Attachment J.12 Assessment on status and challenges of financial inclusion in Colombia (Executive Summary).pdf

ASSESSMENT ON STATUS AND CHALLENGES OF

FINANCIAL INCLUSION IN COLOMBIA BETWEEN

2016 AND 2021-EXECUTIVE SUMMARY

August 2021

This publication was produced at the request of the United States Agency for International Development (USAID), it was prepared independently by the Jaime Arteaga & Asociados (JA&A). The opinions expressed herein are of the authors alone and do not necessarily reflect the vision or opinion of USAID.

PHOTO: JAIME ARTEAGA & ASOCIADOS

CONTENTS

Abbreviations and Acronyms

Executive Summary

Overview Challenges For Financial Inclusion

Gaps between population groups Use of financial products and transactional information Financial inclusion of legal entities Insurance supply and demand constraints Low financial capabilities of the population and lack of management information in MSMEs Pending modifications to the National Agricultural Credit System

Conclusions

ABBREVIATIONS AND ACRONYMS

ACH Automated Clearing House

ADT Agricultural Development Titles

ANT Agencia Nacional de Territorios National Agency for Territories

Bancoldex Banco de Desarrollo Empresarial de Colombia Business Development Bank of Colombia

BdO Banca de Las Oportunidades

CAF Development Bank of Latin America

CATS Cuentas de Ahorros de Trámite Simplificado Simplified Transaction Savings Accounts

CCF Cajas de Compensación Familiar Family Compensation Funds

CCSD Cámara de Compensación de Sucursales y Delegadas Clearing House of Branches and Delegates

CD Term Deposit Certificates

CE Credit Establishments

CENIT Compensación Electrónica Nacional Interbancaria National Interbank Electronic Clearing

CF Financial Corporations

CFC Financing Companies

CIEEF Comisión Intersectorial para la Educación Económica y Financiera Intersectoral Commission for Economic and Financial Education

CIIF Comisión intersectorial para la Inclusión Financiera Intersectoral Commission for Financial Inclusion

CNA Censo Nacional Agropecuario National Agricultural Census

CNCA Comisión Nacional de Crédito Agropecuario National Agricultural Credit Commission

COP Colombian Peso

CUD Sistema de Cuentas de Depósito Deposit Account System

DANE Departamento Administrativo Nacional de Estadística National Administrative Department of Statistics

DNP Departamento Nacional de planeación National Planning Department

ECF Encuesta de Medición de Capacidades Financieras Financial Capabilities Measurement Survey

ED Electronic Deposits

EMF Employees Fund

FAG Fondo Agropecuario de Garantías Agricultural Guarantee Fund

FINAGRO Fondo para el Financiamiento del Sector Agropecuario Fund for the Financing of the Agricultural and Livestock Sector

FNG Fondo Nacional de Garantías National Guarantee Fund

Fogacoop Fondo de Garantías de Entidades Cooperativas Guarantee Fund for Cooperative Entities

Fogafín Financial Institutions Guarantee Fund

FONSA Fondo de Solidaridad Agropecuaria Agricultural Solidarity Fund

GRM Graduated Response Model

HVPS High- Value Payment Systems

ICR Incentivo a la Capitalización Rural Rural Capitalization incentive

IDB Inter-American development bank

ISA Incentivo al Seguro Agropecuario Agricultural Insurance Incentive

LEC Linea Especial de Crédito Special Lines of Credit

LVPS Low-Value Payment Systems

MADR Ministry of Agriculture and Rural Development

MEN Ministerio de Educación Nacional Ministry of National Education

MHCP Ministerio de Hacienda y Crédito Público Ministry of Finance and Public Credit

MinCIT Ministerio de Comercio, Industria y Turismo Ministry of Commerce, Industry and Tourism

MSME Micro, small and medium-sized enterprises

MSMES Micro, small, and medium enterprises

NDP National Development Plan

OECD Organization for Economic Cooperation and Development

PCA Principal Component Analysis

PECP Permiso Especial Complementario de Permanencia Special Complementary Permanence Permit

PEP Permiso Especial de Permanencia Special Permanence Permit

PEPFF Permiso Especial de Permanencia para el Fomento de la Formalización Special Permanence Permit for the Promotion of Formalization

PRAN Programa Nacional de Reactivación Agropecuario National Agricultural and Livestock Reactivation Program

RIF Reporte de Inclusión Financiera Financial Inclusion Report

SAGRILAFT

Sistema de Autocontrol y Gestión del Riesgo de Lavado de Activos y Financiación del Terrorismo Control and Risk Management System for Money Laundering and Financing of Terrorism

SANEEF National Administrative System for Economic and Financial Education Sistema Administrativo Aacional de Educación Económica y Financiera

