In the first quarter of this year, the Microcredit Bill (the “Bill”) was tabled before the House of Representatives. The stated reason for this draft legislation was to curb the excessive interest rates and predatory lending practices of certain entities. For the most part, these entities had free rein in how they operated.
Who Will be Regulated & By Whom
The Bill when passed, will regulate anyone who is, or will be, operating a business which offers a microcredit service. Under the Bill, “microcredit” is defined as the loan facilities offered to individuals and to micro, small and medium sized enterprises (“MSMEs”) by a microcredit institution. A “microcredit institution” is defined as a company that is licensed to provide microcredit service. A microcredit service includes: (i) the granting of loans to individuals and to MSMEs; (ii) the provision of business and personal finance advisory services primarily to individuals and micro and small sized enterprises; and (iii) any other activity designated as such.
The regulator named in the Bill is the Bank of Jamaica (“BOJ”). The BOJ will be responsible for the administration of the Bill when it becomes legislation and the supervision of microcredit institutions. Although the designated regulator is the BOJ, the Bill contains provisions which promote the cooperation between the BOJ and other regulators, like the Financial Services Commissions, Consumer Affairs Commission (“CAC”) and even foreign regulators. The CAC is identified as the body to which complaints should be made regarding the service offered by a microcredit institution.
Importance of Compliance and How to Comply
A contract for the provision of microcredit services will be unenforceable if the person is offering microcredit services without a licence.
A person who desires to provide microcredit services must apply to the Supervisor (the Governor of BOJ) by submitting an application form, along with proof that it is a registered Company under the Companies Act, including a certified copy of the Articles of Incorporation and such other information as may be prescribed. Accordingly, it would seem that only
registered Companies will have the ability to be licensed.
The Bill provides that applicants must have (i) all the required systems and arrangements; and (ii) substantial shareholders and officers of the company who are fit and proper. A substantial shareholder is a person who holds 20% or more of the shares of a licensee. Once a licence is granted, the licensee must pay the annual licence fee and commence operation within one year of the grant of the licence.
Once the Bill is passed, a person operating a business which falls within the criteria of a microcredit institution or offers microcredit services is, within 12 months, to apply to be a licensee or cease to carry out such business. If a person is offering microcredit services together with another type of business, that individual must separate the microcredit business and apply to be a licensee or cease to carry out the microcredit business.
A licensee must: (i) only be engaged in the provision of a microcredit service; (ii) display their licence, or a certified copy, in their principal office and at every branch; (iii) keep accurate records of the microcredit business – to be retained for 7 years; and (iv) have annual audited financials – to be done by an external auditor.
A licensee must also notify the Supervisor of any alteration to its Articles of Incorporation, any change in location of the business or any establishment of a branch and must receive the appropriate response before proceeding.
Protection of the Consumers
The Bill requires loan agreements by licensees to be clear and unambiguous. If technical language is unavoidable, it should be accompanied by an explanation in simple language that is not false or misleading.
Of note is that the interest rate of a loan given by a licensee must take into consideration certain factors and shall be linked to the treasury bill rate at which the Government borrows on short term instruments. Currently treasury bill rates range from 2.15% – 2.18% per annum, which would lead to a drastic reduction in the interest rates that are presently being charged by microfinance institutions. The Bill also requires that interest and any penalty to be paid on default shall be calculated only on the outstanding balance of the loan and not on the original principal sum.
While the Bill creates several offences that may be committed by licensees, for example, using any false or misleading information in advertising loans, the Bill also captures the actions of third parties, for example, hired bill collectors, who in an attempt to recover a debt owed to a licensee, behave in a threatening, abusive, harassing or intimidating manner to a borrower or to a guarantor.
The Bill does not apply to certain regulated entities (namely banks, merchant banks, credit unions) as well as specified transactions including money lending transactions between persons who do not offer microcredit services on a day-to-day basis to the public or segments of the public. Of note, the term “day-to-day” is not defined. The Bill does not repeal the
Moneylending Act, the existing legislation which governs lending arrangements, and entities exempt from the Bill will still have to operate within the scope of the Moneylending Act. Many had hoped for the repeal of the Moneylending Act, which though short, is somewhat archaic, imprecise in its wording and results in most lenders simply seeking exemptions by Gazette from the provisions of same.
While many stakeholders may be wary of the introduction of this type of legislation, regulation of microfinancing is not unusual in other jurisdictions, including the United Kingdom, France, Romania, Ghana and Guatemala. Many others are also on the verge of implementing similar legislation.
It is advisable that all businesses who are offering microcredit services become aware of the impending legislation and their obligations in order to continue operating in the microfinancing marketplace. Do not allow the new reign of this legislation to cause you to be left out in the rain.
Simone Bowie Jones is a Partner and Shaniel May is an associate at Myers, Fletcher & Gordon and they are members of the firm’s Commercial Department. They may be contacted via firstname.lastname@example.org , email@example.com or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.