ATTACHMENT_7.a_USAID_SUPPORT_FOR_FINANCIAL_DEVELOPMENT_IN_COLOMBIA_2004-2013.pdf

7 NOVEMBER 2014

This document was produced for review by the United States Agency for Internacional Development. It was prepared by Diana Parra Correa.

USAID SUPPORT FOR FINANCIAL

DEVELOPMENT IN COLOMBIA

2004-2013 i

USAID SUPPORT FOR

FINANCIAL DEVELOPMENT IN

COLOMBIA

2004-2013

7 NOVEMBER 2014

PREPARED BY:

DIANA PARRA CORREA

OLGOONIK

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 of the United States Government.

ii

TABLE OF CONTENTS

List of Acronyms and Abbreviations ............................................................................................................................. v

1. Introduction

2. Background

3. Diagnostic

4. Estrategy

5. Results

5.1. Regulation and Institutionality

5.1.1. Capital Markets

5.1.2. Financial Intermediaries

5.1.3. Risk Management

5.2. Financial InfrastructurE

5.2.1. Banking Agents and Branch Expansion

5.2.2. Promotion of Mobile Banking

5.2.3. Advances in Coverage Expansion

5.3. Supply of Financial Products

5.3.1. Credit

5.3.2. Saving

5.3.3. Insurance Products

6. Pending Agenda

6.1. Regulation and Institutionality

6.2. Infraestructure

6.3. Products

7. Conclusions

8. Annexes

8.1. Microfinance program

iii

8.2. Village Banking

8.3. Savings and Credit Groups

8.4. Promoting a Savings Culture

9. Bibliography iv

LIST OF ACRONYMS AND ABBREVIATIONS

ADAM USAID Municipal Alternative Development Program (initials in Spanish) AFS Agricultural Financial System AGF Agricultural Guarantee Fund Fondo Agropecuario de Garantías (The state credit guarantee provider for loans in the agricultural sector) AMV Autorregulador del Mercado de Valores (Colombian Securities Industry Self-Regulatory

Organization) (initials in Spanish) ATM Automatic Teller Machine BAC Banco Agrario de Colombia S.A. (Only bank owned by Colombian government) BCS Banco Caja Social BdO Banca de las Oportunidades Program (A program sponsored by the GoC to promote use of banking services by the population) BMC Bolsa Mercantil de Colombia (Colombian Mercantile Exchange) (initials in Spanish) BVC Bolsa de Valores de Colombia (Colombian Securities Exchange) (initials in Spanish) CAF Corporación Andina de Fomento (Multilateral Development Bank for Latin America)

(initials in Spanish) BA Banking Agent CCT Conditional Cash Transfers CD Certificate of Deposit CIFIN Central de Información Financiera (a private credit reporting service provider in Colombia)

(initials in Spanish) CRCC Cámara de Riesgo Central de Contraparte (Colombian Central Counterparty Risk

Clearinghouse) (initials in Spanish) CRR Certified Reference Rates (interest rates for consumer lending and separately for microcredit lending periodically that are certified by the SFC as the market reference rates)

CSEDP Companies Specialized in Electronic Deposits and Payments (Sociedades Especializadas en Depósitos y Pagos Electrónicos)

CSR Corporate Social Responsibility DPS Departamento para la Prosperidad (formerly Acción Social) (an executive agency of the

GoC charged with promoting social welfare) (initials in Spanish) EAR Effective Annual Rate ESA Electronic Savings Accounts FI Financial Institutions FINAGRO Fondo para el Financiamiento del Sector Agropecuario (The national development bank for the agricultural sector) (initials in Spanish) FNG Fondo Nacional de Garantías (The public credit guarantee provider for loans in the commercial and services sectors) (initials in Spanish) FOGACOOP Fondo de Garantías de Depósitos de las Cooperativas de Ahorro y Crédito (The GoC administrative entity that provides deposit insurance for the financial cooperatives) FOGAFIN Fondo de Garantías de Instituciones Financieras (The GoC administrative entity that provides deposit insurance for the financial services sector) FTA Free Trade Agreement FTT Financial Transaction Tax GDP Gross Domestic Product v

