Attachment J.13 Assessment on status and challenges of financial inclusion in Colombia (English Version).pdf

ASSESSMENT ON STATUS AND CHALLENGES OF

FINANCIAL INCLUSION IN COLOMBIA BETWEEN

2016 AND 2021

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 List of tables, diagrams, and graphs

1. Introduction

2. Financial inclusion ecosystem

2.1 Deposit and savings products providers

2.1.1 Entities supervised by the SFC

2.2 Credit providers

2.2.1 Supervised Entities

2.2.2 Unsupervised entities

2.3 Insurance companies

2.4 Low value payment methods

2.5 Public institutions

2.5.1 Second-tier entities

2.5.2 Guarantee Funds

2.5.3 Intersectoral bodies

2.5.4 Regulatory bodies

3. Financial inclusion figures for the last five years

3.1 Financial presence

3.2 Access and use indicator

3.3 Expectations for the coming years

Box 1. Possible Improvements to the measurement of financial inclusion

4. Challenges for financial inclusion

4.1 Gaps between population groups

4.1.1 Urban-rural gap

4.1.2 Gap among age groups

4.1.3 Gender Gap

4.1.4 National-migrant gap

4.2 Use of financial products and transactional information

4.3 Financial inclusion of legal entities

Box 2. Artisanal mining financial inclusion

4.4 Insurance supply and demand constraints

4.5 Low financial capabilities of the population and lack of management information in MSMEs

5. Pending modifications to the National Agricultural Credit System

6. International experiences in financial inclusion

References

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

LIST OF TABLES, DIAGRAMS, AND GRAPHS

Figure 1. Financial Inclusion Ecosystem in Colombia

Figure 2. Composition of the CE portfolio by year

Figure 3. Participation in the microcredit portfolio in 2020

Figure 4. Composition of credit granted by CCF by modality in 2020

Figure 5. Credit with Fintech companies

Figure 6. Share of premiums written by type of insurance in 2020

Figure 7. Share of premiums written by type of microinsurance, 2019-2020

Figure 8. Payment system in Colombia

Table 1. Low-Value Payment Systems Infrastructure in Colombia

Figure 9. Evolution in the numbers of access points

Figure 10. Access points per 10,000 adults disaggregated by type of municipality

Figure 11. Access points per 10,000 adults disaggregated by region

Figure 12. Offices by type of organization

Figure 13. Correspondents by type of organization

Figure 12. Banking offices and correspondents per 10,000 residents by 2020

Figure 14. Access points by rurality level

Figure 15. Access and usage indicator of financial products

Figure 16. Access and usage indicator by deposit product

Figure 17. Access and usage indicator by region

Figure 18. Indicator of outstanding loan tenure

Figure 19. Access and use indicator by region

Figure 20. Number of loans vs. amount by product type

Figure 21. Actions for financial inclusion - SFC

Figure 22. Fintech ecosystem in 2021

Table 3. Improvements in financial inclusion measurements

Table 4. Monetary poverty, multidimensional poverty and unemployment rate by gender and location

Figure 23. Inactive population by sex and type of main activity

Figure 24. Average daily time by genre in work activities

Figure 25. Impact on the income of heads of household as a consequence of the emergency

Figure 26. Unemployment rate of the young population (14 to 28 years)

Figure 27. Youth unemployment rate by sex

Figure 28. Percentage of adults with any financial product

Figure 29. Percentage of adults with an outstanding loan by level of rurality

Table 5. Disbursements in number and amount by credit type

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

Figure 31. Indicator of access to and use of financial products by age group

Figure 32. Indicator of access to and use of financial products by gender

Figure 33. Sources of credit by gender

Figure 34. Composition of the microcredit portfolio by gender

Figure 35. Use of cash in Colombia, 2010-2020

Table 6. Participation of means of payment in basic transactions

Figure 36. Annual percentage change in the number of transactions by type of channel

Figure 37. Number of transactions associated with digital products

Figure 38. Number of legal entities with financial products

Figure 39. Number of legal entities with outstanding loans

Figure 40. Holding and use of deposit products by legal entities

Figure 41. Access to credit for companies, according to their size

Figure 42. Percentage of rejection of new loan applications, by type of loan

Figure 43. Use of non-face-to-face tools by marketing channel in 2020.

Table 7. Most important findings of the ECF in Colombia, 2019.

