Microloans market now valued at $46 billion

The size of the microcredit market has grown to $46 billion, more than 15 per cent higher than a year ago, based on the loan balances of applicants, according to the Government of Jamaica in its foreign filings of its annual report to the US Securities and Exchange Commission last month.

Last June, the Bank of Jamaica estimated the market at $40 billion, amid the issuing of licences to microfinanciers, marking the sector’s shift towards full oversight by the central bank.

The market size was equivalent to 1.7 per cent of Jamaica’s economic output, or GDP. Comparatively, microloans are around 3.5 per cent the size of the $1.3 trillion of loan balances held by the eight commercial banks operating in Jamaica. There are said to be 200 or more microcredit firms – alternatively referred to microlenders or microfinancing firms – but so far the Bank of Jamaica has only licensed 60 of them, the listings on the central bank’s website shows.

The microcredit market’s 15 per cent loan growth outpaced that of the commercial banks and credit unions, which grew their portfolios by 11 per cent and 9.0 per cent, respectively, year-over-year. The data extends to June for banks, and March for credit unions, of which there are now 25.

Government disclosures indicate that the Bank of Jamaica had received some 155 applications for microcredit licences up to March 2024. Up to that time, 50 licences had been issued, but less than six months later that number has now grown to 60.

The 50 in March represented four-fifths of the loans in the sector. This is a substantial increase from the seven licenses issued up to the end of 2022, when formalisation of the new regulatory structure began to take hold. The seven accounted for about 50 per cent of the market at that time.

Access Financial Services Limited, a publicly traded company and one of the largest firms in the microloans sector, was the first to obtain a microcredit licence under the new central bank regime. Access Financial’s loan book is currently valued at $5.8 billion.

Microfinancing firms generally sell small loans to small and micro businesses and entrepreneurs, for whom bank credit is not easily accessed. They also issue consumer loans to individuals, and are partial towards persons who earn a salary. For that reason, the personal credit that microlenders issue is sometimes called a payday loan, because it is serviced from the borrower’s pay cheque.

The microcredit sector, which has long operated in a relatively informal environment, now sits under the regulatory umbrella of the BOJ, following the implementation of the Microcredit Act in 2021. The regulations are designed to promote transparency, consumer protection, and the prevention of illicit financial activities.

Microcredit firms are now required to comply with governance standards, including separating their microlending operations from other business activities, maintaining proper records, and disclosing loan terms to consumers.

Last year, the BOJ shifted from manual, paper-based tracking of the microfinanciers to an online risk-based system called ORBS.

“The ORBS platform allows the BOJ to efficiently undertake the risk assessment of a large number of microcredit institutions that are subject to national and global anti-money laundering, combating financial terrorism, and proliferation of weapons of mass destruction laws,” the Government of Jamaica said in its market filing. “This has enabled the bank to risk-rate 100 per cent of applicable entities, ahead of licensing, and the risk-rating results are used to inform BOJ’s supervisory plans.”

The BOJ reportedly takes a tiered approach to its prudential or regulatory supervision of the firms, based on their loan portfolios. Tier 1 includes institutions with gross loans of less than $75 million, which are expected to have at least three board members, with the compliance function possibly merged with internal audit. Tier 2 institutions, with loans exceeding $75 million, must have at least five board members, with separate compliance and internal audit functions. In both tiers, one-third of the board members must be independent.

steven.jackson@gleanerjm.com