THE microfinance model, once heralded as a vehicle for economic empowerment in Jamaica, is at a turning point. Two major financial institutions, MFS Capital Partners Limited (MFS) and Lasco Financial Services Limited (LFSL), have scaled back or outright exited the micro loan business, citing unsustainable risks and prolonged losses.

The latest move comes from MFS, which recently rebranded its microfinance subsidiary, Micro-Financing Solutions Limited, as Monolith Financial Services, and signalled a decisive pivot toward foreign exchange trading, remittances, bill payments, and private credit. This follows Lasco Financial’s decision last year to de-risk its lending portfolio, reducing exposure to the very borrowers microfinance was designed to serve.

The shift goes beyond corporate restructuring as it highlights structural weaknesses in Jamaica’s microfinance sector. Lasco Financial’s Managing Director Jacinth Hall-Tracey, speaking at the company’s AGM last year, provided a candid assessment of the company’s challenges in the micro loan space, stating, “It can’t work. These borrowers do not have assets, and hence when their source of income was suspended by the pandemic they were never able to recover in order to pay their past debt or create a new business for the future.”

“They could not manage, and therefore we were left with a high delinquent portfolio,” she told shareholders.

For years, micro loans fuelled financial inclusion, offering capital to small entrepreneurs, gig workers, and low-income earners without traditional collateral. But when the pandemic struck, mass delinquencies wiped out earnings, leading firms to reconsider their exposure. High default rates, low recovery options, and costly debt collection processes have made this segment increasingly unviable.

Lasco’s response was to refocus lending on more structured small and medium-size enterprises (SMEs), leveraging partnerships with Development Bank of Jamaica (DBJ) and government agencies. MFS’s move, while different in execution, appears driven by the same underlying reality — high-risk lending to unbanked individuals is no longer sustainable.

Speaking on the new company name, in a press statement CEO Tamar Webley said, “The name Monolith Financial Services more accurately reflects who we are today and our vision for the future. While micro loans played a significant role in our early years, our focus has shifted to providing diverse and robust financial services that empower individuals and businesses alike.”

Efforts by the Jamaica Observer to obtain a response from other players in the sector were unsucessful up to press time. However, president of Jamaica Association for Micro-Financing (JAMFIN), Blossom O’Meally-Nelson noted that while gaining insight into individual companies’ operations is challenging, some have been vocal about industry concerns.

“Most of them won’t talk, even if they are moving away from funding these individuals. But what I’m certain is a problem is the fact that many people borrow money and then leave the island and don’t repay,” she told the Business Observer.

MFS’s retreat from micro loans comes amid mounting financial pressures. The company reported a net loss of $41.3 million for the nine months ended March 31, 2024, a sharp downturn from the $3.9 million profit recorded in the same period the previous year. Revenues collapsed from $14.59 million in 2023 to just $493,100 in 2024, underscoring the financial strain tied to the transition.

Despite these challenges, MFS has dramatically expanded its asset base, largely due to the acquisition of its former microfinance arm. Total assets surged from $65.6 million in June 2023 to $786.3 million in March 2024 — a staggering 1,098 per cent increase.

However, this growth came at a cost. Liabilities skyrocketed from $105.6 million to $867.5 million in the same period, largely due to long-term debt incurred to finance acquisitions.

In response, a connected party — widely believed to be MFS CEO and largest shareholder Dino Hinds — has begun offloading shares to manage the company’s debt. A total of 84.17 million shares in MFS Capital were sold in August, as disclosed in a Jamaica Stock Exchange (JSE) filing. The transaction, executed at $0.60 per share, aligns with a February AGM resolution that authorised the sale of existing or new shares to reduce debt obligations.

The initial divestment is expected to be followed by an additional share issuance to the market, further strengthening the company’s financial position. MFS has also secured shareholder approval for a $500-million debt-to-equity conversion, which aims to stabilise its balance sheet and bolster investor confidence.

MFS’s reorganisation comes at a time of heightened regulatory scrutiny. The Jamaica Stock Exchange (JSE) suspended trading of the company’s shares due to the company’s failure to submit its audited financial statements for the year ended June 30, 2024, and its first-quarter results for September 30, 2024. These filings, overdue by 93 days and 46 days, respectively, raise concerns about governance and transparency at a time when the company is undergoing a strategic overhaul.

MFS has not provided a timeline for its overdue filings, leaving investors in limbo. However, the company maintains that its realignment toward higher-margin financial services will drive long-term profitability.