Before the Microcredit Act.
Before the Microcredit Act the lending of money to individuals was regulated by the Money Lending Act and Banking Services Act. The Money Lending Act required that every loan agreement be evidenced by a memorandum in writing signed by the borrower containing all the terms of the contract and in particular the date of the loan and the interest rate per annum. The Money Lending Act primarily regulated non-commercial money lending activities usually taking the form of occasional agreements between private entities and individuals who were not taking money from a bank or other registered financial institution.
What are Microcredit services?
The Microcredit Act was passed earlier this year and came into effect on July 30, 2021. Under the Microcredit Act a “microcredit service” is defined as —
(i) the granting of credit facilities to individuals or MSMEs or both; and
(ii) the provision of business advisory services to individuals or MSMEs or both;
An MSME is a micro sized enterprise (an enterprise with total annual sales not exceeding $14,999,000.00), small sized enterprise (an enterprise with total annual sales ranging between $15,000,000.00 and $74,999,000.00), or medium sized enterprise (an enterprise with total annual sales ranging between $75,000,000.00 and $425,000,000.00). Therefore, the Microcredit Act regulates the lending of money to small businesses and individuals.
Under the Act, there is an adjustment period of one year from July 30, 2021, to allow all existing money lenders to become compliant with the new regime. This means that all money lenders will need to obtain a licence to provide microcredit services from the Bank of Jamaica by July 30, 2022 or they will find that all their loan agreements entered into after that date will be unenforceable. However, contracts entered into before July 30, 2021 will remain enforceable. Additionally, a person found providing microcredit services without a licence will be guilty of an offence and liable to a fine or imprisonment.
Getting a licence
An application for a licence to operate a microcredit institution shall be made to the Supervisor (the Governor of the Bank of Jamaica) in the prescribed form accompanied by proof that the applicant is a company registered in Jamaica and copies of the incorporating documents. Therefore, it appears that only companies incorporated in Jamaica or overseas companies registered in Jamaica are capable of being licensed under the Microcredit Act. All officers and substantial shareholders of a company wishing to be licensed must pass the fit and proper test outlined in the regulations.
A licensee also has the continuing obligations of; keeping their microcredit business separate from any other business of the company, prominently displaying their licence or a certified copy in every office of the company, keeping accurate records of the microcredit business (to be retained for seven years), keeping secret and confidential all information pertaining to customers of the licensee, and ensuring that annual audited financials are done by an external auditor and filed with the regulator.
All loan agreements issued by a licensee must also fulfil all the requirements imposed by the Microcredit Act. Some of the requirements for loan agreements imposed by the act include: using simple language, ensuring that all interest rates are given as Annual Percentage Rate, or Effective Annual Percentage Rate stated in percentages and dollar values, stating the terms and conditions for repayment ahead of the stipulated loan period, and expressly stating any penalty applicable in default of payment.
There are some money lenders and agreements that are exempt from the provisions of the Microcredit Act, these include:
- Occasional loans extended on a non-commercial basis between private parties or such other money lending that is subject to the Money Lending Act.
- Registered Friendly societies
- Licensed building societies
- Registered Co-operative societies
- Any body corporate empowered by an enactment of parliament to lend money
- Any company licensed under the Banking Services Act
- Any insurance company that lends money in course of its business
- Any entity that extends credit to its customers for the supply of goods and services
- A licensee under the Securities Act
- A registered Superannuation fund or retirement scheme
- Lenders that provide credit facilities to high-net-worth individuals
The Microcredit Act has created a place for the provision of commercial lending services by persons that are not Banks or building societies. This should result in increased access to funding for entrepreneurs and small business owners and allow consumers who may not normally qualify for a loan from a bank to legally obtain loans from licensed microcredit service providers. Under the Microcredit Act, consumers will be able to be confident that they are dealing with fit and proper persons and have the benefit of all loan agreements being presented in simple and easily understood language. The consumers from the outset will also know the exact dollar figure payable as interest from the outset without having to worry about doing any complex calculations for themselves. Requiring the providers of microcredit facilities to become licensed will allow the persons in most dire need to have access to reliable, safe, and secure loans to help them meet their needs and grow their businesses.
Luke Phillips is an attorney at Myers, Fletcher and Gordon and a member of the firm’s Commercial Department. He may be contacted at email@example.com or through the firm’s website www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.