SBF Stock Brokerage Firms

SCC Savings and Credit Cooperatives

Sedpes Companies Specializing in Electronic Deposits and Payments

SES Solidary Economy Superintendency

SFC Financial Superintendency of Colombia

SMMLV Current Legal Monthly Wages Legal in Force

SNCA National Agricultural Credit System

SSF Superintendency of Family Subsidies

TC Trust Companies

URF Special Administrative Unit of Normative Projection and Financial Regulation Studies

USD United States Dollar

WAP Working Age Population

EXECUTIVE SUMMARY

OVERVIEW

In the last five years, Colombia has made significant progress in terms of financial inclusion. The indicator of access to financial products increased from 77.3% in 2016 to 87.8% in 2020 exceeding, two years ahead of schedule, the target of the National Development Plan (NDP) 2018-2022 (85%). Additionally, there has been an improvement in the supply of financial services due to the entry of new suppliers and greater innovation within the financial industry.

These achievements have been reflected in Colombia's position within the Global Microscope ranking prepared by The Economist Intelligence Unit, where the country has been in first place since 2016 within a sample of 55 middle and low-income countries. This ranking highlights the environment for financial inclusion in Colombia due to five dimensions: government and policy support, stability and comprehensiveness, products and points of sale, consumer protection and infrastructure.

Financial inclusion is a broad concept that refers to the process by which people and companies gain access to useful and affordable financial products and services that meet their deposit, savings, credit and insurance needs, as well as their transaction and payment needs. It’s promotion not only seeks to ensure that the population acquires financial services, but also that their use generates welfare to the extent that they are provided in a responsible and sustainable manner.

In Colombia, the financial inclusion ecosystem is made up of several supervised and non-controlled agents that complement and compete depending on the area analyzed. The supply of financial products in Colombia can be disaggregated between (i) deposit and savings, (ii) credit, (iii) insurance and (iv) payment systems as seen in Figure 1.

Figure 1. Financial Inclusion Ecosystem in Colombia

Source: Own elaboration

According to Castaño (2021), the results of the 2020 Financial Inclusion Report "show that the public policies adopted for financial inclusion are being successful and very effective in helping to address the negative effects of the pandemic". It mentions that the health crisis highlights three fundamental elements that were key in said results: (i) Financial services for the most vulnerable population, (ii) Deepening of digitalization, and (iii) Public policies coordinated with the private sector.

Additionally, in recent years the Colombian Fintech ecosystem has consolidated itself in a convincing manner, thanks to the increased demand for digital financial services and the impetus received from public policy makers. In the last two years, the sector has registered an average growth rate of over 27% and the same or higher levels are expected for the next five years.

In the last five years, Colombia has made significant progress in terms of financial inclusion. Access points to the financial system per 10,000 adults increased from 214.2 to 258.1, with banking correspondents and payment terminals registering the highest growth. In the same period, the indicator of access to financial products increased from 77.3% in 2016 to 87.8% in 2020, surpassing two years ahead of schedule the target of the National Development Plan 2018- 2022 (85%). In line with the above, the usage indicator increased from 66.3% to 72.6% between 2016 and 2020; however, the gap with respect to the access indicator increased from 11 pp in 2016 to 15.2 pp five years later.

For the upcoming years, expectations regarding access to and use of financial products by the Colombian population are positive due to public policies adopted and the development of the Fintech ecosystem, but some significant challenges persist in the access and use of financial products for women, youth and older adults, rural areas and some other regions of the country.

CHALLENGES FOR FINANCIAL INCLUSION

Despite progress, challenges are evident in six dimensions. First, the gap in access and use of deposits and credit for urban and rural dwellers, between women and men, youth and adults, and migrants. Second, the use of financial products and the lack of transactional information for some productive segments and for people with no previous experience with the financial system. Third, the lags in the financial inclusion of legal entities, especially for micro, small and medium-sized enterprises (MSMEs). Fourth, the low penetration of voluntary insurance (including microinsurance) due to supply and demand factors. Fifth, the low financial capabilities of the population and the lack of information on the management skills of micro and small entrepreneurs. Finally, the challenges faced by the National Agricultural Credit System (SNCA for its Spanish acronym) to benefit a greater number of rural dwellers, especially those with lower incomes and under greater vulnerability.

GAPS BETWEEN POPULATION GROUPS

Urban- Rural Gap

When analyzing the indicators of access to and use of financial products, a gap against rural residents is evident. In this sense, the percentage of adults with some financial product decreases as the level of rurality increases as shown in Figure 2. In contrast to 2020, the indicator of rural and dispersed rural municipalities was lower, on average from 2016 to 2019, 23.3 pp and 33.2 pp, than that of cities and agglomerations. When the latter is analyzed, it is observed that cities and agglomerations and intermediate municipalities recorded higher growth (14.2% and 12.5%, respectively) than rural and dispersed rural municipalities (10.8% and 8.8%, in order). These positive growth rates reflect the increase in the number of access points.

Figure 2. Percentage of adults with any financial product

Source: Own elaboration based on Financial Inclusion Reports.