Figure 44. Capability scores and financial literacy in Latin America

Figure 45. Current classification of types of agricultural producers

Table 8. Current SNCA offer

Figure 46. Portfolio balance by type of producer

Figure 47. Small producer portfolio by financial intermediary

Figure 48. Number of operations by type of producer

Figure 49. Agricultural and livestock producers with development loans

Figure 50. Portfolio balance per investment municipality as of December 2020

Figure 51. Portfolio by investment municipality and funding source as of December 2020

Table 9. Summary of the Producer Type Classification Proposal

Figure 52. Countries that have topped The Economist's Global Microscope scores

1. INTRODUCTION

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%). In the same period, the access points to the financial system (Payment terminals, correspondents, ATMs and offices) rose from 214,2 to 258,1 for every 10,000 adults, and the 100% coverage in Colombian municipalities with at least one access point reached in 2015 was maintained. Likewise, there was 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 the result of the effort of the public and private sectors, as well as international cooperation agencies, which have worked to improve the regulatory framework for financial inclusion, the relevance of the financial products and services offered, and the trust and satisfaction of financial users. The above, has 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.

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.

Working on these dimensions is key given the importance of financial inclusion in poverty reduction and the fulfillment of the Sustainable Development Goals- SDGs (World Bank 2018). In this regard, Lu and Zhuang (2009) point out that financial sector development impacts poverty through two channels: the first (indirect) is through economic growth and the second (direct) is through the use of financial services. Along the same lines, Fedesarrollo and IDB (2015) emphasize that greater access to financial services reduces poverty by reducing household vulnerability, increasing the number of MSMEs, and encouraging greater formalization of companies. Finally, Claessens and Feijen (2006) mention that finance make transactions easier, reduce remittance costs and facilitate the process of asset consolidation and consumption smoothing in the face of income shocks.

In order to address the identified challenges, the United States Agency for International Development (USAID), within the framework of the objectives in its development cooperation strategy, has structured a new program called Equitable and Resilient Finance which will complement the achievements of the Rural Finances Initiative implemented between 2014 and 2020. The goal of the new program is to improve both the supply and demand for formal services in rural areas and underserved and conflict-affected regions.

The following analysis is an input for interested parts in this program, as it presents the status and challenges of financial inclusion in Colombia based on a review of secondary sources. The information analyzed comprises public policy documents from the National Government, multilateral organizations reports, think tanks, industry associations and/or donors, and academic research results published mainly between 2016 and 2021. Documents published before 2016 were included for their relevance and due to the lack of updated information and more recent references for the same topics. The repository of the information analyzed is published as an annex to this document for easier consultation.

This document is divided into seven sections, including this introduction. The second section presents the financial inclusion ecosystem in Colombia, with a characterization of the entities offering financial products and services. The third section presents financial inclusion figures, highlighting the progress made in the last five years. The fourth section presents evidence on the challenges identified for financial inclusion in Colombia. The fifth section presents the challenges faced by the SNCA and the sixth section highlights some international experiences in financial inclusion. Finally, conclusions are presented.

2. FINANCIAL INCLUSION ECOSYSTEM

Financial inclusion is a priority for governments, multilateral organizations, and international donors given its role in reducing poverty and achieving the Sustainable Development Goals (World Bank 2018).

According to Klapper et al. (2016), financial inclusion contributes directly to the achievement of 7 of the 17 SDGs: 1: End Poverty, 2: Zero Hunger, 3: Health and Well-Being, 4: Quality Education, 5: Gender Equality, 6. Clean Water and Sanitation, and 7. Affordable and Non-Polluting Energy.

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.

The providers of financial services vary between and within countries, given the regulatory framework, the policies of financial entities and the characteristics of the population. In the Colombian case, the financial inclusion ecosystem is made up of several supervised and non-controlled agents that complement and compete depending on the area analyzed (Figure 1). Below is a description of the supply of financial products in Colombia, disaggregating between (i) deposit and savings, (ii) credit, (iii) insurance and (iv) payment systems, as well as their main providers.

Figure 1. Financial Inclusion Ecosystem in Colombia

Source: Own elaboration.

2.1 DEPOSIT AND SAVINGS PRODUCTS PROVIDERS

In Colombia, deposit and savings products providers require authorization from the Financial Superintendency of Colombia (SFC for its Spanish acronym) or the Solidary Economy Superintendency (SES for its Spanish acronym), that oversee their operation with the goal of safekeeping the financial stability of the country. By law, these entities must register with the Financial Institutions Guarantee Fund (Fogafín) and with the Guarantee Fund for Cooperative Entities (Fogacoop), which guarantee the money saved by the public in case the financial entity goes into liquidation1. Although the credit establishments supervised by the SFC are the more sizable ones, with savings deposits of COP$246 trillion (t) to December 2020, the SES supervised entities with an amount of COP $16,5 trillion play an important part in the intermediate cities and in rural areas where a trust relationship with the client is achieved.

