminal offences that the MCA will give effect to once it is enacted. The CAC will become the body responsible for investigating complaints against the institutions, and for developing a code of conduct for the institutions on consumer-related matters.

“The concern is that the overall approach of the bill seems to be punitive rather than developmental, but that’s water under the bridge for us now, because its already in law. We are now preparing ourselves for the new regulations and hopeful that in the next five years, the act can be reviewed,” O’Meally-Nelson said.

karena.bennett@gleanerjm.com