A fear that new regulations under the Microcredit Act (2021) will cull the small business lending sector is said by technocrats to be unfounded.

Rather, it is expected that more robust companies will emerge over time. The small lenders, classified as microfinance institutions (MFIs), are expected to apply for licensing with the Bank of Jamaica (BOJ) by July 2022, as stipulated under the Act.

The Jamaica Observer has been advised by government sources that new rules have not been enacted with the intention of causing industry contraction.

One technocrat, who did not wish to be named, told the Business Observer that, instead of a lending sector reduced in size, it was expected that companies would emerge with reduced money laundering risk.

He specified, “Regulation is necessary for the reasons given which include improving customer service (ie outlawing rapacious practices) and closing down the opportunity for money laundering.”

Others have suggested that bigger companies could result in the same way that credit unions merged into bigger operations while awaiting BOJ supervision. Still others project that loan portfolios may come on the market for sale.

Blossom O’Meally Nelson, president of the Jamaica Association for Microfinancing (JAMFIN), is not in agreement with any of this, stating that membership will be culled as it becomes too expensive to operate under the pending regime.

Over 200 Jamaicans make a living by lending, it is estimated and some employ others. O’Meally Nelson told the Business Observer that when meetings were called by the BOJ there were over 200 in attendance. However, there are about 50 lenders which are registered.

Speaking on Monday, April 4, she said, “There is going to be a fallout because the application process, cost and compliance requirements are very onerous. Not everybody is going to meet them. Even if they can meet them it would be difficult to run a bad business.

“It is going to be more costly. You’re going to divide tasks under data protection and KYC; it can’t be a one-man band operation anymore. They have to increase the number of employees.”

O’Meally Nelson said that the impact is that “it is very likely that there will be closures by individuals who cannot run a viable operation and can’t meet the requirements.

She suggested, “Very likely there will be underground operations where other people see the opportunity. I don’t see where there are any provisions for ensuring compliance for everyone.”

She pointed out, “The cost of licensing involves reorganising and restructuring to accommodate certain positions with legal implications, including a compliance officer and data protection officer. They (microfinanciers) need to have a board — two-thirds external and one-third internal. Directors have to be compensated. Also they must meet stringent fit and proper requirements.

“The fit and proper requirements of MFIs are more stringent than banks and investment companies. Family and connected parties are also scrutinised. It is like an investigation which is beyond the requirement for any other institutions in the financial sector. Then the company has to ensure they have all the policies, and also hire and train staff to follow practices and procedures to meet financial best practices. It requires a more complex organisation.”

“You also have to deal with accounting, with three years of audited statements required. That’s costing $300,000 to $400,000 to get audited statements for each year. The total cost could be over $1 million.”

So far, the head of JAMFIN said, “There is no indication of consolidation. If any want to sell or merge they are not saying. But they are staring down a very serious tunnel and they will have to make a decision.”

The sector leader said members would benefit from a grandfathering period in which they were allowed to acclimatise and organise.

Small lenders have in the last year also complained about “the frequency of the proposed reporting relationship” between micro lenders and the BOJ which they describe as exhausting.

Reports that are required include new hires and termination of employees, policy development and future expansion.

Licenses can be revoked if there is late reporting or lack thereof.

Sector members have been asking Finance Minister Dr Nigel Clarke to revisit the Act and make amendments.