2.1.1 ENTITIES SUPERVISED BY THE SFC

Credit Establishments (CE)

Credit Establishments are state entities with a main function to intermediate between deposits from the public and credit placements to individuals and corporations. Within this classification are banking establishments, financial cooperatives, financing companies (CFC) and financial corporations (CF).

Although these types of institutions tend to specialize, either in personal or corporate services, they must comply with the same regulations and offer three basic products, which are adjusted to their lines of business and the needs of their clients.

In the first place, savings accounts, which are deposits that allow the customer to dispose of his money through the use of ATMs and debit cards, and which generate interest in accordance with the policies of each entity. Secondly, checking accounts, which are demand deposits in which the holder can access their resources through conventional mechanisms, together with the possibility of writing checks and having overdraft quotas.

Thirdly, term deposit certificates (CD), which are savings and investment mechanisms that, by means of a document, certify that certain resources have been left in charge of a CE for an established term and, after expiration, the client will receive the initial balance together with an additional amount from a fixed or variable yield.

There are 46 CEs in Colombia, 26 of them are banking establishments, 10 are financing companies, 5 financing cooperatives and 5 financing corporations. Among this group, the Banco Agrario de Colombia2 (state bank focused on the agricultural sector and with the largest network of offices in rural municipalities in the country), niche banks that specialize in lower-income segments (Bancamía, Banco W, Banco Mundo Mujer and Mibanco); and Banco Coopcentral, which is a key player in the Coopcentral

1The maximum amount recognized by Fogafín is COP $50 million and by Fogacoop, COP $12 million.

2 In accordance with its corporate purpose, no less than 70% of its new active credit operations must be aimed at financing rural, agricultural, livestock, fishing, forestry and agro-industrial activities. However, at the end of 2020, 39.5% of its assets were in investments and not in portfolio.

Network, which integrates nearly 120 cooperative organizations to provide integrated transactional and financial services to its members, stand out.

Companies Specializing in Electronic Deposits and Payments (Sedpes)

Sedpes are financial entities that operate almost entirely through virtual platforms, whose function is to collect money through electronic deposits, which can be used to make payments, transfers, and send and receive financial drafts. These entities are supervised and regulated by the SFC, under a laxer banking license than traditional banks, which allows them to operate with lower operating costs and financially include more individuals and companies. Like CEs, they must register with Fogafín, thus guaranteeing the public's resources.

Currently, the SFC has authorized the operation of 5 Sedpes3, which reached 1.3 million clients among individuals and companies at the end of 2020 and mobilized $39.7 billion Colombian Pesos (COP). The Sedpes with the largest market share was Movii with 94.16% of the market, reporting movements between clients for more than $30 billion. In order of importance, it was followed by Pagos GDE (Powwi) with COP $9.3 billion, Aval Soluciones Digitales S. A. with COP $222 million, Tecnipagos with COP $103.5 million and finally Coink S. A. with COP $318.7 million.

These entities played a central role during the pandemic, distributing solidarity4 income transfers and reducing the use of cash in small-scale businesses. Going forward, they are expected to facilitate access to credit for this population through external allies, as Law 1735 of 2014 prohibits them from granting credit or any other type of financing.

Trust Companies (TC) and Stock Brokerage Firms (SBF)

As alternative savings products, there are the products offered by Trust Companies and Stock Brokerage Firms. Although these companies are not as relevant for the financial inclusion of the vulnerable population, they can play a role in channeling investment for the development of these territories.

TCs make investments, manage assets, and provide guarantees to ensure compliance with the obligations acquired by the trustor under a trust5. For their part, SBFs develop commission contracts for the purchase and sale of financial assets, manage third-party securities portfolios, and provide advice on capital market activities.

3 Currently, the SFC is processing the authorization for Sedpe Bold to be carried out in Colombia 4 Program created by the Government through Decree 518 of 2020 to provide unconditional cash transfers to individuals and households in a situation of poverty and vulnerability. These transfers amounted to COP $160,000 per household; to date, 3.2 million subsidies have been delivered for a total amount of COP $7.4 trillion.

5 It is a type of contract by means of which a trustor delivers to a third party an asset or resource to manage it during a determined period of time, with the purpose of fulfilling a purpose in favor of both parties. The trustor is the natural or legal person who entrusts a trust company with the management of an asset to fulfill a lawful purpose.