0,0%

20,0%

40,0%

60,0%

80,0%

100,0%

2016 2017 2018 2019 2020

Cities and agglomerations Intermediate Rural Dispersed rural

Contrasting rural and urban dwellers, it was also found that the rural population faced challenges access to credit and credit disbursements in the past five years.

Gap among age groups

From 2016, young adults (between 18 and 25 years old) and people over 65 years old have been the groups showing the greatest lags in financial inclusion with an access indicator on average during the five-year period of 55.4% and 62.6%, 25 pp and 17.9 pp below that reported for people between 41 and 65 years old, respectively (Figure 3). Historically, the population between 18 and 29 years of age presents the lowest access indicator, which can be explained, in part, by their economic dependence, since their link to the labor market is mainly unpaid or informal, or because they receive low remuneration.

However, in 2020 a change in this trend is observed due to their greater access to digital products.

Between 2019 and 2020, the highest growth rate was recorded for young adults between 18 and 25 years old (41.71 pp), highlighting the 9.7 pp increase in product ownership by the youngest adults (5.6 million with products).

Figure 30. Number and percentage of adults with financial products by age range

Source: Own elaboration based on Financial Inclusion Reports.

As a whole, young adults are increasingly attractive to financial and non-financial entities, and are able and willing to access financial products, especially through electronic means. In addition, they generally teach adults how to operate electronic financial platforms, contributing to improve the indicator of access and use of financial products in the older segment of the population.

13,3%

37,6% 41,1%

7,9%

53,9%

87,8% 88,3%

73,9%

57,3%

87,7% 89,1%

77,5% 71,5%

83,1%

89,3%

73,4%

81,2% 85,0%

94,4%

80,2%

5.000.000

10.000.000

15.000.000

20.000.000

25.000.000

30.000.000

35.000.000

40.000.000

18-25 26-40 41-65 >65

2016 2017 2018 2019 2020

With the important role that Fintech and Sedpes have played in allowing the vulnerable population to be beneficiaries of monetary transfers by the Government during the last year, a greater proportion of Colombians were able to access this type of financial services easily and at low cost, competing with traditional banking.

Gender Gap

Regarding gender as a factor to financial inclusion, it is evident that the gender gap in access to the financial system has widened in the last two years, a critical situation given that it restricts women's socioeconomic development. Higher levels in poverty in women than men may be associated with the fact that women have structural lags in terms of participation in the labor market, which were aggravated during the pandemic as a result of the affectation of sectors with greater participation of women (hotels, restaurants, beauty salons, cleaning, paid care services) as well as the closure of schools and day care centers nationwide. As of December 2020, 90.5% of adult men in the country had access to at least one financial product, compared to 84.5% of women (6 pp difference).

In relation to the use of financial products, it is observed that 74% of men have active products compared to 70.5% in the case of women. This gap is 2.5 pp smaller than the access gap, which indicates that women make greater use of the products they acquire. In addition to this, it is observed that the indicator for both men and women increased by an average of 6.4 pp between 2019 and 2020. Going from 67.4% to 74% in the case of men, and from 64.3% to 70.5% in the case of women.

The highlighted gender gaps change depending on the level of rurality of the municipalities. In cities and agglomerations, as well as intermediate municipalities: the gap in the access indicator was in favor of men, while in rural municipalities it is women who have more access. Although it would be interesting to know how the holding of deposit and credit products varies by gender and by type of municipality, disaggregated information is not available at this level.

This can be explained, in part, because of the total number of microbusinesses (5.9 million), only 37.6% were owned by women according to the 2019 DANE Microbusiness Survey. On the other hand, it is noteworthy that 17.9% of male owners applied for credit, compared to 16.7% of applications by women.

Although women apply for less credit, they exhibit a higher credit approval rate by financial entities than men according to the 2021 Special Report on Financial Inclusion conducted by Banco de la República, In terms of credit sources by gender, most financing received by women and men is from financial institutions (68.6% vs. 71.3%), followed by loan sharks (16.2% vs. 15.5%) (Figure 33). These last results are worrisome due to the risk of this type of credit and the lack of regulation on the costs that debtors must assume, especially women, who are more likely to opt for the loan shark (70 basis points difference with respect to men). The above emphasizes the need to strengthen both the financial capacities of the population, so that they better understand the disadvantages of this type of loan, as well as the supply of the formal system, so that it better meets the needs of the population.

In the future, it will be useful to gather information on demand to understand the reasons why people use loan sharks despite the risks involved. Some experts point out that immediacy and closeness to the client are one of the main advantages of this instrument. It could also be intuited that people tend to exclude themselves less from this type of scheme because they see it as more accessible than the formal financial system. Within this analysis, it would be crucial to know why women use loan sharks more than men.

National- Migrant Gap

Within the Colombian Government's policies for the integration of the Venezuelan population, financial inclusion is a central axis given its link with social and economic integration. Considering that the formalization of their status is the first step, the Government has granted them special permits such as the special permanence permit (PEP for its Spanish acronym), the special permanence permit for the promotion of formalization (PEPFF) and the special complementary permanence permit (PECP).

