THE Jamaica Micro Financing Association (JaMFA) is pushing for the establishment of a Micro Credit Act to taper the growth of interest rates charged by the sector.

They hope to see a bill tabled in parliament by next April.

Over the years, several complaints have been received by the Ministry of Finance and Planning regarding the high interest rates being charged by Micro Finance Institutions (MFIs) and the aggressive collection techniques of some lenders.

MFIs argue that the interest rate has to be high because the clients they serve are high-risk due to the low value of their collateral — if they have any to put up in the first place — and the cost of monitoring repayment.

The prescribed rate set by the Ministry is 40 per cent per annum but most companies charge higher rates to cover unsecured loans.

“This is a fast-evolving sector and there has to be some kind of order,” chairman of the JaMFA, Hurshel Cyrus, told the audience at the JaMFA Round Table Forum last Wednesday.

He reckons that the admission of small companies in the micro financing sector without a money lending licence under the Money Lending Act has caused a 20 per cent increase in the number of lending institutions over the last 10 years.

Currently, small institutions are only required to register at the Companies Office of Jamaica before starting operations. However, these institutions have been touted as having very little capital to maintain their businesses.

“What you find is that anybody can just set up shop and start lending money and these people normally charge high interest rates because they don’t have the basic capital needed, so they charge interests to get higher returns,” he said.

Quite often the rates are quoted on a weekly or monthly basis rather than per annum, which may lead borrowers to believe that the rate is affordable, according to Cyrus. In the quest to access financing, the loan document is signed without the requisite understanding which often results in a small loan amounting to a massive outstanding balance.

The Money Lending Act is a legislation that deals with loan contracts which do not fall within the ambit of the regulated financial industry. It was originally intended to safeguard borrowers from unscrupulous money lenders who charge exorbitant interest rates.

The Act also provides some recourse for the customer by imposing a maximum interest rate which a money lender can charge. However, an exemption from the Act can afford regulated companies to increase that limitation. While there are some 60 retail lenders, fewer than 20 are exempt under the Act.

“Most of the complaints received from the public were associated with companies that have not sought or received exemption from the provisions of the Money Lending Act,” Cyrus stated. “But this is the only way for institutions to charge interest rates of up to 40 per cent, by law.”

The Minstry is currently in the process of deliberating on a proposal for the enactment of a Micro Credit Bill, which will replace the Money Lending Act. The new legislation is aimed at creating a Regulatory Authority for MFIs to make mandatory the registration of small companies under the Micro Credit Act, which will automatically allow them to charge rates up to 40 per cent.

The JaMFA is proposing that the functions of the authority include formulating procedures for licensing, compliance monitoring, handling complaints and anti-money laundering and counter-terrorist financing matters.

In addition, the regulatory authority should be given the power to issue directions or standards on transparent lending practices, credit administration and other matters relating to operational issues.