2.1.2 ENTITIES SUPERVISED BY THE SES

Savings and Credit Cooperatives (SCC)

Savings and Credit Cooperative are non-profit associative entities that are constituted through the contributions of their associates and are supervised by the SES. Their purpose is to provide savings and credit services by creating deposits, granting loans and offering financial services. Due to their legal nature, the surpluses generated are not subject to taxes and must be reinvested in their associates and in the community where they operate, which has allowed them to build trusting relationships.

By December 2020, there were 178 SCC distributed throughout the country. The largest ones, according to the value of their assets, are located in the departments of Santander and Northern Santander (Comultrasan and Crediservir) and Bogotá (Fincomercio) or are associated with a particular sector (Cooperativa del Magisterio and Cooperativa Nacional de Trabajadores).

Employees Fund (EMF)

Employees Funds are non-profit associative entities formed by employees of the same company or by a business group. Their objective is to provide savings, credit and social welfare services to their members. Their diversity in terms of scope and services offered led the SES to group them into three categories: basic (1,018 funds), intermediate (188) and full (159).

The SES also supervises other non-profit mutual entities and pre-cooperative worker cooperatives, which, although they may raise funds from their members, do so to a lesser extent than the SCCs and EMF, since this is not their mission.

2.2 CREDIT PROVIDERS

In Colombia, any natural person or legal entity can grant credit as long as it done with their own resources and for legal activities. Credit providers include both formal institutions that are supervised and not supervised, as well as informal entities. According to Iregui et al. (2018), in Colombia, formal and informal credit markets coexist in a generalized manner. Within the formal supervised ones, there are the Cajas de Compensación Familiar supervised by the Subsidies Superintendency (SSF), as well as the CEs, the SCCs and the EMFs described in section 2.1.1. The group of non-controlled formal companies includes microfinance companies, Fintech companies and some companies in the real sector. The informal category includes loan sharks and pawnshops.

Although there is no consolidated and public information on real and informal sector financing sources, it is known that they play an important role in the financing of consumer goods, emergency response and in the financial burden of households/micro-establishments. In this regard, the 2021 Special Report on Financial Inclusion by Banco de la República states that more than 15% of micro-establishments were financed through loan sharks.

2.2.1 SUPERVISED ENTITIES

At the aggregate level, the main credit providers are the CEs, which recorded a gross portfolio of COP $512.8 trillion at the end of 2020 (52% of GDP). As shown in Figure 2, most of the portfolio is focused on commercial (50%) and consumer (30%), followed by housing (15%) and microcredit (3%).

It should be noted that the modality of microcredit may be overestimated since 46% corresponds to the Banco Agrario de Colombia, which loans are classified as microcredit because of the amount and not the methodology6. According to Clavijo et al. (2020), most of Banco Agrario de Colombia’s loans correspond to credit for small producers and not to microcredit, since it does not evaluate the family unit as a whole but only the productive project. Of the remaining 54% of the microcredit portfolio, 35.2% is focused on niche banks, underscoring that the supply of this type of loan is limited to a few CEs (Figure 3).

Figure 2. Composition of the EC portfolio by year

Source: Own elaboration based on information from the Financial Superintendency of Colombia

6 In Colombia, microcredit is defined according to the amount of credit (25 SMMLV with MSME commission and 120 SMMLV without such commission). To the extent that a high percentage of Banco Agrario De Colombia disbursements are less than 25 SMMLV, they are defined as microcredit.

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Commercial Consumption Housing Microcredit

Figure 3. Participation in the microcredit portfolio in 2020.

Source: Own elaboration based on information from the Financial Superintendency of Colombia

As of December 2020, the SCCs recorded a portfolio of COP $12.57 trillion, of which 69% represented the consumer portfolio, 15% the commercial portfolio, 10% the housing portfolio and 6% the microcredit portfolio. Given the relevance of these kinds of entities in the intermediate cities and rural areas, it could be convenient to develop alternative credit lines focused on financing productive activities.

In the case of employee funds, the portfolio amounts to COP $6.5 trillion, of which 89.5% is for consumer loans. Despite their limited size, these types of institutions can play an important role in bringing the population closer to the formal financial sector, given the credit history they generate and the relationship of trust that is built. To the extent that the client requires other types of products, they are more likely to obtain them and less likely to exclude themselves.

