POLICY INITIATIVES TO INCREASE FINANCIAL ACCES IN COLOMBIA Cesar Prado May 31 2006

1. POLICY INITIATIVES TO INCREASE FINANCIAL ACCES IN COLOMBIA Cesar Prado May 31 2006

2. Colombia has low levels of financial penetration, even compared to its Latin-American counterparts. Micro loans only account for 2% of the total loan portfolio. Argentina 11% Bancarización en América Latina - 2004 Venezuela 11% Paraguay 17% México 17% Perú 19% Guatemala 20% Colombia 23% Nicaragua 27% R. Dominicana 28% Brasil 35% Bolivia 42% Chile 56% 0% 10% 20% 30% 40% 50% 60% CURRENT SITUATION Loan portfolio/GDP Source: Financial Superintendence

3. Despite the economic recovery, current levels of lending are still far below from Colombian own records. CURRENT SITUATION Loan Portfolio/GDP Source: Financial Superintendence

4. CURRENT SITUATION Bank branches coverage Source: Own estimation based on DANE and Financial Superintendence Notwithstanding, if Agrarian Bank (state owned) is not taken into account, the rest of the industry (mainly private banks) has presence only in 25% of the municipalities, covering 73% of the population.

5. CURRENT SITUATION Banked population over 18 years of age in Bogota Source: Survey of financial services Bogotá DANE - World Bank, 2002

6. MAIN BARRIERS TO INCREASE FINANCIAL ACCESS • DEMAND SIDE • High fees for holding an account and per transaction. • Tax on financial transactions (4 X 1000) • Slow processes to open accounts and hard requirements to have credit access • Unsuitable products • Self exclusion • SUPPLY SIDE • High costs to increase coverage (branches and cash handling). • High costs associated to small amount transactions • Interest rate ceiling • Difficulties in obtaining reliable information and lack of data on credit bureaus • Enforcement of secured lending is timely and costly

7. POLICY PROPOSAL • Regulatory reforms • Creation of the “Fund of the Opportunities” Allowing banks to have correspondents • Correspondents • Interest rate ceiling • “Habeas Data” • Tax reform • Creditor rights

8. POLICY PROPOSAL • Allowing banks to have correspondents • Easiness to implement: government decree which will address issues like risk allocation, responsibilities of both parties, information that should be given to the public, advertisement, operative standards, Financial Superintendence competence, etc. • Good previous and current experience (utilities and credit card payments through non banking networks). • There are in place very good non banking networks (the company which operates the most popular lottery has over 5.000 POS for ticket sales through retail businesses like grocery, bakery, chemists, etc. in more than 400 municipalities).

9. POLICY PROPOSAL • Allowing banks to have correspondents • It enables the banks to expand dramatically at very low cost. • Correspondents will have a broad capability: • Account opening and credit requests • Reception of monies for bill payments • Reception and payment of monies against the customer’s account • Disbursement of loans and collection of payments on them • Local and foreign remittances • Pension payments

10. POLICY PROPOSAL • Interest rate ceiling • Strong tradition on interest rates intervention. Historical background: the canon law prohibition regarding loans that carry on an interest rate. • Both the Civil and the Commercial Code set up a limit or ceiling on interest rates, which applies to all transactions (whether financial or not). The Criminal Code still includes the crime of usury, which is penalized with prison. • Compounding interest was allowed in 1990 for banks but the Constitutional Court ruled that it was illegal regarding mortgage backed lending when financing housing. The rationale behind the judgment could be extended to other types of lending.

11. POLICY PROPOSAL • Interest rate ceiling • The limit is calculated on a monthly basis as 1,5 times the average of the interest rate the banks are charging for all types of loans. • The limit set by law – even if it is calculated by reference to the market – does not allow the market to fix up the prices for all types of lending, according to their risks and costs. • A law passed a few years ago allowed the banks to charge a management fee of 7,5% on microloans (granted to micro entrepeneurs in an amount below 25 minimum legal wages – USD$4.000).

12. POLICY PROPOSAL • Interest rate ceiling • Current limits (25% annually plus the management fee in case of microloans) do not permit the banks to lend sums below USD$500. • The limit has been justified on the ground of the borrower’s protection. However, ironically, it has left the poorest population with no access to credit or exposed to informal lenders who in fact charge exorbitant interest rates (anecdotal evidence indicates that in some segments it could be of 10% or more per day). • Even though commercial and penal limits apply to all type of finance, in fact, informal lenders are not subject to any effective control.

13. POLICY PROPOSAL • Interest rate ceiling • Possible reforms: • To abolish the limits (it would require to reform the Civil, Commercial and Criminal Code). • To calculate limits per type of loan. • To increase the management fee for microloans (perhaps requiring gradual decreases). • Redefining the concept of microloan.

14. POLICY PROPOSAL • “Habeas Data” Legislation • A comprehensive act on credit reporting is going to be submitted before Congress in July. • The proposal includes: • 5 year period for maintaining data. • Clear rules for access to information. • Rules for consumer protection, including means to access their own data, supervision of credit bureaus and dispute resolution mechanisms. • Obligation of non financial entities to provide financial information to the credit reporting system (for instance utilities).

15. POLICY PROPOSAL • Tax reform • The government will submit to Congress in July a comprehensive (radical) tax reform, including the likely elimination of the tax on financial transactions. • Strengthening creditors rights • An insolvency proposed bill which protects in an adequate manner creditor’s rights is being discussed in Congress. • Reform the civil procedural code to allow regulated creditors like banks to enforce their security with minimum judicial intervention.

16. POLICY PROPOSAL • Creation of the “Fund of the Opportunities” • The Government approved a USD$ 50 million appropriation to create a fund which will be in charge of promoting the policy on financial access (the fund will have a very small but highly qualified staff and will be able to spend only the real revenues it generates, in order to guarantee its continuity). Some of its functions will be the following: • To propose to the Ministry of Finance legal reforms that could contribute to enhance financial access. • To stimulate the spread and usage of sufficient, timely and reliable information on micro-financing issues • To design and propose incentives to promote financial access. • To develop and stimulate programs of technical assistance in favor of microfinance institutions.

17. CONCLUDING REMARKS • Promoting financial access is a huge challenge and, in a emerging country, a social obligation, as banking access has positive effects on poverty reduction and economic growth. • It is necessary to involve actively the relevant constituencies and all microfinance institutions (banks, cooperatives, NGO’s). • The role of the government must be limited to create the adequate conditions to let microfinance institutions do their job. • Solutions should be very imaginative and break old and traditional concepts. • The “unbanked” represent a huge market potential for financial institutions as there is little room to grow with the higher income customers.

18. THANKS FOR YOUR ATTENTION