Recently, the Government created the Temporary Protection Statute to homogenize the formalization process. In this way, it seeks to have a single registry for this population group, thus facilitating their access to services and the monitoring of policies.

According to the 2020 Financial Inclusion Report, in the last quarter of 2020, 15,528 Venezuelans were linked to the financial system. Of these, 55.3% did so with the requirements of the Basic Legal Circular1, 44.1% with the PEP, 0.49% with the PEPFF and the remaining percentage with the PECP. As the issuance and use of the Temporary Protection Statute progresses and the respective adjustments are made in the systems of the financial entities, it is expected that progress will be made in closing the gaps with respect to nationals.

Through the Rural Finance initiative, USAID has promoted the financial inclusion of the migrant population through partnerships with mobile channels such as Tpaga and Movii and financial institutions such as Congente, Crezcamos, Bancamía, and Banco Mundo Mujer. Among the products offered are savings accounts, with which they can receive salaries, save, and make investments, as well as voluntary digital insurance and revolving credits. According to USAID (2021a), this portfolio ended 2020 with almost 110 thousand associates, of which 50% are women.

Despite the progress made in Colombia, it is important to identify the barriers to both demand and supply to promote, not only access to a financial product, but also the use of a comprehensive portfolio that supports their financial wellbeing. Along these lines, USAID (2020) analyzed the challenges for the financial inclusion of Venezuelan migrants in Peru and Ecuador based on information on demand and supply. On the demand side, it characterizes current holdings of financial products, the relationship of migrants with the financial system when they were in Venezuela and some sociodemographic characteristics. The analysis of supply is constructed through interviews with office managers of financial institutions to learn about their perception of the availability of financial products aimed at this population, whether or not they serve them, what are the barriers that prevent them from providing services to them, among others.

USAID (2020) concludes that there are gaps and barriers that prevent the financial inclusion of Venezuelan refugees and migrants; therefore, only 16% have had access to financial services and 2% to credit. The recommendations it lists are divided into two: i) on the demand side, it is necessary to offer participatory and reflective financial education programs that influence behavioral change regarding the

1 Foreigner's identification card, passport or ID issued by the Direction of the Protocol Department of the Ministry of Foreign Affairs.

use of personal, family and business finances; ii) on the supply side, technical assistance should be provided to financial institutions for the redesign of products suited to the needs of this population, as well as the adjustment of internal processes and policies to reduce existing barriers.

USE OF FINANCIAL PRODUCTS AND TRANSACTIONAL INFORMATION

In terms of financial wellbeing, it is not only important that people acquire new products, but also that they are aware that they have them and use them according to their financial needs. In this sense, it is essential to monitor the gap between the access and use indicator and identify the segments where it is highest. The gap between the access and use indicator at the end of 2020 was 15.2%, 4.2 pp above that of 2017, which relativizes the achievements in holding financial products. By type of municipality, cities and agglomerations show the largest gap between the access and use indicator (15.7 pp), followed by intermediate (14.7 pp), rural (14.1 pp) and dispersed rural (12.3 pp) municipalities.

When looking for the products with the largest gap between holdings and active holdings by number of adults, it is observed that savings accounts present the largest difference (27.9m vs. 18m). In contrast, checking accounts present a gap of 300 thousand (1.9 m vs. 1.6 m), followed by simplified processing savings accounts (2 m) and electronic deposits (4 m). This may indicate the advantages of some products over others, which are reflected in higher usage by acquirers.

Although there is no precise information on the reasons that limit the use of financial products, those that explain non-holding can serve as a reference. According to the CAF, SFC and BdO's 2017 Financial Inclusion Demand Study, the main reasons why adults do not have accounts are that: (i) do not need it (36%), (ii) income is low (18%), (iii) do not have a job (12%), (iv) belief that they are not for them (8%), and (v) that they have not been offered it (6%). Reasons (i) and (iv) reflect signs of self-exclusion, (ii) and

(iii) are exogenous to the financial market, and (v) is endogenous to the financial market.

In contrast, the reasons listed for opening an account are security (62%) and that it generates discipline (19%). Similarly, the suggestion of the employer (53%), the disbursement of a loan (10%) and to receive government assistance (6%) are highlighted. The latter are rather induced or mandatory; in these cases, people are more likely to decide not to use the products for their transactions.

Cash has been the most used and preferred means of payment globally as it allows users to have liquidity and carry out transactions easily and without any kind of registration. Although it is often seen as a cost-free means of payment, there are a variety of indirect costs that fall on individuals, businesses, and government entities. The main obstacles to greater financial inclusion lie in the lack of information on cash transactions, which impedes knowledge of people's profiles and the identification of their activities and needs. However, the use of non-cash means of payment such as credit cards, electronic transfers and checks has grown in recent years in terms of participation in basic transactions such as the purchase of food, clothing, payment of utilities, transportation and housing. According to the National Survey on the Provision of Banknotes and Coins and Payment Instruments, although cash continues to be the most used means of payment for these transactions (87.4%), as of 2019, a significant growth has been observed in the participation of instruments such as credit cards and electronic transfers (Table 1).

