Three years into the passing of the Microcredit Act, payday borrowers are unimpressed with the rates being held by microlending institutions, despite initial talks that the Act would help curb the predatory lending practices employed by some.

They say they’ve seen little to no change in the interest rates charged by microcredit institutions (MCIS). In fact, in some cases the rates on short-term loans have trended upwards; however, customers have found interest charged on long-term loans to be more “manageable”.

On average, microloan companies charge up to 5 per cent per month on short term loans which when annualised would run 60 per cent in interest rates, industry sources say, comparable to rates charged ahead of the passing of the Microcredit Act in January 2021.

“When I heard about the regulation of industry, I really thought that the loan rates would have been better than before, but I’m yet to see any real changes,” payday loan borrower Sabrina told the Jamaica Observer.

“A few years ago, I took a loan with a microcredit institution for personal use. The interest was more than what the banks were charging but I found it easier to process the loan with this company and so I went through with it. Over time I cleared that loan, but then last year I needed another loan and I went back to that company since they had all my information on file, only to find that the interest rates are still the same, if not more,” she continued.

The broad purpose of the Act was to licence and regulate MCIs that provide financing to individuals as well as micro, small and medium-sized enterprises, which includes bringing order to predatory lending practices.

In tabling the draft in 2019, Minister of Finance Nigel Clarke said there was a proposed cap on microcredit interest rates, pegging microlenders to the Treasury Bill rate, but that was later thrown out after heavy criticism from both industry players and the opposition spokesman on Finance who argued that the Bill in its current state would “destroy the sector”.

The Act, which came into effect mid-2022 with the Bank of Jamaica (BOJ) as the new sector supervisor, does not impose a limit on interest rates charged by microcredit institutions. It recently expounded on the decision, stating that the imposition of caps on lending rates could have unintended consequences for lenders such as microcredit insitution’s deciding not to lend to higher-risk segments of the market, leading to a larger group of underserved persons in the economy.

The BOJ, however, outlined that MCIs may impose interest on a loan calculated (i) at a rate based on market forces; and (ii) consequent on the assessment by the MCIs of the risks involved in providing the loan to the borrower.

“There have been complaints from some customers about the interest rates and its true; it’s often the short-term loans that they complain about. When you annualise the interest rate on the short-term loan, it may look astronomical, but the fact is that you’re only paying that amount for two or three months, not for a year,” Dr Blossom O’Meally-Nelson, chair of the Jamaica Association of Micro Financing Limited (JAMFIN), told the Jamaica Observer.

“If you default on your loan payments, then you will end up paying more in interest,” she said.

She added that there are fixed costs that the lenders must cover when processing these short-term loans, including cost of funds, profit margins, borrowers’ credit risk, administrative costs, and other loan-related costs that come with these unsecured loan facilities. Asset-backed loans are typically repaid over a longer tenure, between 24 to 36 months, and carry a lower interest rate of 30 per cent on average.

Despite borrowers’ dissatisfaction with short-term loan rates, recently released financials from a few of the industry players show that the lending agencies are disbursing more loans year-on-year.

For example, large microlending institution Access Financial grew loans and advances to $5.7 billion as at December 2023, an increase of $694 million or 14 per cent year over year. ISP Financial Services also reported a 33 per cent in net loans, pushing the company closer to the $1 billion-mark.

Neither company provided a breakdown on which business category saw the biggest improvement in disbursements year on year, but Access Financial said that the increase in disbursements is a continuing trend consistent with the gradual improvement in the economic environment and higher levels of demand for consumer loans.

Earnings of Access swelled to $325 million for the nine-month period, an increase of 44 per cent when compared to $226 million for the prior year.

As at December 31, 2023 the Group’s asset base stood at $7.2 billion; an increase of $970 million or 16 per cent when compared to the prior year. Interest income from loans were also up 4.7 per cent for the December quarter, but profit dipped from $140.3 million to $90.9 million over the three-month period.

Conversely, earnings of ISP Finance rose 156 per cent to $26.4 million.

Meanwhile, Lasco Financial Services, which operates micro-lending business Lasco Microfinance Limited, reported a dip of 7.5 per cent in its loan book as at December 2023. Its loan portfolio balance stood at $1.73 billion, down from $1.87 billion a year earlier.

“The industry has had to deal with getting for the MicroCredit Act over the last few years and then, on top of that, the operators were faced with COVID-19. But the microlenders have bounced back, its not that all our problems are behind, its more that we have learnt how to live with the challenges and to respond accordingly.

“The Act is not restricting how we do business and there is some amount of recovery at the informal economy level. We have seen increases in some sectors — for example, construction — and that drives transport activities, the development of restaurants, and so on,” O’Meally-Nelson said.