Microlenders tremble at costs to secure licenseWednesday, November 24, 2021
BY AVIA USTANNY-COLLINDER
AUDIT and compliance costs for microlenders seeking to gain licensing through the Bank of Jamaica (BOJ) to operate as a microfinance institutions (MFI) under the new Microcredit Act (MCA), 2021 are estimated at over $1 million.
The costs arise as the Ministry of Finance and the Public Service, through the BOJ, is moving to regulate the microlending sector in order to weed out practitioners who belong to the loan shark category and also make room for lenders to improve business practices.
One industry advisor is also warning lenders to beware, on their own part, of corporate raiders who will use the coming crunch to buy their loan portfolios for pennies on the dollar.
With the July 2022 deadline for applying to the BOJ for licensing approaching, some 260 lenders face a tight deadline and increasing worry, as most operate largely informally or do not have the resources to meet the requirements under the new Act.
Courtney Lodge, CEO of business advisory service Sure Profits Academy and a former general manager of microfinancing at the Development Bank of Jamaica (DBJ), told the Jamaica Observer that MFIs will face numerous challenges in trying to qualify.
He said, “In this unstable environment, which feels like a sinking sand environment for some MFIs, they should be wary of 'white knights' who are really corporate raiders that will try to come and buy out, merge with, or provide unviable equity investments.”
Lodge said there have also been suggestions that the BOJ would rather encourage mergers and closures so that it can regulate just a few MFIs, as is the trend in the banking and credit union sectors. However, he stated, MFIs are being encouraged to not rush into any such mergers or collaborations until they get the guidance notes that the BOJ will share to steer the sector.
While mergers, selling shares, or obtaining other types of help is not wise, he advised, “Just be wary of those corporate vampires that will want to take advantage of the current environment to force hard-working MFI owners to give away their businesses.
“Instead of going it on their own, thinking they know best, MFIs should trust their industry associations and the BOJ to provide the appropriate guidance.”
Lodge indicates that most of the challenges will come even before the actual application is required as, in truth, most MFIs do not have policies and procedures, systems and tools in place to address the requirements related to the following five key areas: corporate governance; human resource management; operations (including risk, compliance and information technology); sales, marketing, corporate communications and business development; and finance and accounting.
Lodge said, “Even large banks struggle with some of these areas. So, in the first instance, it is not a matter of striving for perfection, but instead showing that the areas are adequately covered by well-thought-out policies.”
Denisher Forbes, managing director of E-Loan Micro Financing Ltd in Montego Bay, told the Business Observer, “As CEO and managing director of E-Loan, I embrace the regulation of the sector which I anticipate will provide more leverage and credibility to my institution and award micro financiers with a mini bank status.”
However, she added, “it is evident that one will not enjoy the sea and the excitement of swimming without the possibility of drowning”. Forbes indicates, “Firstly, the cost of the compliance for micro and small businesses is exorbitant. One such example is the cost of the last three years of audited financials, which will be a minimum of one million dollars, not to mention all other consulting and coaching that is required to become compliant.”
Secondly, she says, “the frequency of the reporting relationship between microlenders and the BOJ is exhausting. This is so, given the extensive list of reporting and reports that are required — starting with the employment and termination of employees, to future expansion of the business, then to internal SOPs, and policy documents amongst many other requirements. These can and will result in the licences being revoked if there is late reporting or lack thereof”.
Finally, Forbes comments, the fit and proper requirement for all shareholders/directors “is extremely intrusive”
She points out, “This involves unravelling and extricating everything about the directors and their finances, education and citizenship, amongst many other criteria, before a licence can be granted or denied. I could continue to list the negatives but I would love to focus on the positives for now, hoping I have interpreted them correctly.”
Forbes said that the most welcome or anticipated benefit will be that once all requirements are satisfied by the lender to the BOJ, there will be a level playing field for all players in the microfinance industry.
She noted, “Going forward, all micro financiers will now be able to lend freely to both the public sector employees and private sector employees without bias and prejudice in the system of granting only a selected few the exclusivity to lend to the public sector employees.
“This is what I embraced the most alongside the fact that every company is expected to meet the same requirements. Notwithstanding, I would have greatly preferred a more relaxed set of requirements for the companies that fall under the category of small and micro enterprises.”
Forbes, meanwhile, is appealing to Finance Minister Dr Nigel Clarke to revisit the Act and make amendments to the microcredit regulation to facilitate the smaller companies, “as I fear this will force several businesses out of operation — which could severely damage our already fragile economy”.
She advises, “The success of any business or economy will always require the synergy of rationality and emotionality for the convergence of the best decision.”
The FSC (Investigation and Enforcement Division) meanwhile told the Business Observer that from time to time it still receives calls from people who may have been victims of “loan sharks”.
However, it advises the complaint would be directed to the Ministry of Finance that has a unit tasked for that purpose. It also notes that under the new Act, complaints arising from matters of this nature are to be directed to the Consumers Affairs Commission.
The Act authorises the Consumer Affairs Commission to investigate complaints brought to it by a consumer of a microcredit company such as a borrower, and outlines the requirements for loan agreements.
In terms of the actual application to become licensed, some MFIs have expressed a desire to be assisted with the interpretation of some of the issues outlined, and to be guided in their preparation, says Courtney Lodge, whose company has developed just such a programme, in collaboration with the Blossom O'Meally-Nelson-led Jamaica Association for Micro Financing (JAMFIN), to provide assistance for MFIs to get ready for, and then to apply for the required licence.
One type of such assistance is an “MFI licensing readiness survey/self-audit” that is free of cost.
After the MFIs rate themselves, they can then: keep that self-audit to themselves or share the results with JAMFIN, as a survey feedback, to assist with an industry assessment; and seek assistance from JAMFIN or other providers to help them improve in the areas of weaknesses.
Through its Caribbean Institute of Business and Microfinance (CIMB), JAMFIN has been hosting webinars and workshops to help to provide clarity and guidance to MFIs. Sure Profit can also guide the MFIs to sources of financing for the process now underway, Lodge says.