Table 1. Participation of means of payment in basic transactions

Source: Own elaboration based on information from Banco de la República.

It should be noted that there are important concentrations in the use of digital media that define an obstacle to obtain more information on transactions and users. Of the use of electronic transfers, the survey reported that in 2019, 59.2% of transactions were recorded in Bogota, and almost 20% were concentrated in cities such as Cali, Medellin, Barranquilla and Neiva, so it is important that digital channels have greater coverage in rural areas through easy-to-open products that imply greater access to transactional information that adequately reflects the needs of target groups.

Also, it is noteworthy that, as a consequence of the pandemic, there is an increased use of digital channels, namely audio response, internet, mobile, ACH and automatic debit. In 2020, the number of transactions recorded through digital channels registered a growth of 62.9% while those made by face-to-face means fell by 11.4% (Figure 36). Thus, the proportion of transactions by digital means increased from 29% to 43% between 2019 and 2020.

FINANCIAL INCLUSION OF LEGAL ENTITIES2

The number of legal entities that had a financial product grew by an average of 5.8 pp during the last five-year period, and the usage indicator increased by 3.4 pp during the same period. However, in 2019 and 2020, declines were observed in both indicators. In 2019, the sustained growth trend evidenced since 2016 was reversed. In this year, the access indicator decreased 1.5 pp, and the usage indicator in 2019 (-5.2 pp).

Within the segment of legal entities, MSMEs are the ones with the greatest limitations in terms of access to the financial system. This is despite the fact that they provide more than 78% of employment nationwide, according to data from the Single Corporate and Social Registry as of May 2021. However, the true size and contribution of MSMEs may be underestimated due to the informality of this business segment.

MSMEs are mostly represented in the commerce and services sectors with 41% and 40%, respectively, which were strongly affected by the isolation measures to prevent the spread of COVID-19. According to the guild of micro, small and medium-sized enterprises (ACOPI), 50% of MSMEs decreased their employment in 2020 compared to 2019, with small companies being the most affected with a drop of

2 According to Article 633 of the Colombian Civil Code, a legal entity is "a fictitious person, capable of exercising rights and contracting civil obligations, and of being represented judicially and extrajudicially. There are two types of juridical entities: corporations and public charitable foundations".

2017 2019 2017 2019 Cash 92,4% 88,1% 89,6% 87,4%

Debit card 5,8% 5,1% 7,3% 5,3% Credit card 1,3% 2,1% 2,0% 2,0%

Transfer 0,4% 2,7% 0,9% 3,2% Other 0,1% 2,0% 0,2% 3,1%

Number of operations Cost of operations

36%. The construction sector was the most affected (-38.4%), while the least disadvantaged was commerce (-3.2%).

According to Banca de las Oportunidades and Financial Superintendency of Colombia (2019), limited access to adequate credit is one of the main reasons why MSMEs do not grow. It is more difficult for these companies to face crisis situations or invest to modernize their operations and innovate when they do not have access to formal sources of financing.

Within the universe of MSMEs, there are some sectors that have greater restrictions on access to credit, such as artisanal mining and rural tourism.

According to Jaulín (2017), a high percentage of micro-establishments in Colombia are typified as 'discouraged' borrowers, i.e., those who do not turn to the formal financial system despite needing credit due to high operating costs and/or fear of being denied. The author finds that most of these establishments would have been accepted had they made a formal credit application, which emphasizes the role of self-exclusion in the low levels of formal leverage of micro-establishments. Finally, it highlights that productivity, size by number of employees, the formality of the company and the use of technology reduce the probability of being discouraged, contingent on the company's need for credit.

In line with the above, financial intermediaries adjust their offer according to the size of the company.

According to the Report on the Credit Situation in Colombia prepared by Banco de la República3, the credit demand perception indicator shows that all types of companies increased their access indicators in banks and CFCs, with large and medium-sized companies having the best access. In the case of cooperatives, only small and microenterprises increased their access indicators (Figure 4).

Figure 4. Credit access for companies, according to their size

Source: Banco de la República

3 The purpose of this report is to analyze the perception that institutions have regarding supply, demand and access to credit, changes in allocation policies in the short term and the expectations that financial intermediaries have for the next quarter, in addition to presenting the behavior of loan modifications and restructurings.

Percentage

INSURANCE SUPPLY AND DEMAND CONSTRAINTS

Insurance plays an important role in financial inclusion because it reduces people's vulnerability to adverse events affecting their living conditions, health and family or work assets. In this sense, it is essential to promote access to these products for all places, population segments and socioeconomic levels, since these risks affect the entire population. Financial inclusion in insurance becomes a mechanism that facilitates the process of social mobility by allowing people to overcome negative shocks without strongly affecting their assets and/or living conditions.

