Encouraging more low-income clients to join the sector

As in most Latin American countries, financial inclusion in Colombia is a challenge. Deficiency in infrastructure and education, together with a high level of labour informality and large difficulties in accessing the vast rural areas of the country, make large parts of the population unable to participate in financial services. However, Colombia continues to take important steps in the process of financial inclusion.

By The Numbers

According to the Banking and Financial Entities Association (Asobancaria), by September 2013, Colombia had 21.8m adults who used at least one financial product, representing 69.3% of the adult population, compared to 66.8% the previous year. The most popular product was a savings account, with 20.1m adults participating, followed by credit cards, with 6.5m clients. Consumer loans and microcredits follow with 5m and 1.7m clients, respectively.

Currently, the services showing the largest growth in financial inclusion are electronic deposits or mobile banking, savings accounts and credit cards.

However, statistics may be misleading. In the case of savings accounts, the percentage of adults with savings accounts drops from 63.9% to 43.9% when excluding Bogota from the analysis. The same occurs with credit cards, where the national average of persons with credit cards drops from 20.7% to just 7.2%. This shows that other regions in the country require more attention and that there are great opportunities for banks and financial institutions to increase their client base outside main urban centres.

Microcredit

In 2000, the government established the limit for micro-loans at 25 times the legal monthly minimum wage. To be considered a micro-enterprise, a company must not exceed 10 employees and its total assets cannot be greater than 500 times the monthly minimum wage (COP308m, $154,000). In 2008, decree number 919 established the limit of indebtedness for micro-enterprises to 120 times the minimum wage.

The Colombian Association of Microfinance Institutions, which groups 93% of the microcredit market, reported total microcredit outstanding loans equivalent to COP10.08trn ($5.04bn) by the end of 2013, a 17% rise compared to the previous year. Over the same period, the number of micro-loan clients grew from 1.84m to 2.69m, a 45% increase. The average microloan size is COP3m ($1500) and only 6% of the clients required loans for less than COP1m ($500). Non-performing loans (NPL) increased from 4.6% at the end of 2012 to 5.6% at the end of 2013, partly affected by a standstill in farming that occurred in August 2013.

Banco Agrario, a state financial entity that mainly provides banking services for customers in the rural sector, is the largest micro-lending institution, accounting for 48% of total loans. Banco Agrario’s advantage resides in its infrastructure, reaching much of the country through a large network of 742 branch offices and 305 banking correspondents. An alliance with MovilRed provides another 4300 banking correspondents with limited services. Banco Agrario also offers savings accounts, current accounts and micro-insurance to low-income citizens and micro-entrepreneurs.

Four types of entities participate in the microcredit sector: retail banks, micro-financing institutions, NGOs and cooperatives. While retail banks and micro-financing institutions are regulated by the Financial Superintendence of Colombia, NGOs and cooperatives are not. Even though most of the microcredits are aimed at supporting and financing productive activities, there are some institutions offering micro-loans and credit cards aimed at consumers.

Due to structural causes, microcredit has larger coverage in urban areas than in rural zones, where access is difficult and operational costs are much higher. The government and microcredit entities are pushing towards greater coverage nationwide through the use of banking correspondents. However, the granting of microcredits is still done through regional bank executives through a labour-intensive process.

To cover part of the operational costs, the government allows microcredit firms to collect fixed annual tariffs of 4.5% of the outstanding balance for credits above four times the monthly minimum wage, and 7.5% for those below it. This allows financial institutions to compete on interest rate levels and remain below the interest rate ceiling enforced by the government, or what is called the “usury rate”, which stands at almost 30%.

Other Initiatives

Empresas Públicas de Medellín (EPM) is a public utility that provides natural gas, electricity and water services to 3.6m citizens in Medellín and its metropolitan area, while providing 23.5% of the total power generation capacity of the country.

In 2008, EPM followed Codensa and launched a service called Financiación Social, with the objective of offering microcredit loans to low-income customers. The programme’s two products target residential and small companies: Tarjeta Grupo EPM and Crédito Crecer. Tarjeta Grupo EPM is a “credit card” that allows participants to purchase electronic equipment, computers, appliances, motorcycles and home-improvement products through affiliate stores and retailers. Payments are charged directly in the monthly utility bill. Crédito Crecer was launched in 2012 and is aimed at micro and small enterprises in the Antioquia department. Funding must be put towards the purchase of machinery and equipment, software, construction materials, or conversion of vehicles to natural gas.

EPM has the advantage of creating its own credit rating by tracking the payment of utility bills in its client database. Besides obtaining financing, the programme helps clients create their personal credit history, giving them access to new financial services. In 2012, the programme enrolled 36,729 families as credit card holders, reaching 121,771 total. During that year, Financiación Social offered COP45.31m ($22,655) in loans.

Codensa, the electric utility that has a presence in Bogota and another 106 municipalities, began a similar initiative in 2008 called Crédito Fácil Codensa. Codensa ultimately sold its credit card business to ColPatria by the end of 2009 when the programme had reached a client base of 700,000 customers and total loans outstanding of COP700bn ($350m). The initiative still operates, with ColPatria providing financing while Codensa is responsible for collecting payments.

Mobile Banking

After simplifying the procedure to open an account and obtain credit, banks moved to concentrating their services to low-income clients. As a result, mobile banking services have shown great dynamism, adding 1.3m users from September 2012 to September 2013 and reaching a total of 1.76m users nationwide. During 2013 the financial system reported more than 77m transactions over mobile banking platforms, of which 87.8% were balance inquiries and the remaining 12.2% were monetary transactions totalling COP212.6m ($106,300).

“Mobile platforms like ours will in the short term also be utilised for microcredit giving, which will increase the financial opportunities for those living in the most remote areas through their mobile phone,” Efrain Forero, President of Davivienda, told OBG. To maximise the potential of these platforms it is important that the levels of financial education increase,” he added.

Besides allowing balance inquiries and monetary transactions, the mobile platforms are enabled to receive international remittances and government subsidies. In Colombia, the most common method of mobile banking transactions is through SMS text messages.

However, the main obstacles for mobile banking to achieve greater economies of scale are obtaining better access to mobile networks and reducing mobile telephone costs. According to an analysis from the Communications Regulatory Commission, mobile telecom operators set SMS tariffs in accordance with banks’ purposes, and great tariff differences exist among different mobile operators. Banking institutions also face the risk of disconnection if they do not abide to conditions set by mobile operators.

Banking Correspondents

In 2006, the government and the banking industry created banking correspondents to promote access to financial services to sections of the population otherwise unserved. According to Asobancaria, as of September 2013, 99.9% (1094 out of 1,102 municipalities) of the national territory was covered through 42,722 agents. Services include collection of public service payments, cash deposits and withdrawals, transfer of funds, balance inquiries, and collection of documentation related to the opening or cancellation of accounts.

Among financial institutions, Bancolombia has the largest coverage through banking correspondents reaching 756 municipalities, or 68.6% of the national territory. Banco Agrario covered 624 municipalities, while Red Multibanca Colpatria and Citibank have a presence in 484 and 480 municipalities, respectively.

By September 2013, the number of transactions through banking correspondents reached 65.1m, surpassing the 63m that took place during all of 2012. The estimate for end-2013 was a total of 94m transactions. The average amount of each transaction grew from COP170,000 ($85) in 2007 to COP212,000 ($106) in September 2013. The average deposit was COP470,000 ($235) and the average withdrawal COP408,000 ($204).