ATTACHMENT_5_ACCESS_TO_FINANCIAL_SERVICES_IN_RURAL_AREAS_-_MARKET_STUDY.pdf

7 JULY 2014

The opinions expressed herein are of the authors alone and do not necessarily reflect the vision or opinion of the United States Agency for International Development.

ACCESS TO FINANCIAL

SERVICES IN RURAL AREAS

MARKET STUDY

ACCESS TO FINANCIAL

SERVICES IN RURAL AREAS

MARKET STUDY

07 JULY 2014

PREPARED BY:

DIANA PARRA CORREA

OLGOONIK

Senior Advisor for Strategic Alliances Bogotá, Colombia

DISCLAIMER:

The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

Access to Financial Services in Rural Areas – Market Study July 2014

TABLE OF CONTENTS

List of Acronyms and Abbreviations .............................................................................................................................. i

Information about Institutions ........................................................................................................................................ ii

Definition of Technical Terms ....................................................................................................................................... iv

1. Introduction

2. Framework

3. Agriculture Sector in Colombia

Agriculture Financing

4. Financial Intermediaries in Colombia

Commercial Banks and Financial Companies

Cooperatives Microfinance NGO and other MFI

5. Market Study

Selection of Financial Intermediaries Methodology

6. Results of the Market Study

Geographic Coverage and Infrastructure Products Target Markets Provision of Financial Services in Rural Areas Loans to Microenterprises

Agriculture Financing Interest in a Strategic Alliance Key Contributions to the Alliance Interest in DCA Credit Guarantees

Most Promising FI

7. Conclusions of the Market Study

8. Recommendations

9. Inputs for GDA APS

10. Annexes

Annex 1: FI Selected for Market Study Annex 2: Contact Details of Selected FI Annex 3: FI Selected for Market Study - Methodology Annex 4: Survey

Annex 5: Geographic Coverage and Infrastructure

Page i

Annex 6: Products Annex 7: Target Markets Annex 8: Provision of financial services in rural areas

Annex 9: Portfolio Annex 10: Agriculture Financing – Main Difficulties Annex 11: Agriculture Financing – Factors to facilitate Annex 12: Interest in an Strategic Alliance

Annex 13: Key Contributions to the Alliance - USAID Annex 14: Key Contributions to the Alliance - FI Annex 15: Ranking of Interest and Potential - FI

11. Bibliography

Page ii

LIST OF ACRONYMS AND ABBREVIATIONS

A2F Access to Finance APS Annual Program Statement BA Banking Agent BAC Banco Agrario de Colombia (Public owned bank) BCS Banco Caja Social BdO Banca de las Oportunidades Program (Colombian public agency) BVC Bolsa de Valores de Colombia (Colombian Stock Exchange) CCT Conditioned Cash Transfer DCA Development Credit Authority (USAID) DPS Departamento para la Prosperidad Social (Department of Social Prosperity) FAG Fondo Agropecuario de Garantías (Agricultural Guarantee Fund) FC Financial Company FI Financial Intermediary FMujer Fundación de la Mujer FMM Fundación Mundo Mujer FNG Fondo Nacional de Garantías (Colombian Guarantee Fund) FOMIN Multilateral Investment Fund, member of the IDB Group FSC Financial Superintendence of Colombia GDA Global Development Alliance GoC Government of Colombia IMF International Monetary Fund LAC Latin American Countries LPG Loan Portfolio Guarantee (USAID´s standard guarantee product) NGO Non-Government Organization NYSE New York Stock Exchange MFI Microfinance Institution MIX Market Microfinance Information Exchange, Inc.

PAR30 Portfolio at Risk beyond 30 days PPP Public-Private Partnership SME Small and Medium-sized Enterprise SSE Superintendence of the Solidary Economy TA Technical Assistance UMIC Upper Middle Income Countries WOCCU World Organization of Cooperatives

Page i

INFORMATION ABOUT INSTITUTIONS

Asomicrofinanzas

The Colombian Association of Microfinance Institutions - Asomicrofinanzas is an apex institution created in 2009 by the financial intermediaries that offer microfinance products (banks, financial companies, cooperatives and microfinance NGOs) to represent the microfinance industry in Colombia.1

AVAL Group AVAL Group is one of the most important financial conglomerates in Colombia. It has four commercial banks (Banco de Bogotá, AV Villas, Banco Popular and Banco de Occidente), financial and leasing companies, and the Microcrédito AVAL Microfinance NGO, among others. It is listed on the NYSE and has presence in 8 countries in Central America.2

Banca de las Oportunidades (BdO)

Banca de las Oportunidades (BdO) is a policy of the Government of Colombia (GoC) whose main objective is to promote access to credit and other financial services to the unbanked Colombian population, specially to low-income families, micro and medium-sized enterprises and entrepreneurs. This program, managed by the Bank for Foreign Trade - Bancoldex, is part of the GoC’s long-term policy to reduce poverty, promote social equity and stimulate economic development in Colombia.3

Bancolombia Group

Bancolombia Group is the largest financial conglomerate in Colombia, offering a wide range of financial products and services to a diversified individual and corporate base of more than 7 million customers. This group is comprised of Bancolombia, the largest commercial bank, and its subsidiaries. It has presence in 3 countries in Central America and 3 off-shore banking subsidiaries.4

Bolivar Group One of the most important economic groups, with over 70 years experience and presence in 8 countries in Latin America. It is present in sectors such as financial, (through Davivienda and its subsidiaries), insurance and construction5.

Finagro The Fondo para el Financiamiento del Sector Agropecuario - Finagro is the agricultural second-tier bank of Colombia. Finagro provides funds to banks to lend to the agricultural sector. To use Finagro’s funds banks have to lend to producers following Finagro’s lending conditions, at subsidized interest rates.