Given that the lowest income sectors have the least access, the public, private and international cooperation sectors have been encouraging the offer of microinsurance through technologies that reduce the costs of serving this segment of the population. However, there are still several challenges related to both the demand and supply of this type of products. On the demand side, the following stand out: (i) the population's low-income levels, (ii) the instability of the flow of this income, (iii) the low level of financial education and (iv) low satisfaction with this type of product and distrust of the financial system.

From the demand side, there is low satisfaction with this type of products and distrust of the financial system, which limits the acquisition of financial products such as insurance. According to Martínez (2021), claim rejection rates and the number of complaints per policy in force in microinsurance are higher than the industry averages, which could be reinforcing the self-exclusion of this segment of the population.

From the supply side, the barriers to be considered include (i) insurance product design conditions, (ii) the need for new marketing mechanisms and (iii) regulatory aspects.

Regarding these barriers, in Colombia, strategies such as the CONPES for Financial Inclusion and Digital Transformation, as well as the Access to Insurance Initiative (A2ii) and the "More insurance, more future" initiative of Banca de las Oportunidades and Fasecolda, have encouraged the development of products with greater diversification, simplicity and number of marketing channels to reach more remote places at lower cost.

It should be noted that new technologies have made it possible to overcome barriers associated with the lack of mechanisms and information for policyholders through digital identification, in addition to improving the experience in the management and payment of claims through digital wallets or payment channels of the Fintech ecosystem. Among the highlights, new business models, applications, processes and products of the insurance sector have been tested within the Arenera ("sandbox") proposed by the SFC (see section 3.4) that represent a benefit for customers and facilitate financial inclusion.

LOW FINANCIAL CAPABILITIES OF THE POPULATION AND LACK OF MANAGEMENT INFORMATION IN

MSMES

One of the key elements for advancing financial inclusion is the understanding of the population's financial capabilities. This concept not only refers to financial education or knowledge of financial products, but also includes other areas related to the population's behavior, planning and vulnerability.

This expanded approach to financial capabilities ensures not only that people are aware of financial products, but that they acquire and use them for greater financial wellbeing. As shown by Pacheco and

Yaruro (2018), although 96% of respondents in Colombia know at least one financial product, only 44.2% report having at least one. Hence, the importance of structuring programs that strengthen people's financial capabilities to ensure the acquisition and use of this type of products.

According to Atkinson et al. (2005), a financially capable consumer is one who knows how to manage their money, spends according to their income, plans for the future and provides part of their resources for adverse events, knows how to choose financial products, when to seek advice and how to act on it.

Similarly, Reddy et al. (2013) mention that financial capabilities include the behavior, knowledge and attitude of each person in relation to their personal finances.

In line with the above, several initiatives have been created in Colombia that seek to measure the financial capabilities of the population, especially in populations with greater needs for financial inclusion and education. In 2019, the Development Bank of Latin America (CAF) together with the SFC promoted the Financial Capabilities Measurement Survey (ECF for its Spanish acronym), which was applied to 1,200 people of different socioeconomic levels in urban and rural areas of Colombia.

When compared with other Latin American countries, it is notable that Colombia lags in financial capabilities. According to Figure 5, Chile is the country with the best results in the OECD Toolkit's comparison of financial education and skills scores, which is composed of three dimensions: financial knowledge, financial behavior and financial attitude.

Figure 5. Financial education and skills scores in Latin America

Source: Development Bank of Latin America.

In the case of Chile, they have incorporated financial education topics in its basic and intermediate national curriculum to improve students' financial capabilities; the analysis of financial information disaggregated by gender, which shows the presence of women in the financial

4 4 4,1 4,1 3,9 4 3,9 3,2

6,1 5,4 5,2 5,1 5,2 5,2 4,6

3,6 3,2 3,3 3,1 2,9

3,1 2,8

13,1 13,0 12,5 12,5 12,2 12,1

11,6 11,0

Chile Bolivia Ecuador Perú Subregión Argentina Colombia Paraguay

Conocimiento Financiero Comportamiento Financiero Actitud Financiera Puntaje total system; and the Law for the modernization of banking legislation, in order to make it more in line with the advance of technology, stand out.

Regarding financial knowledge, women perceive that they have less financial knowledge than men, which emphasizes the low levels of self-confidence of the former. The financial knowledge index, whose maximum score is 8, for Colombian women was 4.83, equal to that of Peru (4.83) but higher than the rest of the countries.

On the other hand, it should be noted that in Colombia the digital gap between men and women is the highest (9 pp) of the countries analyzed. In Colombia, only 26% of women have a smartphone with a data plan, while in Peru and Brazil this percentage rises to 49% and 48%, respectively.