Finally, the Family Compensation Funds (CCF for its Spanish acronym) were created by Decree 118 of 1957, with the mission of managing and paying a family subsidy, which seeks to alleviate the economic burdens of supporting families. One of its social services is the offer of social credit through lines of free investment, consumption, education, health, recreation and tourism, among others. As of December 2020, the 43 CCF reported 55,285 social credit disbursements for a global amount of COP $100.3 b, with free investment (62.6%) and consumption (20.4%) being the most representative (Figure 4). Due to their social mission, the credit approval policies of these entities are more flexible than those of traditional banks, making them a key ally in the indicator of access to credit.

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Figure 4. Composition of credit granted by CCF by modality in 2020

Source: Own elaboration based on information from the Superintendency of Family Subsidies (SSF).

2.2.2 UNSUPERVISED ENTITIES

Microfinance

Microfinance institutions are entities that offer financing products to low-income populations and with small-scale productive activities. These entities have played a pivotal role in the financial inclusion in Colombia since they finance excluded segments in the traditional bank due to their conditions of informality, the lack of collateral, and credit demands. According to the CONPES on financial inclusion and financial education DNP (2020), these entities have played a fundamental role in the financial inclusion of rural areas due to their attention models and offered services.

In Colombia, microcredit comprises loans to microenterprises for an amount of less than twenty-five

(25) Current Minimum Legal Monthly Wages Legal (SMMLV for its Spanish acronym) (Article 39 of Law 590 of 2000). For this type of loans, the SFC sets the usury rate (56.6% in December 2020) and the Micro, Small and Medium Enterprise (MSME) commission, which remunerates the activities of knowledge, follow-up, accompaniment, and financial education to the microentrepreneur carried out by the microfinance companies according to the provisions of Article 39 of Law 590 of 20007.

7 According to Resolution 01 of March 7, 2007, of the Superior Council of Microenterprise, for loans of less than 4 SMMLV, the MSME commission may not exceed 7.5% per annum of the loan balance; and for loans between 4 and 25 SMMLV, the commission must be equal to or less than 4.5%.

Free Investment 62,6%Consumption

20,4%

Other 8,2%

Housing Credit 5,7%

Marketing, healthcare, education, tourism and entrepreneurship 3,1%

Microfinance entities may also "grant microcredits (one or several) for an amount greater than 25 SMMLV, provided that the debtor's balance of indebtedness with the financial sector and other sectors, excluding mortgage loans for housing, does not exceed one hundred and twenty (120) SMMLV at the time of approval of the respective operation" (Concept 2014056513-007 of April 13, 2015, of the SFC).

As of December 2021, microfinance institutions reported a portfolio of COP $1.4 trillion, of which 75% corresponded to urban microcredit and the remaining 25% to rural microcredit. As of this date, the clients of these entities amounted to 415,046.

Fintech

Fintech companies are those entities that seek to modernize financial services through new technologies, digital media and applications, being an important mechanism for the challenges of financial inclusion due to their ease of use and access. Among these are the Sedpes and another group of non-regulated entities that offer credit.

The loans offered by these entities are easy to access, immediate delivery and short term. Some Fintechs approve the loan within 24 hours of its application, with the only requirement being the completion of personal data on the entity's website or application. As shown in Figure 5, the most representative Fintechs by amount of loans to individuals are Lineru, RapiCredit and KrediCity, offering amounts between COP $120,000 and COP $700,000, COP $100,000 and COP $750,000, and between COP $100,000 and COP $500,000, respectively. In the case of loans to companies, Sempli stands out with loans between COP $150,000 and COP $150,000, Fintra from COP $5 million and up, Gulungo between COP $5 million and COP $150 million, and Finaktiva, which finances entrepreneurs and SMEs for amounts over COP $5 million8.

Figure 5. Credit with Fintech companies

Source: La República and Colombia Fintech

8 According to the most recent figures from the Registro Único Empresarial y Social (RUES), which collects information from the 57 Chambers of Commerce in the country, between January and March 2021, 96,431 companies were created in Colombia, 9.3% more than in the same period of 2020.

2.3 INSURANCE COMPANIES

The purpose of insurance companies is to carry out insurance operations, so they offer products associated with the protection of agents against different types of risks, who transfer such risks to insurers that provide compensation services for all or part of the damages that occur at the time of the occurrence of an event foreseen in the insurance contract. According to Banca de las Oportunidades and the Financial Superintendency of Colombia (2019), insurance has positive impacts in terms of anticipation of unexpected shocks similar to a savings mechanism, so access to the products of insurance entities would allow progress in terms of financial inclusion and social welfare.