Financial Superintendence of Colombia (FSC)

The Financial Superintendence of Colombia (Superintendencia Financiera de Colombia - SFC) is a technical State agency responsible for the inspection, supervision and control of entities engaged in financial, securities activities, insurance and any other activities related to the management, use or investment of resources collected from the public. Its aim is to monitor the Colombian financial system in order to preserve its stability, security and confidence, as well as, promote, organize and develop the Colombian stock market and the protection of

1 Asomicrofinanzas, “Antecedentes” http://asomicrofinanzas.info/index.php/loquesomos/nosotros 2 Grupo AVAL “About us,” https://www.grupoaval.com/wps/portal/grupo-aval/bienvenido/investor-relations/about-us 3 Banca de las Oportunidades, “Who we are?”

http://www.bancadelasoportunidades.gov.co/ingles/contenido/contenido.aspx?catID=324&conID=705 4 Grupo Bancolombia “At a Glance”, https://grupobancolombia.com/about 5 Davivienda “Investor Relations”, https://davivienda.com/investor

Page ii http://asomicrofinanzas.info/index.php/loquesomos/nosotros https://www.grupoaval.com/wps/portal/grupo-aval/bienvenido/investor-relations/about-us http://www.bancadelasoportunidades.gov.co/ingles/contenido/contenido.aspx?catID=324&conID=705 https://grupobancolombia.com/about https://davivienda.com/investor investors, depositors and insured.6

FOMIN The Multilateral Investment Fund (FOMIN), funded by 39 donors, supports private sector-led development benefitting the poor and low-income households - their businesses, their farms, and their households. The aim is to give low-income populations the tools to boost their incomes: access to markets and the skills to compete in those markets, access to finance, and access to basic services, including green technology.7

Microfinance Information Exchange (MIX Market)

The Microfinance Information Exchange (MIX Market) provides objective data and analysis about the microfinance sector in the world. MIX Manages financial and social performance data submissions from 200 + microfinance institutions (MFI), and provides instant access to current data, analytical tools and market intelligence.

Data are validated and standardized by MIX data analysts.8

Superintendence of the Solidary Economy (SSE)

The Superintendence of the Solidary Economy (Superintendencia de la Economía Solidaria - SES) is a technical State agency responsible for overseeing the legal status and business activity of the solidarity economy entities under its purview. Its objectives are to protect the interests of its members and the community, build trust, and strengthen the solidarity sector as an alternative to foster social and economic development of Colombia.9

WOCCU The World Council of Cooperatives – WOCCU is the global trade association and development agency for cooperatives and cooperative financial intermediaries, with member organizations in nearly 60 countries. 10 In Colombia, WOCCU has been the provider of technical assistance (TA) financed by Banca de las Oportunidades (BdO) to selected cooperatives in institutional strengthening; it is currently finishing TA to 12 cooperatives in the development of “Semilla Cooperativa” and has recently started providing TA to 9 FI (4 banks, 2 cooperatives and 3 microfinance NGOs) in the implementation of micro agri loans.

6 Superintendencia Financiera de Colombia, https://www.superfinanciera.gov.co/jsp/loader.jsf?lServicio=Publicaciones&lTipo=publicaciones&lFuncion=loadContenido Publicacion&id=60607#naturaleza1 7 FOMIN, “About MIF”, http://www.fomin.org/en-us/home/aboutmif.aspx 8 MIX Market, http://www.mixmarket.org/ 9 Superintendencia de la economía solidaria, http://www.supersolidaria.gov.co/es/nuestra-entidad/mision-vision-valores 10 WOCCU, “Membership”, http://www.woccu.org/memberserv/membership

Page iii https://www.superfinanciera.gov.co/jsp/loader.jsf?lServicio=Publicaciones&lTipo=publicaciones&lFuncion=loadContenidoPublicacion&id=60607%23naturaleza1 https://www.superfinanciera.gov.co/jsp/loader.jsf?lServicio=Publicaciones&lTipo=publicaciones&lFuncion=loadContenidoPublicacion&id=60607%23naturaleza1 http://www.fomin.org/en-us/home/aboutmif.aspx http://www.mixmarket.org/ http://www.supersolidaria.gov.co/es/nuestra-entidad/mision-vision-valores http://www.woccu.org/memberserv/membership

DEFINITION OF TECHNICAL TERMS

Agricultural Guarantee Fund

(FAG)

The Agricultural Guarantee Fund (Fondo Agropecuario de Garantías – FAG) is a public credit guarantee for agricultural activities. Financial intermediaries can use this guarantee only if they lend with Finagro resources at the subsidized interest rates established for agricultural lending. Although these guarantees are open to the entire banking system, in practice only Banco Agrario, Colombia’s only State-owned bank, uses them to lend to small farmers.

Cédula Cafetera Cédula Cafetera is a debit card offered by Banco de Bogotá to the coffee farmers which are members of the National Federation of Coffee Growers (Federación Nacional de Cafeteros). The Cédula Cafetera is their ID for the Federation and farmers can use it to receive GoC subsidies, payments for coffee sales and other payments.11

Commercial Bank A commercial bank (bank) is a financial intermediary that can offer the full scale of retail (including mortgage) and corporate banking services with the exception of investment banking and financial leasing. The Financial Superintendence of Colombia (FSC) exercises oversight of the commercial banking system.12

Cooperative A cooperative or credit union is a member-owned financial cooperative, democratically controlled by its members, and operated for the purpose of promoting thrift, providing credit at competitive rates, and providing other financial and non-financial services to its members. The Superintendence of Solidary Economy (SSE) exercises oversight of Cooperatives in Colombia.13

Development Credit Authority

(DCA)

Type of public-private partnership under which USAID assumes a portion of the credit risk in order to encourage private banks to lend to creditworthy but underserved entities or persons in new sectors and regions.14 DCA uses risk-sharing agreements to mobilize local private capital to fill this financial gap. The guarantees may cover an individual loan or a portfolio of loans, and have a considerable leveraging effect, contributing to unlocking private sector investment.15 USAID’s standard guarantee products are: Loan Guarantee, Loan Portfolio Guarantee, Portable Guarantee and Bond Guarantee.