Finally, there is a lack of information on the management skills of micro and small entrepreneurs. Having this data would help to better understand their relationship with the financial system and the failure rates of productive enterprises in Colombia.

PENDING MODIFICATIONS TO THE NATIONAL AGRICULTURAL CREDIT SYSTEM

One of the main sources of financing for the rural population are the resources of the SNCA, which was created by Law 16 of 1990 to address the financing restrictions of the rural agricultural sector. This law also created the CNCA, which is responsible for determining the conditions of the SNCA instruments depending on the type of agricultural producer (Figure 6). Thus, the CNCA's decisions on the interest rates of credit lines, the conditions of the guarantees of the Agricultural Guarantee Fund (FAG for its Spanish acronym), and the percentages of the Agricultural Insurance Incentive (ISA for its Spanish acronym) and the Rural Capitalization incentive (ICR for its Spanish acronym) are differentiated by type of producer.

Figure 6. Current classification of types of agricultural producers

Source: Own elaboration based on information from FINAGRO.

Within the SNCA, small producers enjoy preferential treatment due to their vulnerability, their representativeness within the rural sector and the market failures they face in accessing credit. As illustrated in Table 8, small producers receive the lowest interest rates in terms of subsidized loans, the highest subsidy in the Special Lines of Credit (LEC for its Spanish acronym), the lowest commissions and the highest coverage within the FAG, and the highest percentage of the ISA.

Despite these affirmative actions, the share of small producers in FINAGRO's total portfolio balance is low and concentrated in the Banco Agrario de Colombia. As of December 2020, FINAGRO's total portfolio balance amounted to COP $30.9 trillion, of which only COP $6.7 trillion corresponded to small producers (Figure 46). On the other hand, large producers recorded COP $18.7 trillion and medium producers COP $5.4 trillion in portfolio. At the same date, the Banco Agrario De Colombia portfolio represented 93% of the total portfolio for this type of producers (Figure 47). This concentration seems to be explained both by Banco Agrario De Colombia's mission objective, as well as by the lack of interest of private intermediaries in serving this segment of the population.

The challenge of greater inclusion for small producers is fundamental, since the SNCA seeks to benefit especially this type of debtors, who are the most representative within rural Colombia. According to Leibovich (2013), 87.3% of agricultural producers had less than 2 Family Agricultural Units (FAU), and 66.8% had less than half a FAU. In line with the above, of the total of 2.4m FAUs identified with the National Agricultural Census (CNA), 39% have between 0 and 1 hectare (ha), 22% between 1 and 3 ha and 20.2% between 3 and 10 ha. Of the remaining 18.8%, 7.6% have between 10 and 20 hectares, 6.2% have between 20 and 50 hectares and 5% have more than 50 hectares.

Some academic and public policy studies have highlighted the need to modify the SNCA, especially the classification of the types of rural agricultural producers and the incentives for the placement of loans to small producers in rural areas of the country. Leivobich (2013), Marulanda Consultores (2013), Ocampo (2014). Even the Technical Secretariat of the CNCA (2021) and the CONPES on financial inclusion and education DNP (2020) have recognized that there is room for improvement within the SNCA, in order to benefit the most vulnerable population to a greater extent.

Leivobich (2013) highlights that the current system has several problems of inclusion (type I) and exclusion (type II), which affects the targeting of public policy. Using information from the cadaster and average land values in Colombia, he classifies agricultural producers according to their UAF and compares them with the current SNCA classification. Based on these results, it proposes to reduce both the threshold value for the definition of the small producer (from 145 SMMLV to 90 SMMLV) and the medium producer (from 5,000 SMMLV to 1,000 SMMLV). In this way, subsidies could be concentrated on the producers who need them most, thus contributing to equity in the Colombian countryside.

On the other hand, Marulanda Consultores (2013) stresses that one of the main disincentives to financing small producers is the 9.5% limit on the intermediation margin set by the CNCA, since it does not allow financial institutions to cover the costs of serving this clientele. These costs are in fact higher than those of the urban population due to the greater dispersion of rural clients, the time required to evaluate their productive projects and the risk inherent in agricultural activity. Despite this diagnosis, the author sees little likelihood of encouraging a change in the financing conditions of small producers due to the socio-political circumstances.

Thus, its recommendations include i) simplifying processes by eliminating individual rediscount and enabling the modality of lines of credit backed by endorsed promissory notes; ii) incentivizing supply by creating an incentive that reduces the cost of credit for the financial intermediary and/or providing technical assistance to financial institutions on risk analysis methodologies for this segment; and iii) diversifying the access of financial intermediaries to FINAGRO by including new entities such as microfinance institutions.

Even though the proposal described above addresses some of the recommendations on the SNCA, in the sense that it improves the classification variable and the targeting of the smallest producers, it must be articulated with instruments adjusted to both supply and demand conditions. If for the new category of small low-income producers, for example, the same limit on the small producer interest rate is maintained, it is unlikely that financial intermediaries will decide to offer it, given the risk and operating costs they must assume. If, in addition, the same productive project methodology is maintained without support, it is difficult to ensure that demand and supply are brought closer together.

