Study prompted by complaints alleging customers being forced to make full interest payment on loans completely repaid before maturity date

The Fair Trading Commission (FTC) has found microfinance institutions (MFIs) in Jamaica wanting, regarding the findings of its just completed study on the early repayment of personal loans in Jamaica’s financial sector.

In carrying out the study, the FTC reviewed the policies of MFIs, commercial banks and credit unions, regarding the early repayment of personal loans. The review was prompted by complaints alleging that MFIs were demanding that the full interest be paid on loans completely repaid before the maturity date.

Additionally, complainants alleged that MFIs charged an additional amount for borrowers who complete repayment of their loans before the maturity date.

Loans play an important role in the lives of consumers, as they allow them to consume goods and services that they may not have been able to afford based on their current disposable income.

For consumers who complete their loan repayment before the maturity date, there is the expectation that the total amount paid will be lower than if the loan was repaid based on the repayment schedule. In its research, the FTC examined the websites of all commercial banks, all credit unions and 13 MFIs (Jamaica Association of Micro Financing Limited-JAMFIN members) to check for information on their policy regarding the early repayment of personal loans.

Major findings of the study

A few of the banks and credit unions disclose information on their websites, however, none of the MFIs in the study had information on their websites. Based on a telephone survey, almost two-thirds of the MFIs included in the study, all of the commercial banks and half of the credit unions indicated that they communicated their early repayment policy to borrowers at the start of the loan process.

Further, just over a quarter of both MFIs and credit unions indicated that the information was supplied if the client specifically asked. The information garnered from the study suggests that MFIs who are members of JAMFIN generally inform consumers of their early repayment policy at the start of the loan process.

The FTC noted that, “this finding cannot be generalised to the estimated 200 MFIs in Jamaica as only 16 MFIs were included in the study”. The recently passed Microcredit Act specifies that MFIs will be required to disclose the terms and conditions for repayment of the loan ahead of the stipulated loan period before the consumer signs the loan agreement.

“Therefore, this legislation is expected to reduce, if not eliminate, incidences of inadequate information on the part of consumers in the microfinance sector,” the FTC advised.

Until the Microcredit Act is gazetted, the FTC is encouraging consumers to ask questions if they are unclear about a financial institution’s policy on the early repayment of loans.

Purpose of the research

The purpose of the research  is to provide borrowers with information on the practices of financial institutions concerning the early repayment of loans. It is hoped that the study will facilitate a more informed decision making process on the part of borrowers. The paper identifies the stated policy of MFIs, commercial banks and credit unions as it relates to the early repayment of loans.

The FTC points out that, “it is important to shed light on the policy of MFIs as, based on complaints, the expectations of borrowers regarding the early repayment of loans differ from their experience with MFIs. This suggests that there is some degree of information asymmetry in operation.”