Family Agricultural Unit (UAF)

The Family Agricultural Unit (Unidad Agrícola Familiar - UAF) is the size of a peasant family farm required to generate an income of US $640 per month, which is the minimum income estimated to be required for a peasant family to have a decent quality of life and a sustainable production. Farmers’size in Colombia is

11 Banco de Bogotá, “Nueva Cédula Cafetera Inteligente”, https://www.bancodebogota.com/pls/portal/docs/PAGE/WEBBOG/CONTENIDO/ADMIN/MINISITES/CEDULA-

CAFETERA/INDEX.HTML

12 Superintendencia Financiera de Colombia https://www.superfinanciera.gov.co/jsp/loader.jsf?lServicio=Glosario&lTipo=user&lFuncion=main&letra=C 13 Confecoop, http://www.confecoop.coop/index.php/cooperativismo/doctrina 14 "An overview of USAID's Credit Guarantees", USAID, undated, http://www.usaid.gov/sites/default/files/documents/1870/1210-usaid-onepager-v5-4_2.pdf 15 "Impact Brief 2013," USAID Development Credit Authority, 2013, http://www.usaid.gov/sites/default/files/documents/2151/2013ImpactBrief.pdf

Page iv http://en.wikipedia.org/wiki/Financial_institution http://en.wikipedia.org/wiki/Cooperative http://en.wikipedia.org/wiki/Credit_(finance) https://www.bancodebogota.com/pls/portal/docs/PAGE/WEBBOG/CONTENIDO/ADMIN/MINISITES/CEDULA-CAFETERA/INDEX.HTML https://www.bancodebogota.com/pls/portal/docs/PAGE/WEBBOG/CONTENIDO/ADMIN/MINISITES/CEDULA-CAFETERA/INDEX.HTML https://www.superfinanciera.gov.co/jsp/loader.jsf?lServicio=Glosario&lTipo=user&lFuncion=main&letra=C http://www.confecoop.coop/index.php/cooperativismo/doctrina http://www.usaid.gov/sites/default/files/documents/1870/1210-usaid-onepager-v5-4_2.pdf http://www.usaid.gov/sites/default/files/documents/2151/2013ImpactBrief.pdf determined according the number of UAF:

Subsistence Farmers: < 0,5 UAF Small Farmers: 0,5 ≤ UAF ≤ 2 Medium Size Farmers: 2 ≤ UAF ≤ 10 Large Farmers: > 10 UAF The UAF concept combines both farm size and income. According to productivity of land, the UAF varies in size (number of hectares) from one municipality to another.16

Financial Company

(FC)

A financial company (FC) is a financial intermediary that offers lending and/or leasing services. A financial company has lower capital requirements than a commercial bank and does not offer checking accounts. Financial Companies are supervised by the FSC.17

National Guarantee Fund

(FNG)

The National Guarantee Fund (Fondo Nacional de Garantías - FNG) backs credit operations for commerce, services and the manufacturing industry. FNG’s objective is to facilitate access to credit to Colombian micro, small and medium size enterprises by providing them with credit guarantees.18

Semilla Cooperativa

Semilla Cooperativa is a savings and loan product targeted to rural populations, designed by WOCCU. Semilla Cooperativa facilitates savings and loan paying on-site, using a technology which consists of a tablet or mobile phone, connected online with the FI, and a small printer to give the receipt to the clients. Semilla Cooperativa is based on the visit of a loan advisor, once per month, to a group of rural populations, close to their farms (i.e. a school), to collect savings and loan payments. In these visits the loan advisor also provides financial literacy training among participants, emphasizing the importance of saving.

16 Law 160 of 1994; Law 607 of 2000; MADR Incoder, Resolution 1132 of 2013.

17 Superintendencia Financiera de Colombia https://www.superfinanciera.gov.co/jsp/loader.jsf?lServicio=Glosario&lTipo=user&lFuncion=main&letra=C 18 Fondo Nacional de Garantías, “About Us”, http://www.fng.gov.co/fng/portal/apps/php/index.get?getlanguage=RU4=

Page v https://www.superfinanciera.gov.co/jsp/loader.jsf?lServicio=Glosario&lTipo=user&lFuncion=main&letra=C http://www.fng.gov.co/fng/portal/apps/php/index.get?getlanguage=RU4

1. INTRODUCTION

Land and rural development is one of the GoC priorities that USAID has committed to support during the coming years. To champion access to finance (A2F) for unbanked populations in rural areas, USAID plans to develop strategic alliances with partner financial intermediaries (FI) which have interest and potential to provide and scale-up financial services in these areas.

In order to understand the challenges FI face when expanding towards rural areas, OLGOONIK (hereinafter “the consultant”), carried out a market study among selected FI during April and May of this year. This study will provide valuable information to USAID to forge effective alliances with the most promising FI, explore practical means of cooperation, and determine how a partnership could be effective in unlocking financing for Colombia’s rural population.

The purpose of the market study was to get information from FI to determine: i) the key issues that need to be solved to achieve higher impact in an alliance; ii) the degree of interest among FI in providing /scaling-up financial services towards rural areas; iii) the main challenges that FI face related to infrastructure, building capacities, mitigating risks and development of adequate financial products; iv) the key factors that would facilitate FI’s expansion towards rural areas; v) their interest in forging a strategic alliance; and vi) the areas in which a partnership with USAID would be most effective in unlocking A2F for rural areas.

The purpose of this document is to present the results of the market study which was carried out with 29 FI (8 commercial banks, one financial company, 7 microfinance NGO and 13 cooperatives). Based on the results of the market study, and on the review of alliances focused on providing financial services in rural areas that have been implemented in other countries19, this document also presents recommendations on concrete alliances that USAID could successfully develop with FI in Colombia and provides inputs for Global Development Alliances (GDA).

