What is a Microlender?
Microlending, also known as microfinance lending, provides small-scale loans to small businesses or poor and underserved individuals who, owing to their background, may not have the means to access larger loans from financial institutions like banks. The amount loaned used to be P150,000.00 pesos, as per BSP Circular No. 272 and 622, but a later amendment in BSP Circular 649 increased the threshold to P 300,000.00 pesos. Increasingly, microlending is also being done online, with the increasing availability of online lending apps offering microloans to people who used to go to different places to obtain loans.
Microlenders can provide a lifeline for people from basic sectors like farmers, fisherfolks, workers in the formal or informal sector, and others who were enumerated in Republic Act No. 8425, or the Social Reform and Poverty Act of 1997, who would otherwise not have been able to borrow money outside the traditional banking institutions. However, compared to bank loans, microlenders tend to charge a higher interest rate and have shorter payment schedules. Institutions that are engaged in microlending include banks (rural and thrift), non-governmental organizations, cooperatives, financing companies and lending companies.
Laws and Regulations governing Microlenders
Republic Act No. 8425
Republic Act No. 8425, also known as the Social Reform and Poverty Act of 1997, recognizes the pivotal role of microfinancing in poverty alleviation. The law requires Government Financial Institutions (GFI) to allocate a portion of their loan portfolio for microfinance. Specifically, the law mandates in Section 16 that the GFI set up special credit windows and other arrangements to promote microfinancing and cater to the savings and credit needs of the poor.
Republic Act No. 9474
Lending Company Regulation Act of 2007, Republic Act No. 9474 (RA 9474) governs lending companies. It requires that all lending companies:
- must be registered in the Securities and Exchange Commission (SEC) as a stock corporation;
- secure the necessary Certificate of Authority (COA) before operating;
- make annual reports to SEC to ensure continuing compliance.
Furthermore, Section 5 provides that the “minimum paid-up capital for any lending company shall be 1 million pesos (P 1,000,000.00),” but the SEC may prescribe a higher minimum capitalization if warranted by circumstances.
A majority of the voting capital stock for the lending corporation shall be owned by Filipino citizens. No foreign national may be allowed to own stock unless the country which he is a national accords the same rights to Filipinos.
As a lending company, it may charge reasonable amounts in interest rates and charges as agreed by the between the lender and the debtor, provided that the agreements comply with the provisions of R.A. 3765, or the Truth in Lending Act, and R.A. 7394, the Consumer Act of the Philippines. As such, the SEC can investigate companies that charge unconscionable rates. The law also prescribes penalties, both fines and imprisonment, for any microlenders which failed to secure a Certificate of Authority, as well as other violations of the law.
Republic Act No. 10693
Microfinance NGOs Act, or Republic Act No. 10693 (RA 10693) governs non-government organizations (NGO) that engaged in microfinance in order to help the government fulfill its stated policy of “poverty eradication wherein poor Filipino families shall be encouraged to undertake entrepreneurial activities to meet their minimum basic needs including income security.” It defines ‘poor’ as “individuals and families whose income fall below the poverty threshold as defined by the National Economic Development Authority (NEDA)”
According to RA 10693, NGO’s are defined non-stock, nonprofit organizations duly registered with the SEC that provide microfinance services to the underserved sectors of society. NGO’s must also be accredited by the Microfinance NGO Regulatory Council (MNRC) in order to avail of tax incentives provided for in RA 10693.
Republic Act No. 7394
Republic Act No. 7394, or the Consumer Protection Act, provides consumer protection and governs fair trade to ensure consumer rights are not violated. Article 110 prohibits false, deceptive or misleading advertisement, while Articles 139 – 147 has provisions requiring the disclosure of information to the consumer as required by the law, such as clear and understandable information about loan interest rates, fees and penalties.
Anti-Money Laundering Act (AMLA) and KYC requirements
Anti-Money Laundering Act, or Republic Act No. 9160 mandates that larger and more formal lending institutions are required to comply with AMLA regulations, including the reporting of covered transactions, to prevent money laundering or terrorism financing. As part of the compliance of this act, lending companies must have a robust Know Your Customer (KYC) system. This system requires the lenders to have a competent customer identification to identify the borrowers, record-keeping of customer transactions for up to 5 years, and reporting of suspicious transactions to the Anti-Money Laundering Council (AMLC).
Data Privacy Act
Republic Act No. 10173, or Data Privacy Act of 2012, imbues the lending companies with the responsibility of proper collecting and handling of personal data of their customers. Since microlending is increasingly being done online with lending apps or even mobile wallets offering small short-term loans, data collection is also being done online. Enumerated in the law are the rights of a data subject, or person whose personal data was obtained, and the data collected cannot be transferred to third parties without consent of the data subject, and prescribing penalties for violations thereof.
Banko Sentral ng Pilipinas (BSP) Circulars
BSP Circulars are not applicable to most microlenders unless they are banks or quasi-banking institutions. However, the circulars can help serve as guidelines that can be emulated by microlenders in order to influence best practices in the industry, such as encouraging transparency in amount of the loan and in the interest rates. Others, such as BSP Circular 622 and 649, prescribes the maximum amount that can be loaned in microlending.
Conclusion
The Philippines is a fast developing country with a relatively young population that is technology savvy and sophisticated. For Filipinos used to modern conveniences, this need for accessible money has led to an influx of online lending apps which offered small amounts of loan that are covered under microlending. With microlending business being done in both physical and online setting, it is important for microlenders, current and prospective, to have knowledge of the many laws and regulations to keep pace with the increasingly complex world of microfinance, and to ensure the rights of the borrowers are well protected.
At Abo and Penaranda Law, we specialize in guiding prospective entrepreneurs and corporations through the legal and regulatory landscape of microfinance. With the help of the firm, clients can confidently navigate the complex and complicated world microfinance while ensuring full legal compliance and protection of their interests.
