Microlenders still vague on tax rate, permissible interest on loans

Jamaica’s operation of a two-tiered corporate tax system that treats regulated and unregulated companies differently is causing a headache for microlenders who are unsure of where they stand.

Companies in the sector have been paying the marginal rate of 25 per cent. But soon, they will start operating under a licensing regime and overseen by the Bank of Jamaica, BOJ, which will serve to reclassify them as ‘regulated entities’.

That should mean that they will start paying the higher marginal tax rate of 33.33 per cent.

But as of last week, that and other questions were still being punted to the Ministry of Finance.

In a bid to assist microcredit businesses comply with the new law requiring licensing by the BOJ as of July this year, the central bank has been hosting a series of online consultations with microlenders. The last was at the end of February. The next will be in April.

The information sessions are throwing up several questions and operational challenges facing microlenders, with the BOJ deferring some matters to the finance ministry and the tax authorities.

Division chief for financial institutions supervision at the BOJ, Dr Jide Lewis, says the central bank, which has been made the regulator for microlenders by the new Microcredit Act, stopped short of saying what tax rate would be levied on microfinance companies, which are now designated as financial institutions.

“In relation to tax matters, they are best addressed to the Ministry of Finance. I wouldn’t want us to make statements on that particular matter. It’s obviously a very important question. I just don’t think this is the audience,” Lewis said.

He also kicked upstairs to ministry bureaucrats, microlenders’ concerns about whether, once licensed, they would be permitted to lend to government workers without the need for special permission, as is now required.

“Those kinds of questions around government policy are best addressed there,” the central banker said, referring the question to the ministry.

Meanwhile, the financial institutions supervision divisional head is discouraging microlenders from handling foreign currency in their operations without a cambio licence. His comments were in response to questions from operators about the legality of accepting repayments in US dollars.

“The repayments in a foreign currency would not be a breach of Section 22 (of the Microcredit Act). The issue would have to be around trying to understand what are the sort of operational arrangements,” said Lewis.

“For simplicity, it would be best that the person changes those funds first and then makes their repayment in Jamaican dollars. One you have a business model around receiving payments in US dollars, really what you need is a cambio licence because that’s how the framework operates. If it’s a one-off transaction here and there, that’s a separate matter. The Microcredit Act is a Jamaican-dollar thought process both in terms of lending and receiving funds,” he explained.

He added that accepting US dollars also posed operational risks that microlenders should consider.

“You might also have to think through the operational risks of being in the business of lending with a licence that, basically, circumscribes the lending activity to Jamaican dollars, and then having to go through a process of changing those US dollars, and the person who is on the other side of that transaction not having the clarity as to how you arrived at these funds. That would be an operational risk that you would expose yourself to because the persons who are changing that for you, at the back end, also have obligations to understand the source of those funds,” Lewis said.

Head of microcredit supervision at the BOJ, Janice Smith, in a presentation on the requirements of the Microcredit Act, clarified that the law does not set prescribed levels of interest rates.

“There appears to be some misconception in the market that the act imposes a limit on interest rates. That is not true. There is no such limit or cap under the legislation,” said Smith.

“I think some persons may be confusing (provisions) that were in the bill but got removed before being passed. Institutions are free to establish rates based on the market and based on risks posed by the customer. There is a requirement for customers to be provided with information on the effective annual interest rate. The main stipulation around that is calculation of the rate, and where interest rates are being advertised, (the effective annual interest rate) should be the most prominently displayed rate,” she said.

The central bank has said that it will consider providing applicants for microcredit licences with templates of various reporting forms once they make the request in writing. This followed calls for such assistance from microlenders, who said they were being quoted several million dollars by providers of business advisory and documentation services.

The central bankers reported that several applications have already been received ahead of the July 30 deadline. They clarified, too, that it is expected that applicants, which are existing businesses, would be able to continue their operations even if their licence applications are not fully processed at the end of July as the licensing process could take between 30 and 90 days.

“We will respond in the shortest possible time so that there is no disruption,” according to the central bankers. Microcredit licence applicants have been assured of acknowledgement of the receipt of their licence applications within five working days.

At the same time, microlenders who have ceased lending, but at July 30, expect to have a significant loan portfolio for collection, are being encouraged to apply for a microcredit licence.

“If your portfolio of existing loans prior to July 2022 would have a very long tail for repayment, I would recommend that you apply for a licence because you would be in the space for some time. Obviously, if that book of loans is pretty much maturing by July 2022, then application would not be necessary,” Dr Lewis advised.

To avoid the need for licensing, he suggested that operators that have stopped lending but will possess a large collections portfolio at July should consider selling the loans to enable them to exit the business.

huntley.medley@gleanerjm.com