The market study is presented in the next eight sections. Section 2 explains the framework for the development of the market study, focusing on the new USAID vision of development. Next, Section 3 presents an overview of the agriculture sector in Colombia and of agri financing. Section 4 is about FI in Colombia, aimed at providing a general understanding about the size and composition of FI, as well as an understanding of the position of the FI selected for the market study within the Colombian financial sector. Section 5 presents the market study, explaining the criteria to select the FI and the methodology used to carry out the market study. Section 6 presents the results of the market study, based mainly on a survey carried out. Section 7 offers the main conclusions of the market study. Based on the results of the market study and the desktop review mentioned, Section 8 makes recommendations on concrete alliances that USAID could develop. Finally, Section 9 provides some inputs for implementing Global Development Alliances (GDA). Detailed information for every FI is included in the annexes at the end of the document.

19 Parra (2014).

2. FRAMEWORK

USAID’s new vision of development asserts that the best way to achieve effective results and sustainable development is to understand, work with, and boost local systems. This new vision also emphasizes the importance of promoting inclusive development. Inclusive development recognizes that all parts of society, including governments, civil society, private sector and individual citizens, have knowledge, resources and ideas that are essential to achieve sustainable development.20

As local systems have a variety of multiple, interconnected actors, multi stake-holder alliances are key. In this context, working through partnerships becomes a primary strategy. Direct partnerships with local agents who have in-country knowledge, networks, and expertise, generate shared responsibility, mutual accountability and facilitate the achievement of concrete results. Additionally, by pooling resources, experience and engagement, the results and impact will be higher.21 Simply put, the objective is to achieve a new vision of development that is “locally owned, locally led and locally sustained”.22

One of the main objectives of the USAID mission in Colombia in the medium term is to support rural development. One of the key aspects for achieving rural development is to increase access to finance in rural areas.

In order to achieve this objective and its new vision of development, USAID ought to develop strategic partnerships with financial sector entities that are interested and have the potential to expand their products and services to rural areas. The objective is to develop lasting, sustainable partnerships to ensure sustainability by investing in and through FI.

The market study among selected FI is intended to provide USAID with a map of the local financial system, regarding A2F in rural areas, analyze the best way to engage with this local system to achieve higher impact and results, and to provide recommendations to USAID regarding the most advantageous partnerships it may form within the financial system.

20 USAID (2014).

21 Ibid.

22 Ibid, Pg. 2.

Ten principles for engaging local systems

1. Recognize there is always a system.

2. Engage local systems everywhere.

3. Capitalize on our convening authority.

4. Tap into local knowledge.

5. Map local systems.

6. Design holistically.

7. Ensure accountability.

8. Embed flexibility.

9. Embrace facilitation.

10. Monitor and evaluate for sustainability.

3. AGRICULTURE SECTOR IN COLOMBIA

As of 2012, in Colombia there are more than four million farmers in both, agricultural and livestock activities. Regarding their size, 67% are subsistence farmers, 21% are small farmers, 10% are medium size farmers and 3% are large farmers23 (Table 1, Figure 1). This information confirms that Colombia is mostly a country of subsistence and small farmers (88%).24

Table 1 Number of Farmers Figure 1 Distribution of Farmers

Source: Leibovich (2013).

Regarding hectares, there are 42 million hectares in Colombia dedicated to agricultural activities (agriculture, livestock or both). The distribution of hectares according to farmer’s size is 12% subsistence farmers, 26%, small farmers, 30% medium size farmers and 32% large farmers (Table 2, Figure 2).

Table 2 Hectares dedicated to agricultural activities Figure 2 Distribution of hectares dedicated to agricultural activities

Therefore, in Colombia there is a regressive distribution of land used in agriculture. Although smaller producers (subsistence and small) represent 87% of total producers, they only have 38% of the land

23 For the classification of farmers, consult the UAF definition in the technical terms section.

24 Leibovich (2013).

Number of Farmers 2012 Distribution

Subsistence Farmers 2.686.555 67% Small Farmers 823.901 21% Medium Farmers 390.110 10% Large Farmers 118.374 3% Total 4.018.940 100%

Number of Hectares

2012 Distribution Subsistence Farmers 5.186.351 12% Small Farmers 11.189.187 26% Medium Farmers 12.614.579 30% Large Farmers 13.327.190 31% Total 42.317.307 100% area; while medium size producers, which represent 9.7%, have 30% of the land area; and large producers, which represent 2.9%, have 32% of the land area.25

AGRICULTURE FINANCING

In Colombia, agricultural financing is low. Agricultural loan portfolio has represented only 4% - 5% of total portfolio since 2000 (Figure 3), and Colombia has one of the lower ratios when compared to other Latin American Countries (Figure 4). Agricultural loan portfolio in 2013 amounted US $6.6 billion.

Figure 3 Evolution of % GDP Agri /Total GDP and Figure 4 Comparison with LAC

% Agri Portfolio/Total Portfolio

Source: Finagro. Source: Colombian Farmer´s Society (SAC).

Disbursements to agricultural sector amounted US $3.7 billion in 2013 and were made to 278,025 farmers, 88% of them, small farmers.26 The main lenders to farmers are large commercial banks, mainly Banco Agrario de Colombia (BAC), the public owned bank. BAC lends mainly to small farmers with funding from Finagro27 (agricultural second-tier bank), at subsidized interest rates and based on the intensive use of the Agricultural Guarantee Fund (FAG); while private banks lend mainly to medium and large commercial farmers, using their own funds, at market interest rates. In 2013 BAC disbursed US $1.3 billion (36% of amount disbursed) to 258,563 farmers (93% of total farmers that received loans in 2013) (Figure 5).

