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Tufton urges regulation of microfinance sector
Says 'burdensome' interest rates leave businesses in consistent debt
Monday, March 03, 2014 6 Comments
TUFTON... the microfinancing sector is being dominated by lenders who offer easy access to loans, but with overly burdensome interest rates and severe penalties for noncompliance
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DR Chris Tufton yesterday described as "burdensome" the interest rates being charged by microfinance lenders and urged the Government to look seriously at regulating the sector.
Addressing a Jamaica Labour Party (JLP) constituency conference in Southern Trelawny, Tufton, a minister of industry, investment and commerce in the previous JLP Government, appealed to Jamaicans to apply caution before accepting loans from microfinanciers as oftentimes the terms and conditions are so harsh that they place borrowers' businesses in consistent debt.
The upshot, he said, is that individuals who take loans on those terms are reduced to working "only to pay back the loan sharks".
"While there is tremendous value to economic activity in microfinancing, increasingly... the sector is being dominated by lenders who offer easy access to loans, but with overly burdensome interest rates and severe penalties for non-compliance," Tufton said.
He cited the case of a public passenger bus operator who, he said, borrowed $40,000 from a microfinance agency in July 2013 and had difficulty meeting a few payments.
The man's bus was seized by the loan shark, Tufton said, and although he has already paid back $144,000 he was still told that he owes $126,000, and would not be allowed access to his bus until the outstanding amounts are fully paid.
"This is tantamount to abuse, as even though the lender has been more than compensated, there is no way that that small minibus operator can sustain that kind of repayment schedule and still operate a successful small business," Tufton said.
According to Dr Tufton, microfinance companies are charging up to six per cent interest per month for loans for up to two years or 72 per cent per annum.
"I have heard of cases where up to 96 per cent interest is charged per annum," he told his audience.
"The time has come for the Government to look at this sector to determine, where necessary, legislative support for a more orderly operation of the sector, not just as it relates to interest charges, but also debt rescheduling to support small businesses that face difficulties," he said.
"As we move to support more modern insolvency legislation, we should also seek to ensure that small businesses are given the best chance of survival and expansion," he said.
Tufton also called for greater public education for small business entrepreneurs to understand the risks and benefits associated with borrowing. He said as it gets easier to borrow, it's important that borrowers arm themselves with information on terms and conditions.
"In this respect, Government can also play a role," he said.
Says 'burdensome' interest rates leave businesses in consistent debt
Monday, March 03, 2014 6 Comments
TUFTON... the microfinancing sector is being dominated by lenders who offer easy access to loans, but with overly burdensome interest rates and severe penalties for noncompliance
.remove_caption{ display:none; }
DR Chris Tufton yesterday described as "burdensome" the interest rates being charged by microfinance lenders and urged the Government to look seriously at regulating the sector.
Addressing a Jamaica Labour Party (JLP) constituency conference in Southern Trelawny, Tufton, a minister of industry, investment and commerce in the previous JLP Government, appealed to Jamaicans to apply caution before accepting loans from microfinanciers as oftentimes the terms and conditions are so harsh that they place borrowers' businesses in consistent debt.
The upshot, he said, is that individuals who take loans on those terms are reduced to working "only to pay back the loan sharks".
"While there is tremendous value to economic activity in microfinancing, increasingly... the sector is being dominated by lenders who offer easy access to loans, but with overly burdensome interest rates and severe penalties for non-compliance," Tufton said.
He cited the case of a public passenger bus operator who, he said, borrowed $40,000 from a microfinance agency in July 2013 and had difficulty meeting a few payments.
The man's bus was seized by the loan shark, Tufton said, and although he has already paid back $144,000 he was still told that he owes $126,000, and would not be allowed access to his bus until the outstanding amounts are fully paid.
"This is tantamount to abuse, as even though the lender has been more than compensated, there is no way that that small minibus operator can sustain that kind of repayment schedule and still operate a successful small business," Tufton said.
According to Dr Tufton, microfinance companies are charging up to six per cent interest per month for loans for up to two years or 72 per cent per annum.
"I have heard of cases where up to 96 per cent interest is charged per annum," he told his audience.
"The time has come for the Government to look at this sector to determine, where necessary, legislative support for a more orderly operation of the sector, not just as it relates to interest charges, but also debt rescheduling to support small businesses that face difficulties," he said.
"As we move to support more modern insolvency legislation, we should also seek to ensure that small businesses are given the best chance of survival and expansion," he said.
Tufton also called for greater public education for small business entrepreneurs to understand the risks and benefits associated with borrowing. He said as it gets easier to borrow, it's important that borrowers arm themselves with information on terms and conditions.
"In this respect, Government can also play a role," he said.