According to Fasecolda and the SFC, during 2020, premiums were written for a value of COP $30.5 trillion, $0.4 trillion more than in 2019. The largest share of premiums granted by insurance entities, corresponded to group life insurance (14%), followed by occupational risk insurance (13%) and automobile insurance (11%) (Figure 6).

Figure 6. Share of premiums written by type of insurance in 2020

*Including insurance with less participation such as unemployment, subtraction, home, voluntary pensions, transportation, aviation, education, among others.

Source: Own elaboration based on information from Fasecolda and the Financial Superintendency of Colombia

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Compliance

In 2020, the Colombian insurance industry received new regulations from the SFC, as well as recommendations from CONPES 4005, which aimed to adjust the way in which information is reported, allowing for new analyses and classifications of the products offered by insurers. In this way, these entities classified their products into mass insurance and microinsurance9, the latter understood as those designed for the use of low-income population and which access is simple and voluntary.

In this sense, it is observed that in 2020, premiums corresponding to microinsurance represented 2% (COP $614 billion) of total premiums written, showing a decrease with respect to the 2.4% (COP $728 billion) of 2019. The most representative products in microinsurance in 2020 were group life insurance (44.1%), personal accident (18.6%) and individual life (8.4%) (Figure 7).

Figure 7. Share of premiums written by type of microinsurance, 2019-2020

Source: Own elaboration based on information from Banca de las Oportunidades and the Financial Superintendency of Colombia

9 According to Banca de las Oportunidades (2021), a policy is considered to be microinsurance if its monthly premium is less than COP $20,000 in the case of life and accident insurance, COP $30,000 for property and agriculture insurance and COP $75,000 for health insurance.

42,1%

18,7%

9,8%

5,5%

4,3%

3,1%

2,9%

3,3%

5,1%

3,0%

1,5%

0,7%

44,1%

18,6%

8,4%

4,4%

4,3%

4,2%

3,8%

3,2%

3,2%

3,1%

1,8%

0,9%

0% 10% 20% 30% 40% 50%

Voluntary Group Life

Personal accidents

Individual Life

Other General

Theft

Voluntary earthquake

Voluntary fire

Funeral

Unemployment

Liability

Health

Home

2020 2019

2.4 LOW VALUE PAYMENT METHODS

In Colombia, payment systems are defined as a set of rules, payment instruments and technological means " which allow the transfer of funds between users of the system, through the reception, processing, transmission, clearing and/or settlement of payment or transfer orders" (amendment to Decree 2555 of 2010). These systems are essential for the proper functioning of the financial system and the economy in general, since they support the commercial relations of companies and individuals.

Payment systems comprise high-value and low-value ones. The former handle high and urgent payment amounts, and tend to be, in most cases, interbank transactions or financial compensations. Banco de la República is the administrator of the only system of this kind, the Deposit Account System (CUD for its Spanish acronym), which is the axis and support of the country's entire financial infrastructure as it is "the place where the settlement of the money end of the operations carried out with the different financial assets of the country and with the different payment instruments issued by the banks takes place" (Banco de la República, 2021).

Low-value payment systems (LVPS) handle low-value, non-urgent transactions. They comprise the clearing and settlement of multilateral positions generated using debit and credit cards, checks, and electronic payments and transfers, which are transferred through CEDEC10, ACH Cenit11, ACH Colombia and card and ATM networks. In this way, LVPSs process transfers other than those of the high value payment system through an administering entity that mediates the relationship between the sending and receiving parties. These LVPSs are also connected to the CUD, since this is where the settlement of all transactions takes place (Figure 8).

Figure 8. Payment system in Colombia

Source: Banco de la República

10 Banco de la República is the entity that provides the Clearing and Settlement Service for Checks and other Payment Instruments at the national level under the CEDEC system or through the Cámara de Compensación de Sucursales y Delegadas (CCSD) system.

11 The CENIT system (Compensación Electrónica Nacional Interbancaria) is an Automated Clearing House (ACH) operated by Banco de la República, which provides the service of processing low-value electronic payment or collection orders.

Regarding the type of transactions channeled through the LVPSs, those related to recurring payments of payroll, pensions, suppliers, social security, dividends and, in general, invoicing for the purchase of all types of goods and services, as well as automatic collections for these same concepts, stand out in the first place. Between 2019 and 2020, the number of transactions made through ACH Colombia increased by 15.3%, while the amount increased by 8.6%. With respect to drafts and payments from the nation to territorial entities, it is highlighted that, between 2019 and 2020, ACH: CENIT operations decreased by 11.6% and the value of transactions decreased by 10.9%. The largest decreases between the two years analyzed were by CEDEC, with rates of -45.5% and -35.5% in number and amount, respectively (Table 1).