25 Ibid.

26 Finagro (2014).

27 Banco Agrario is the main user of Finagro´s funding.

Figure 5 Disbursements to agricultural sector in 2013

Source: Finagro (2014)

BAC is the largest funder, serves mainly rural areas, and has the largest rural presence of all FI in Colombia, however, it is insufficient for the potential and needs of the sector. Although 87% of subsidized loans (567,700) were made to small farmers in 2012, they reached only 16% of total of small farmers in Colombia (3,510,546) and the other 84% do not have access to formal lending28 (Table 3, Figure 6). If small farmers obtain credit from informal lenders they have to pay an average interest rate of 274% Annual Effective29.

Table 3 Farmers with loans in 2012 Figure 6 Distribution of Agricultural loan portfolio

Moreover, subsidized loans require a burden of documentation and BAC has operational difficulties, especially in smaller and remote municipalities.

28 Leivobich (2013).

29 Econometría (2008).

Farmers with loans

% Farmers with loans

Small Farmers* 567.700 16% Medium Farmers 79.750 20% Large Farmers 2.250 2% Total 649.700 16%

* Subsistence and Small

Funding from private FI is limited due to the lack of knowledge in the assessment of risk and risk management of farming; the need for long-term loans with grace periods based on crop cycles; and because private FI cannot compete with the offer of subsidized credit with capped interest rates to end users. This is more critical in the case of small producers, which are perceived by FI as an even riskier segment.

Agricultural Portfolio balance at subsidized interest rates amounted US $5.9 billion in 2012. Small farmers represented 29%; medium farmers, 38%; and large farmers, 38% (Table 4, Figure 7).

Table 4 Agricultural portfolio balance in 2012 Figure 7 Distribution of Portfolio 2012

4. FINANCIAL INTERMEDIARIES IN COLOMBIA

According to the International Monetary Fund (IMF), “Colombia has a broad financial system, dominated by complex financial conglomerates and with a variety of intermediaries. The financial health of financial intermediaries appears sound, with healthy balance sheet of corporate and households, strong credit quality, and profitable banks”…funding is stable, relying mostly on customer deposits and only minimally on short-term wholesale funding. At end-March 2012, the capital adequacy ratio (CAR) was 15.3 percent (regulatory minimum of 9 percent)… Colombian banks appear resilient to a variety of shocks. Their substantial net interest income serves as solid cushion against the effects of losses related to credit risk, while their reliance on stable deposits for funding helps guard against liquidity shocks.” 30

Financial intermediaries in Colombia are mostly Commercial Banks, followed by Financial Companies (FC), both supervised by the Financial Superintendence of Colombia (FSC); Cooperatives, that are supervised by the Superintendence of the Solidary Economy (SSE) and Microfinance NGOs and others, which are not supervised.

30 IMF (2013), Pg. 5

Portfolio Balance US (million) Distribution Smaller Farmers* 1.703 29% Medium Farmers 2.234 38% Large Farmers 1.960 33% Total 5.898 100%

* Subsistence and Small

COMMERCIAL BANKS AND FINANCIAL COMPANIES

During the last seven years, the banking industry in Colombia has experienced a recomposition, due to the transformation of microfinance NGOs and cooperatives into banks and to the entrance of new foreign financial intermediaries into the local market. As a result, as of 2013, the Colombian banking system is formed by 24 commercial banks, of which 14 are locally-owned and represent 76.4% of the total assets of the banking system, and 10 foreign banks whose assets represent 23.6% of the total assets of the banking system. Within the local banks, there is one public bank, Banco Agrario de Colombia (BAC) which serves mainly rural areas and has the largest rural presence of all FI in Colombia. Bancamía and Banco WWB converted from microfinance NGOs into commercial banks in 2008 and 2011 respectively; Coopcentral was a Cooperative that became a bank at the end of 2013. Regarding financial and leasing companies (FC), 22 are locally owned, some of them by the financial conglomerates that also own commercial banks (Table 5).

Table 5 Commercial Banks, Financial and Leasing Companies in Colombia

Portfolio of commercial banks amounts US $131 billion, of which 57% are commercial loans, 28% consumer loans, 11% mortgage and 3% are microloans (Figure 8).

Total Assets

(USD $ K)

Ownership Operating Income

(USD $ K)

1 Bancolombia $46.156.383 Local 1 Leasing Bancolombia $842.578 2 Banco de Bogotá $29.398.603 Local 2 Compañía Tuya $387.939 3 Davivienda $24.054.792 Local 3 Finamérica $89.927 4 BBVA $17.888.863 Spain 4 GMAC Colombia $78.430 5 Banco de Occidente $14.133.153 Local 5 Serfinansa $75.302 6 Banco Agrario $9.846.782 State Owned 6 Leasing Bolivar $69.105 7 Banco Popular $8.513.079 Local 7 Coltefinanciera $59.610 8 Colpatria $8.384.351 Canada 8 Factoring Bancolombia $58.565 9 GNB Sudameris $7.116.388 Panamá 9 Leasing Corficolombiana $55.994

10 Helm Bank $6.658.930 Local 10 Macrofinanciera $52.437 11 Corpbanca $6.409.823 Chile 11 Giros y Finanzas $51.498 12 Banco Caja Social $5.263.086 Local 12 Dann Regional $32.667 13 Av Villas $4.949.624 Local 13 Leasing Bancoldex $28.416 14 Citibank $4.436.215 USA 14 Internacional $26.463 15 Bancoomeva $1.361.641 Local 15 Financiera Cambiamos $19.158 16 Pichincha $1.158.079 Ecuador 16 La Polar $8.641 17 HSBC $704.789 China 17 Pagos Internacionales $6.144 18 Bancamía $645.458 Local 18 Opportunity International $5.477 19 Finandina $639.840 Local 19 C.A. Credifinanciera $5.377 20 Falabella $619.236 Chile 20 Ripley Cia de Fciamiento $3.525 21 Banco WWB $424.530 Local 21 Credifamilia $2.835 22 Coopcentral $312.346 Local 22 Mi Plata $98 23 Banco Procredit $121.606 Germany Source: La Nota.com (2014) 24 Banco Santander $108.247 Spain EXCHANGE RATE (COL $/US $1) $1,950

Source: Asobancaria (2014) Offer Microcredit

Bank Financial and Leasing

Companies

Figure 8 Portfolio of banks in 2013

Source: Asobancaria (2014).

