FSC issues fraud alert to microlenders

by Marlon Madden

Micro-lending institutions are being encouraged to put robust measures in place to keep fraud at bay.

While these institutions do not pose a threat to the financial system, officials say they see no reason they should not be regulated similar to banks and credit unions.

Microlenders are usually made up of a small group of individuals who lend money to others with the potential of earning high returns.

They tend to attract individuals who have no access to credit or those who are unable to access loans from traditional sources such as a bank or credit union.

Chief Executive Officer of the Financial Services Commission (FSC) Kester Guy said he believed such institutions could be better regulated although they currently posed no threat to the financial system.

“If something should happen untoward or go wrong with those entities, I think the risks largely fall within the entity themselves and because of, let’s say limited interconnectedness with other aspects of the financial system, when we look at it in aggregate, we do not see a direct threat to financial stability,” he said.

However, Guy added: “There are some gains to be had if these entities, because of their financial impact and their financial provision, can be considered under a broad regulatory framework”.

“It doesn’t have to be a similar, and certainly not identical, to neither the current FSC nor the Central Bank regulations because of the source of funding. In a sense these are persons with private funds extending loan facilities under certain types of conditions,” he said.

His comments came recently during the final session of the Central Bank of Barbados 2021 Domestic Financial Institution Conference on Financial Fraud in Barbados.

Guy said the discussion around whether micro lenders should be regulated by the Central Bank or the FSC has been “an age-old dialogue”.

“I think in a large measure we want to make sure those conditions are fair and can be looked at and are open to scrutiny,” he said.

“The remit of the Central Bank is very clear, the remit of the FSC is very clear and yet these entities continue to provide financing to certain aspects of the society. In terms of fairness and any concerns an individual may have with those direct entities, such a complaint can be logged or registered at the Fair Trading Commission who has broad customer protection responsibility for individuals purchasing goods and services within the country,” he said.

Director of the Financial Intelligence Unit (FIU) Kirk Taitt said he believed a lot of people were attracted to micro-lending institutions “because of their small size and they are not like visibly on the radar per se like a commercial bank or credit union”.

“What we are seeing in that context is that customers seem to be attracted to these entities. They perhaps can see that they don’t have some internal controls, and perhaps can ‘get away with murder’ if you will, in terms of coming under the radar,” he said.

However, Taitt warned that such entities should ensure they had vigorous checks and balances in place and tight measures to mitigate against fraud.

“These entities have to make sure they have in place a robust policy framework that addresses potential fraud risks,” said Taitt.

“So that you have to make sure that for example, you have dual accountability . . . and robust programmes are in place to address issues of audit to assure the board of the entity that controls are pretty much in place. With those measures in place, you tend to offset the potential risks in those small entities,” he said.

marlonmadden@barbadostoday.bb