Blossom O’Meally-Nelson | Microfinance companies under the microscope

A recent report on a study carried out by the Fair Trading Commission compared practices related to early repayment of loans across the financial sector.

What the study found is that whereas some microfinance companies observed practices that are comparable with those of commercial banks, which are essentially the gold standard for lending, others did not.

With the impending enforcement of the Microcredit Act, microlending companies are now under the microscope, and my advice to each operator is to begin now to review your practices and capitalise on the opportunities that exist to institute best practices in your operations in order to be ready for registration.

The Bank of Jamaica, which is set to be the regulator for the sector, in collaboration with the Ministry of Finance, is currently in consultation with the microfinance associations to finalise the documentation and regulations related to readiness for registration. Essentially, the die is cast; it is time for microbusinesses to mobilise for readiness.

This, of course, is the worst possible time to enact the law as microfinance companies, large and small, known and unknown, are held firmly in the grip of the economic fallout from COVID-19.

With some companies unsure of whether they will survive, it is difficult for them to pay attention to the development of their policies and procedures, to train staff and to ensure that they have in place all the requirements for compliance as a registered entity.

SOURCES OF CAPITAL

Speaking of compliance, one of the primary requirements for a microfinance company to be in line with the regulations is the disclosure of its sources of capital. Whether it is a new company or one that has been in operation for a number of years, the original source of capitalisation has to be disclosed, as well as subsequent sources.

Far be it from me to predict what will be the response to this stipulation. What I do know is that bringing the microfinance sector into compliance is the underpinning of the Microcredit Act.

Compliance in this sense means carrying out operational practices which are in line with the rules and regulations for lending, as outlined in the Money Laundering Act and the Proceeds of Crime Act. With the sector in compliance, the country would have one less drawback to improving the national compliance rating.

Microfinance operators would do well to acquaint themselves with the laws which govern financial services in Jamaica. These will dictate how they operate, and to ignore them can bring substantial fines and even imprisonment.

Up until now, the microfinance sector has been self-regulated and many of the larger players have instituted systems and procedures to bring them in line with best practices. The Jamaica Association for Microfinancing screens applicants to ensure that they are on the right track in terms of their practices before accepting them into membership.

AML AND POCA

The association also creates awareness of the regulations that relate to anti-money laundering laws and the Proceeds of Crime Act which, although they originated in the United States, now apply here in Jamaica largely because they impact the correspondent banks with which banks in Jamaica do business.

Microfinance companies use the commercial banking system to carry out their transactions and if they are not in compliance, they are a threat to the bank that has them as a customer. The anti-money laundering and POCA laws make it mandatory for financial institutions to report any transactions which they suspect may be illegal. They also need to be on the lookout for questionable use of funds; that is, that funds are not being used to finance illegal activities. All cash transactions must come under scrutiny, and the microfinance companies must gather the appropriate information for customer due diligence.

This is not a simple matter; it requires structure, policies and procedures, and adequately trained staff. For microfinance companies this is a costly business. Each company will have to identify a ‘nominated officer’ who would have the responsible of ensuring that every step in the compliance process is carried out, including the onboarding process for customers and the vetting of customer transactions.

Customer due diligence, or CDD, will be a critical part of the compliance regime; this is the route to ensuring that companies know their customers. Up to now, KYC – Know Your Customer guidelines – has been a stumbling block to microlenders, largely because the majority of their customers are unbankable and lack the documentation, stability and personal history that facilitates the collection and verification of information related to their financial status, employment history and character.

In the absence of a national identification system, carrying out more intense customer due diligence for the average microfinance customer will incur additional costs and will undoubtedly rule out many potential customers who are honest and who really need to have access to finance and, but through no fault of their own, cannot meet the CDD requirements.

This is part one of a two-part article.

Dr Blossom O’Meally-Nelson is chairman of the Jamaica Association for Microfinancing.Email: bomeallynelsonjamfin.cimb@gmail.com Twitter: @MeallyNelson