COOPERATIVES

As of 2013 there are 181 cooperatives supervised by the SSE; six cooperatives supervised by the FSC and one cooperative bank, recently converted to a commercial bank (Coopcentral), totaling 188 cooperatives with a total of 2,780,958 members31.

Cooperatives have an important regional and local presence in small-rural municipalities and are familiar with rural populations. Despite this characteristic, and although cooperatives have rural clients and small farmers among its members, they have focused mainly on consumer loans which represent 73.3% of their total portfolio. Portfolio of cooperatives amounts to US $5.3 billion32 (Figure 9).

Figure 9 Portfolio of Cooperatives

Source: Confecoop (2014).

31 Supersolidaria (2014).

32 Confecoop (2014).

MICROFINANCE NGO AND OTHER MFI

Since 1980, microfinance NGOs have been the leaders in the microfinance industry. There are 20 microfinance NGOs in Colombia. The most successful have been the five institutions affiliated to the Women’s World Banking Network, of which three have recently converted into banks 33 and it is expected that one other, Fundación Mundo Mujer (FMM), will become a bank later this year. Figure 10 shows market share of microfinance industry in Colombia.

Figure 10 Microfinance industry – Market Share (Gross Microloan Portfolio) 201334

Source: Asomicrofinanzas (2014).

Excluding banks, microfinance NGOs are the leaders of the microfinance industry (Figure 11).

Figure 11 Microfinance industry – Market Share (Gross Microloan Portfolio), excluding banks 2013

Source: Asomicrofinanzas (2014).

33 Corporación Mundial de la Mujer Medellín and Corporación Mundial de la Mujer Colombia merged and partnered with BBVA to create Bancamía in 2008 and WWB became Bank WWB in 2011.

34 Microloans of Banco Agrario (BAC) are made with funding from Finagro (agricultural second-tier bank) at subsidized interest rates of around 10% annual effective; while all other financial intermediaries lend with their own funds at an average interest rate of 36% annual effective. The FSC establishes the interest rate ceiling for microloans, which is currently 51.18% annual effective. Financial intermediaries can also charge an additional MSME Commission of 7.5% for microloans up to US $1,260 and of 4.5% for larger microloans.

The portfolio of microfinance NGOs and other microfinance institutions is worth approximately $1.1 billion35 (Table 6).

TABLE 6 Main Microfinance NGO and other microfinance institutions

5. MARKET STUDY

The market study was carried out among 29 FI and included eight commercial banks, one financial company, seven microfinance institutions and 13 cooperatives. This section presents the criteria used to select the FI and the methodology used to carry out the market study.

35 Mix Market, “Colombia Market Profile”, http://www.mixmarket.org/mfi/country/Colombia

Microfinance NGO Portfolio

(USD $ K)

Borrowers

1 Fundación Mundo Mujer $493.563 503.153 2 Fundación de la Mujer $289.996 331.491 3 Contactar $63.635 69.024 4 Interactuar $50.045 31.195 5 Fundación Amanecer $21.566 11.020 6 Fund. M. Santodomingo $6.891 4.983 7 Actuar Caldas $6.853 5.257 8 Actuar Tolima $6.548 9.090 9 Actuar Quindío $4.897 2.897

10 Fundesmag $3.947 1.406 11 Fundación Alcaraván $3.683 2.422 12 Fundesan $3.373 2.990 13 Fundescat $2.492 1.587

Other Microfinance Institutions

Portfolio

(USD $ K)

Borrowers

1 Crezcamos S.A. $65.683 68.516 2 Activos y Finanzas S.A. $18.370 4.500 3 ECLOF Colombia SAS* $1.850 1.400

Source: Mix Market (2014)

* Source: Survey http://www.mixmarket.org/mfi/country/Colombia

SELECTION OF FINANCIAL INTERMEDIARIES

The purpose of the market study is to determine which financial intermediaries (FI) would have the greater potential to expand A2F to rural areas and could be the best partners for USAID in a strategic alliance. The selection criteria used to select FI for the market study were:

1. Geographic coverage and infrastructure: a wide geographic coverage and an extensive network of distribution channels are important to be able to offer financial services in rural areas.

2. Innovative distribution channels: The use of low cost distribution channels, such as banking agents

(BA) and mobile banking, is important to be able to reach rural areas were transaction costs are higher.

3. Target Market: Microentrepreneurs and low income population are one of their target markets.

The knowledge of the market in the base of the pyramid and the interest in fulfilling their financial needs increases the interest and potential to attend clients in rural areas.

4. Financial products: products targeted to small farmers and/or low income rural populations indicate that FI is already reaching rural markets.

In the case of Cooperatives, additional criteria were their size and if they have previously received TA from the GoC to strengthen their institutional and financial capabilities and to develop “Semilla Cooperativa”

Using these criteria, 29 FI were selected; eight banks; one FC; 13 cooperatives and 7 microfinance NGO (See Annex 1). Contact Details of Selected FI are in Annex 2.

METHODOLOGY

The methodology to carry out the market study included five approaches: presentation of the DCA Credit Guarantee scheme to FI, survey, interviews, field visits and research. DCA presentations to 26 FI, 23 surveys, 11 interviews, 3 field visits and research about 20 FI were completed (See Annex 3).

1. DCA Presentations

The purpose of the DCA presentation was to introduce this credit guarantee scheme to FI, as one of the possible means of partnering with USAID. The presentations were made together with USAID and included a context about USAID's strategy in Colombia for the coming years, focused on promoting rural development and the expansion of financial services in rural areas and for vulnerable populations, building alliances with financial partners.