Given the socio-political context, a change in interest rates for small producers is not very feasible, so the supply subsidy proposed by Marulanda Consultores (2013), and Ocampo (2014) could be evaluated.

The other alternative is for the Government to subsidize the interest rate points that make these operations profitable. Something similar is done with the LEC Inclusión Financiera, where the margin for the financial intermediary is 14% (4.7 pp more than for small producers). In addition, it is essential to establish a calibration scheme between microcredit lines under FINAGRO conditions and those for small producers, since there is no evidence of such a process. It is also worth reviewing the implicit and explicit subsidies for both the microcredit and small producer lines, since the latter is concentrating the largest proportion.

Note:

On August 11, 2021, the Technical Secretariat of the CNCA published a new proposal to change the type of agricultural producer in which two qualifying variables are established: assets and income. Thus, the small low-income producers would be those with incomes and assets below 50 SMMLV and 450 SMMLV, and the small ones would be those with maximum income and assets of 140 SMMLV and 450 SMMLV. In the case of medium-sized producers, the limit set for income is 2,717 SMMLV and for assets 5,000 SMMLV; the large producers would be those with higher values in both dimensions. If approved, this measure may restrict access to agricultural credit, since it implies an increase in the operational burden of financial intermediaries, who initially argue that credit under FINAGRO conditions is difficult to grant.

On the other hand, the increase in the limit value of income of the small low-income producer (from 40 SMMLV in the previous proposal) and of assets (from 284 SMMLV in the current classification and 350 SMMLV in the previous proposal) distorts one of the objectives of the proposal, which is to target the smallest producers. As the limits are increased, the smallest are excluded, and the benefits end up being concentrated in the largest within that category

CONCLUSIONS

Financial inclusion is a priority for governments, multilateral organizations and international donors given its role in reducing poverty and achieving the Sustainable Development Goals. This process particularly favors the most vulnerable, as it allows them to access financial products and services that meet their deposit, savings, credit, insurance and payment needs. In the last five years, financial inclusion in Colombia has made significant progress, reaching access and usage indicators of 87.8% and 72.6%, respectively. Nevertheless, challenges persist in the following dimensions.

In the first place, the gap of rural dwellers, women, young people and migrants, who have levels of access and use below the national average. Given the importance and vulnerability of these segments, it is necessary to review in detail the demand and supply factors that are limiting their access to the financial system and implement affirmative measures.

Secondly, the use of financial and transactional products, since it is not only important that people acquire new products, but also that they are aware that they have them and use them according to their financial needs. In Colombia, the gap between the access and use indicator increased in recent years, so the reasons for this phenomenon and measures to change the trend should be studied. Although the pandemic highlighted an increase in digital transactions, it must be ensured that the gains achieved are maintained.

Third, the lags in the financial inclusion of legal entities, especially for micro, small and medium-sized enterprises (MSMEs). In this regard, the reasons for the self-exclusion of some productive initiatives should be analyzed and the "discouraged" segment should be characterized, i.e., those who do not turn to the formal financial system despite needing credit due to high operating costs and/or fear of being denied it. On the supply side, it is necessary to identify the reasons that discourage lending in certain sectors, which may include problems of lack of information, justified or unsupported biases, among others.

Fourth, the low penetration of voluntary insurance (including microinsurance) due to supply and demand factors. Despite advances in regulation and marketing, coverage remains low, especially among the lowest income groups, who are the most vulnerable to different shocks. Promoting their access to insurance appropriate to their needs and means of payment can significantly impact their socioeconomic wellbeing.

Fifth, the need to improve the financial capabilities of the population, especially the most vulnerable segments. This is key because a financially capable person has control over daily finances, is able to absorb financial shocks, has financial freedom to make decisions and meet financial goals. In the case of MSMEs, the lack of information on the management skills of micro and small entrepreneurs stands out.

These data are key to understanding phenomena such as self-exclusion from the financial system and the failure rates of enterprises, and to designing programs to improve these skills.

Sixth, the challenges faced by the SNCA to benefit a greater number of rural dwellers, especially those with lower incomes and greater vulnerability, are discussed. In this regard, it is essential to identify the population that is not benefiting from the SNCA, and the incentives required to include them.

In addition to the above, the physical infrastructure must be improved in those areas of the country that do not have adequate access to Information and Communication Technologies (ICT) and which access roads are precarious. On the other hand, entities that provide financial services should rely on technology and digital development to facilitate and optimize processes to increase access to and use of financial products. The strategies of financial inclusion agents should focus on closing gaps at the regional level and for some population groups, as they may be reinforcing pre-existing inequities, so it is important that digital channels have greater coverage in rural areas through easy-to-open products that imply greater access to transactional information that adequately reflects the needs of the target groups.