Table 1: Low-Value Payment Systems Infrastructure in Colombia

Source: Own elaboration based on Banco de la República's Payment Systems Report.

Just like CEDEC, ACH and the card and ATM networks; Visionamos is another LVPS supervised by the SFC, which manages the only LVPS of a Cooperative nature in Colombia. This system covers the entire Coopcentral Network, which, as mentioned, groups 120 solidarity organizations that integrate their platforms to serve their customers. To date, this network has more than 500 offices connected online, through which 260,000 users have benefited, reporting 30 million transactions for more than COP $13t.

The increased use of LVPSs in Colombia has made them a key ally in promoting the efficiency, access and stability of the financial system. As of April 2020, there have been sharp declines in both the number and value of point-of-sale (POS) payment transactions in several developed and developing economies, including the United Kingdom, Peru, Portugal, Colombia and the Dominican Republic. Likewise, the number and value of cash withdrawals at ATMs decreased, especially in Spain, Chile and Colombia, where bank transactions became more important. This shows that the reduction in POS payments is a

2019 2020 2019 2020

ACH Colombia 909.622 1.048.593 4.215 4.577

Recurring payments of payroll, pensions, suppliers, social security, dividends and in general of the invoicing for the purchase of all types of goods and services, as well as automatic collections for these same concepts.

ACH: Cenit 46.741 41.327 890 987 Mainly drafts and payments from the nation to local and regional authorities.

Cedec 40.553 22.097 757 488 Checks for the purchase and sale of goods, services and settlement of obligations, among others.

Cards and ATMs networks

4.084.011 4.051.773 769 494 Debit and credit card transactions, as well as clearing transactions between ATMs

Type of LVPS Daily Averages

Main operationsNumber of operations Value (in COP billion) generalized phenomenon worldwide, which can be supported through a regulatory framework in line with market dynamics and by increasing the financial capabilities of the population to take better advantage of this transition.

According to Deloitte (2015), LVPSs have been gaining prominence in the financial activity, in an environment of greater use of the internet, e-commerce, entry of new players and changes in consumer preferences in favor of digital media. For their part, Prieto et al. (2018) emphasize that the relevance of electronic payments lies not only in the fact that consumers can make their transactions more efficiently, but also in the fact that it facilitates their access to and use of financial services.

LVPSs can be operated by the private and public sector, as well as by entities supervised or not by the SFC. To strengthen the supply of this type of systems and encourage their use by individuals and companies, the Government issued Decree 1692, which aims to "promote free competition and facilitate the entry of new players, with innovative operating models and specialized in allowing small businesses, neighborhood stores and entrepreneurs, begin to make their sales digitally in a simple and low-cost way," said the Government in a statement. In this way, the government has set a goal to increase the percentage of adults who make online payments or purchases from 20% to 50% by 2025.

2.5 PUBLIC INSTITUTIONS

2.5.1 SECOND-TIER ENTITIES

Bancóldex

The Business Development Bank of Colombia (Bancóldex) is a development bank for business growth in Colombia, which seeks to promote financing for companies of all sizes, sectors, and regions of Colombia. Operating as a second-tier bank, financial institutions request funds from Bancóldex to make them available to individuals and entrepreneurs.

Bancóldex manages resources for special programs that involve (i) advancing financial inclusion in low-income populations through its Banca de las Oportunidades program, (ii) entrepreneurship through iNNpulsa Colombia, (iii) innovation and competitiveness through the Fondo de Modernización e Innovación para MiPymes [Modernization and Innovation Fund for MSMEs] and (iv) promoting productivity and competitiveness in sectors with high export potential. Bancoldex maintains alliances with various government entities and programs to boost productivity and exports in certain sectors, such as Colombia Productiva12. (Productive Colombia)

The entity has traditional lines of credit for working capital and investment, as well as special lines of credit based on classification criteria such as region, sector or activity, and situations of economic complexity. Unlike FINAGRO, several of these lines benefit both supervised and not supervised entities, to which the beneficiary's interest rate is not limited.

12 Entity attached to the Ministry of Commerce, Industry and Tourism to work on the challenges set forth in the National Competitiveness and Productivity Policy (Conpes 3527 of June 23, 2008) and the Productive Development Policy (Conpes 3866 of 2016).