2. Survey

The purpose of the survey was to gather detailed information and opinions from decision makers in selected FI, in order to determine the extent to which FI are interested in attending rural markets, the difficulties they face, the factors that would facilitate provision/scale-up of financial services in rural areas and their interest in forging an alliance with USAID. The survey included seven sections (See complete survey in Annex 4):

I. Generalities: includes contact details and information such as years of operation, geographic coverage and infrastructure.

II. Portfolio: includes total portfolio, microcredit portfolio and micro agro loans portfolio.

III. Products: a list of the FI’s products such as loans, deposits, insurance, transfers and remittances IV. Target Market: includes a review of target market of each FI.

V. Rural Areas: includes details about whether the FI provides financial services outside urban centers.

VI. Agricultural Financing: includes the main difficulties related to providing loans to the agricultural sector and factors that would facilitate agricultural lending.

VII. Strategic Partnerships: discusses whether the FI is interested in forging an alliance with USAID and, if so, key contributions from USAID and from FI.

To facilitate DCA presentations to FI and filling out surveys by FI’s management teams, support was requested from Asomicrofinanzas and WOCCU. Asomicrofinanzas organized two meetings36 and WOCCU organized one.37

3. Interviews

During April and May, 11 interviews were conducted with the management teams of selected FI.

Criteria in selecting the FI to interview included strategic importance, geographic coverage, and experience in attending rural and agricultural markets.

4. Field Visits

Three field visits were made to three cooperatives with presence in small/rural municipalities, to visit clients that they are servicing in rural areas: i) to the Cooperative Coofisam in the municipalities Garzón and Gigante in Huila, in February; ii) to the Cooperative Coocreafam in the municipality El Peñol in Antioquia, in April; and iii) to the Cooperative Microempresas de Colombia in the municipalities of Urrao and Betania in Antioquia. In this last cooperative a BA was also visited. The visits were organized by WOCCU, which is providing TA to these cooperatives in the implementation of “Semilla Cooperativa” a savings and loan product targeted to rural populations. These field visits were important to understand the capacity of cooperatives to provide financial services in rural areas.

36 Asomicrofinanzas organized one meeting in Bucaramanga with four FI and another meeting in Bogotá with 20 FI in April/14.

37 WOCCU organized one meeting in San Gil (Santander) with 12 cooperatives in May/14.

5. Research

Research was carried out in order to complete the market study analysis, based on information requested from the FI, such as presentations and annual reports; on information published by specialized agencies, such as Mix Market and FOMIN; and from the FI’s web pages.

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6. RESULTS OF THE MARKET STUDY

This section presents the results of the market study, classified into the seven sections of the survey.

Results are analyzed by three groups of FI: banks and financial companies, microfinance NGO and SAS, and cooperatives38. Detailed results per FI can be found in the annexes at the end of this document.

GEOGRAPHIC COVERAGE AND INFRASTRUCTURE

Banks and financial companies have the largest geographic coverage, with presence in an average of 614 municipalities and 24 departments. Microfinance NGOs also have an important coverage, while cooperatives have a limited regional coverage (Figure 12).

38 Banks & FC include: Bancamía, Banco de Bogotá, Banco WWB, Bancolombia, Davivienda, Procredit and Finamérica.

Microfinance NGO & SAS include: Fundación de la Mujer, Fundación Mundo Mujer, Contactar, Interactuar, ECLOF, Microcrédito AVAL and Fundación El Alcaraván. Cooperatives include the thirteen cooperatives selected for the market study.

Semilla Cooperativa

Semilla Cooperativa Group in a rural area of the municipality of Betania in Antioquia. The loan advisor visits the group once per month to collect savings and loan payments. Semilla Cooperativa is based on a technology that consists of a mobile phone or tablet, connected online to the Cooperative’s System and a small printer. The receipt of the deposit or payment is printed and a message is sent to the client’s mobile phone. At the end of the day the loan advisor goes to a branch or BA to deposit the money collected during the day.

Figure 12 Geographic Coverage by type of FI

Four Banks, Bancolombia, Banco de Bogotá, Davivienda and Bancamía, have presence in more than 74% of the municipalities of Colombia39 (Figure 13).

Figure 13 Geographic Coverage

Regarding infrastructure, banks have a diversity of distribution channels: branches, banking agents (BA) and ATM. The BA’s network has exceeded the number of branches, and the ATM’s network is also very important (Figure 14).

39 In Colombia there are 32 departments and 1,102 Municipalities.

Figure 14 Infrastructure

The largest banks, Bancolombia, Davivienda and Banco de Bogotá, have mobile based products targeted to low income populations: Davivienda launched the E-Wallet Daviplata in 2011; Bancolombia launched the E-Savings Ahorro a la Mano in 2013: and Banco de Bogotá recently implemented the E-Savings product Transfer Aval.

In the case of microfinance NGOs and cooperatives, their infrastructure is based on branches. Only the cooperative Microempresas de Colombia has 32 BA in small municipalities.

“San Remo” Supermarket, BA of Microempresas the Colombia in Urrao Antioquia.

Geographic Coverage and infrastructure for every FI is in Annex 5.

PRODUCTS

Banks, FC and cooperatives offer loans, deposits and insurance products. Four banks (Bancolombia, Banco de Bogotá, Davivienda and Bancamía) and most of the cooperatives also offer transfers and remittances services. Microfinance NGOs offer loans and insurance products, but not deposits, because they are non-supervised institutions. Products offered by every FI are in Annex 6.

TARGET MARKETS

The primary target markets of selected Banks & FC are microenterprise, medium company, small company and large companies. The reason for this result is that of selected Banks & FC, three are microfinance institutions (Bancamía, Banco WWB and Finamérica). The main target market of the largest banks, Bancolombia, Davivienda and Bancamía, are large companies, governmental and institutional banking, medium companies and individual customers (Figure 15).

