Why microlenders are under the regulatory spotlight

Microlenders face two regulators and one big risk

By Sameer Kumandan, MD of SearchWorks360

Microlending is the practice of providing small loans to individuals or groups who can’t access traditional financial services. In South Africa, microlenders have become a critical lever for financial inclusion, especially for people without stable employment, credit histories, or access to collateral. These loans enable small business owners and informal traders to start or grow their ventures, and help individuals bridge short-term financial gaps.

But any institution offering credit must put compliance measures in place to mitigate financial crime risks. According to the Financial Intelligence Centre Act (FICA), microlenders are “accountable institutions”. This means they are legally required to conduct due diligence on borrowers, report any suspicious transactions, and implement anti-money laundering (AML) and counter-terrorism financing controls to ensure that their lending practices are responsible.

Microlenders actually face dual compliance burdens. They must comply with FICA regulations and with the National Credit Act (NCA), which is focused on fair lending practices, affordability assessments, and borrower protection to safeguard consumers against predatory lending and over-indebtedness. Non-compliance with FICA and/or NCA regulations can result in big penalties, including fines or the suspension of operations. More broadly, failing to follow regulatory policies can negatively affect the sustainability of the industry by undermining both the financial stability and the reputation of microlending institutions. But the costs of maintaining compliance with both FICA and NCA, like conducting due diligence, affordability assessments, employee training, reporting, and technological infrastructure, can be significant. These requirements can even render it impossible for smaller microlenders to offer affordable loans.

Microlending institutions, by their nature, handle numerous small transactions and deal with clients who might not have traditional banking backgrounds or formal credit histories, they are more susceptible to being used for money laundering and fraudulent activities. For example, criminals are increasingly exploiting microlending services to take out multiple loans under different identities because they lack robust customer verification processes. Additionally, microlenders traditionally offer loans with relatively flexible terms, which usually means there is less scrutiny around how the loan will be used, enabling criminals to easily divert funds to pay for unlawful activities.

The role of technology in compliance

To address these challenges, many microlenders are turning to technology to streamline compliance processes. These platforms assist with conducting Know Your Customer (KYC) and Know Your Business (KYB) checks by providing real-time access to credit bureau and business registry data. They also offer tools for transaction monitoring, which make it easier to identify suspicious activity and generate reports for FICA compliance. With automated processes in place, microlenders can focus more on providing loans and less on the administrative burden of compliance.

With VOCA, powered by SearchWorks, microlenders can manage compliance effortlessly – reducing operational risk and protecting the business from penalties. By equipping microfinance providers with tools that make CIPC and credit bureau data available in real time, lenders can assess a borrower’s financial background, identify risks, and make more informed lending decisions. One of the newest VOCA features, Ongoing Monitoring, helps accountable institutions assess and manage risks continuously by tracking client profiles daily and alerting accountable organisations of any changes that might indicate a compliance risk.

Given the compliance demands outlined above, microlenders that adopt efficient technological solutions can dramatically streamline compliance processes. For microlenders, it’s the most effective way to stay compliant while continuing to serve underbanked communities. Balancing financial inclusion with regulatory expectations is complex – but with the right tools, it’s entirely achievable.