Study on the policy of financial institutions on the early repayment of loans

In March 2021, the FTC completed its review of the policies of microfinance institutions (MFIs), commercial banks and credit unions regarding the early repayment of personal loans. Loans play an important role in the lives of consumers as it allows them to consume goods and services that they may not have had 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.

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.

The FTC examined the websites of all commercial banks, all credit unions and thirteen MFIs (Jamaica Association of Micro Financing Limited-JAMFIN members) to check for information on their policy regarding the early repayment of personal loans. 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. This finding cannot be generalized to the estimated 200 MFIs in Jamaica as only sixteen 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. Until the Microcredit Act is gazetted, the FTC encourages consumers to ask questions if they are unclear about a financial institution’s policy on the early repayment of loans.

Click the link below to access the full report.