In the case of cooperatives, the most important target markets are microenterprise and small companies, followed by rural markets: small-scale farmers, rural micro entrepreneurs and subsistence farmers. Microfinance NGO are more focused; after microenterprise, their primary markets are rural and agricultural. Target markets of every FI are in Annex 7.

Figure 15 Target Markets FI

PROVISION OF FINANCIAL SERVICES IN RURAL AREAS

In this market study rural areas were defined as the capacity of FI of providing financial services outside urban centers. From the 29 FI, only three do not provide financial services outside urban centers (Citibank, Procredit and Cootrapeldar).

Usually, FI offer their full range of portfolio of products in both urban and rural areas. However, the largest banks, not focused on microfinance, attend to mainly commercial farmers, and they offer traditional products not targeted to the base of the pyramid. For this reason, although the offer may be present, the low income rural population frequently continues to be excluded. The opposite is the case of microfinance NGOs and some cooperatives, whose offer is targeted to attend to the needs of rural low income populations (Figure 16).

Detailed information about provision of financial services in rural areas for every FI is in Annex 8.

Figure 16 Provision of financial services in rural areas

LOANS TO MICROENTERPRISES

Loans to microenterprises were considered an important aspect in the market study because they show to what extent FI are interested in attending low income populations. The survey asked about clients and portfolio of loans to microenterprises and also about micro agri loans to find out if the FI already has experience in attending small/subsistence farmers.

1. Clients and Portfolio

Colombia’s microfinance industry is dominated by four FI; two microfinance banks, Bancamía and Banco WWB (B.WWB); and two microfinance NGOs, Fundación Mundo Mujer (FMM) and Fundación de la Mujer (FMujer).

Figure 17 Microloan clients and portfolio

2. Micro agri loans

From the selected FI, nine offer micro agri loans: two banks, Bancamía and Finamerica; five microfinance NGOs, FMM, FMujer, Contactar, Interactuar and ECLOF; and two cooperatives, Coofisam and Comultrasan (Figure 18).

Figure 18 Micro agri loan clients and portfolio

3. Portfolio at risk beyond 30 days (%)

Average portfolio at risk beyond 30 days (PAR30) of microcredit in Colombia was 6.3% in 201340. Two cooperatives and one microfinance NGO had the lower PAR30, Coofisam (0,5%), Contactar (1,8%) and Comutrasan (2,4%); and five were above the average: Cooptenjo (14%), Bancolombia (9.9); Cofinal (9.4%), Finamérica (9,3%) and Servimcoop (8%). Finamérica was also above the average in its micro agri loan portfolio (15%).

Figure 19 PAR30 micro loans and microagri loans

4. Microloan Conditions

In Colombia micro loan interest rates are regulated. The interest rate ceiling is certified by the FSC every year, in September. Currently, the annual effective interest rate for micro loans is 51.18%.41 Additionally, FI can charge an additional fee of 4.5% or 7% for loans up to US $3,000 to recognize the higher costs of making small loans.

Average interest rates of Microfinance NGOs are 40.29% for microloans, and 42.35% for micro agri loans; followed by banks & FC (32.33% and 36.99%, respectively). Cooperatives charge the lower interest rates (Figure 20). These interest rates, in the case of microfinance NGOs, explain why they can make the smaller average loans (Figure 21) and, in the case of cooperatives, lower interest rates reflect their lower costs of capital.

40 Asomicrofinanzas (2014).

41 SFC (2013).

Figure 20 Average annual interest rate of micro loans and micro agri loans

The Average amount of microloans offered by both, banks and financial companies, is US $4,062.

Excluding Procredit, a bank with an SME focus42, the average microloan is US $1,750. In the case of cooperatives it is US $1,600, and in the case of microfinance NGOs it is US $1,250. This result reflects that it is more difficult for banks to make small-value loans due to higher operating costs (See Figure 21).

Figure 21 Average amount of micro loans and micro agri loans

The average term of micro loans and micro agri loans is 23 months in the case of Banks & FC.

Cooperatives have a longer average term of 29 months and microfinance NGO lend at an average term of 17 months (See Figure 22).

42 Average loans of Procredit amount US $15,616.

Figure 22 Average term of micro loans and micro agri loans

Detailed information about loans to microenterprises for every FI is in Annex 9.

AGRICULTURE FINANCING

This section of the survey had two questions: i) which are the main difficulties/challenges that FI face to provide agricultural lending, and 2) which would be the factors that would facilitate them to provide agricultural lending. FI were asked to choose the top five difficulties and the top five main factors, ranked from 1 to 5, were 1 is the greatest difficulty or the factor that would be most likely to facilitate them to provide agriculture financing.

1. Main Difficulties

Limited collateral, systemic risks of agriculture (weather, price, etc.) and high credit worthiness assessment costs (loan advisors, technology, etc.) are among the top five difficulties to provide agri financing (See Figure 23).

In the case of banks, lack of collateral is the main difficulty, also lack of infrastructure in rural areas (none/low coverage), and lack of agricultural technical know-how (crop cycles and yields, etc.), showing that this type of FI would need credit guarantees, co-financing for the expansion of infrastructure and capacity building.

In the group of cooperatives, other major difficulties are lack of agricultural technical know-how and lack of experience in providing financial services to the agricultural sector. This is because although some cooperatives are in small municipalities, their primary focus has historically been on consumer loans;

furthermore, from the 13 cooperatives included in this market study, only two offer microagri loans (Comultrasan and Cofisam).

In the group of microfinance NGOs difficulties to identify bankable opportunities in the agricultural sector and lack of infrastructure in rural areas are also among the top five constraints.

Figure 23 Main difficulties to provide agriculture financing

Annex 10 contains detailed information per FI.

2. Main Factors that would facilitate the provision of agriculture financing

Main factors that would facilitate agricultural lending are a credit guarantee and technical assistance on how to assess farmer credit…