Banca de las Oportunidades

This is a National Government program administered by Bancóldex, which seeks to promote financial inclusion in impoverished families, micro-entrepreneurs, entrepreneurs, and small and medium-sized enterprises, to reduce poverty, promote social equality and stimulate economic development in Colombia.

The financial inclusion projects are developed with the support of the "Banca de las Oportunidades Network" made up of banks, financing companies, cooperatives with financial activity, microcredit NGOs and insurance companies.

Banca de las Oportunidades promotes the necessary reforms to the regulatory framework to facilitate and promote access to financial services and establishes incentives for the co-financing of projects and technical assistance.

FINAGRO

Finagro (Fund for the Financing of the Agricultural and Livestock Sector), is a government entity that promotes the development of the rural sector. It is incorporated as a credit institution linked to the Ministry of Agriculture and supervised by the Financial Superintendency of Colombia. Like Bancóldex, it acts as a second-tier bank, granting funds to financial institutions so that they in turn may grant loans to productive projects in the agricultural sector.

Finagro has a wide range of products that promote all types of initiatives in the sector, organized by credit products for all stages of agricultural and agribusiness production, guarantee mechanisms, and incentives that function as economic benefits for individuals and companies that carry out agricultural projects, special lines of credit and special programs such as the Agricultural Solidarity Fund (FONSA for its Spanish Acronym), which seeks to provide financial support to small producers for partial or total debt relief, and the National Agricultural and Livestock Reactivation Program (PRAN for its Spanish acronym), which functions as a policy instrument to meet the needs of the sector.

2.5.2 GUARANTEE FUNDS

National Guarantee Fund (FNG)

The National Guarantee Fund (FNG for its Spanish acronym) is a government entity linked to the Ministry of Commerce, Industry and Tourism (MinCIT) and supervised by the SFC, which seeks to facilitate credit access to self-employed workers, MSMEs, large companies and households that do not have sufficient conditions to back financial operations. To this end, the FNG grants guarantees through the banking entities that allow them to compensate losses and risks associated with the inability to back them up.

The FNG has different guarantee products associated with traditional lines and special products, which are subscribed to agreements with government programs or private initiatives. The traditional lines include corporate guarantees, microcredit, leasing and preferential guarantees for SMEs, while the special programs include guarantees for low-income housing (LIH) and Non-LIH, regional guarantees according to city or departmental initiatives, and guarantees for the disabled, among others.

Under the economic and social emergency caused by COVID-19, the Government created the Unidos por Colombia program to counteract the economic difficulties faced by MSMEs, large companies, self-employed workers and the most affected sectors of the economy. This program offers broader coverage than the traditional ones, with high subsidies on the commission, to encourage credit placements so that companies can solve temporary liquidity problems and/or reinvent themselves amid the difficulties presented by the current situation.

Agricultural Guarantee Fund

The Agricultural Guarantee Fund (FAG for its Spanish acronym) is a fund that aims to support loans granted to the agricultural and rural sector registered with FINAGRO. In this way, it becomes one of the public policy instruments to promote financial inclusion in the rural sector, especially for small producers, who account for 96% of the guarantees issued (FINAGRO, 2020).

The guarantee conditions (coverage, commission) offered by the FAG vary according to the beneficiary of the credit (small, medium or large producers, victims of the conflict, displaced persons, among others) as stipulated by the National Agricultural Credit Commission (CNCA for its Spanish acronym).

It should be noted that this instrument is subsidized by the Government and FINAGRO's profits, to reduce credit costs for debtors and facilitate their access to credit.

So far in 2020, the FAG mobilized credit resources for COP $3.3 trillion in 280,686 operations and with guarantees issued for $2.4 trillion (FINAGRO, 2020). Of this, COP $3.3 trillion, 72.7% was concentrated in Banco Agrario de Colombia and the rest in other private financial intermediaries. As of December 2020, the FAG's capacity to issue new guarantees was of COP $3.3 trillion, a relevant figure considering the leverage needs of the rural population.

2.5.3 INTERSECTORAL BODIES

Intersectoral Commission for Economic and Financial Education (CIEEF)

In 2014, with Decree 457, the National Administrative System for Economic and Financial Education (SANEEF for its Spanish acronym) was created as a network for the coordination of public and private activities to achieve an adequate level of economic and financial education (EFE) of the population. This same decree created the Intersectoral Commission for Economic and Financial Education (CIEEF for its Spanish acronym) as the highest coordinating and guiding body of the SANEEF.

The functions of the CIEEF are to propose guidelines, methodologies and tools for the adoption of a national EFE strategy, to recommend management mechanisms, to…