GoC Government of Colombia KYC Know Your Client LA Latin America LADC Latin American Developing Countries MABS USAID Micro-enterprise Access to Banking Services Program (MABS) MIDAS USAID Investment for Sustainable Alternative Development Program (initials in Spanish) ML/TF Money Laundering/Terrorism Financing MoA Ministry of Agriculture and Rural Development MoF Ministry of Finance MSME Micro, small and medium enterprises MTIC Ministry of Tourism, Industry and Commerce NGO Non Governmental Organization OTA Over the Air PEB Periodic Economic Benefits PEF Private Equity Funds PFM Pension Fund Managers PoS Point of Service PPP USAID Public Policy Program SBSA Small Balance Savings Accounts SCG Savings and Credit Groups SEDPES Sociedades Especializadas en Depósitos y Pagos Electrónicos (New type of FI recently created to offer electronic deposits only) (initials in Spanish).

SES Superintendencia de la Economía Solidaria (GoC administrative agency that oversees financial cooperatives) SFC Superintendencia Financiera de Colombia (GoC administrative agency that oversees the financial sector) SME Small and medium enterprises SSA Simplified Savings Account TA Technical Assistance TAP Technical Assistance Provider TCBS USAID Trade Capacity Building Support Program TDA Títulos de Desarrollo Agropecuario (Agricultural Development Securities) (initials in Spanish) TES National debt instruments (initials in Spanish) UARIV Unidad para la Atención y Reparación Integral a las Víctimas (Unit for Comprehensive

Victims’ Assistance and Reparations) (public entity, initials in Spanish) UMIC Upper Middle Income Countries (World Bank Classification) VB Village Banking WDI World Development Indicators (World Bank) WEF World Economic Forum WOCCU World Council of Cooperatives vi

USAID Support for Financial Development in Colombia 2004 - 2013 November 2014

1. INTRODUCTION

The document presents the support provided by the United States Agency for International Development – USAID to the Colombian Government to promote financial development in the country during the period of 2004 – 2013.

USAID Support for Financial Development in Colombia began during the Free Trade Agreement negotiations (FTA) between the United States Government and the Colombian Government (GoC) in May 2004.1 Its objective was to help stimulate basic fundamentals in order to increase financing available to the productive sector, primarily for SMEs, and to increase and expand financial inclusion. USAID cooperation focused on supporting needed reforms in regulatory framework, strengthening institutionality, developing policy instruments and the financial intermediaries´ ability to serve low-income sectors.

USAID cooperation was provided through four programs: Trade Capacity Building Support – TCBS (Programa de Apoyo al Fortalecimiento de la Capacidad Comercial – FCC) (2004-2006); More Investment for Sustainable Alternative Development-MIDAS (Programa Más Inversión para el Desarrollo Alternativo Sostenible – MIDAS) (2006 – 2009); Program for Municipal Alternative Development-ADAM (Programa Áreas de Desarrollo Alternativo Municipal – ADAM) (2006 – 2009) and the Public Policy Program-PPP (Programa de Políticas Públicas – PPP) (2010-2013).

This document was created at the end of 2013 under the Public Policy Program and was completed under the contract with Olgoonik. It was written based on the reports produced under the four cooperation programs, primarily using quarterly and annual reports and presentations. It was also based on a report contracted for with Marulanda Consultores, which report documents part of the history of USAID cooperation. Further, it was based on studies carried out by USAID for the GoC and results provided by the Banca de las Oportunidades Program (BdO). Finally, outside statistics and sources were also consulted, primarily from Asobancaria, the World Bank and the World Economic Forum.

This is an appropriate point to express thanks for the valuable information provided by the Colombian Government, through the Banca de las Oportunidades, as well the review and comments to this document made by Marulanda Consultores and Miguel Arango, who led the GoC support for the promotion of financial development through the USAID cooperation programs.

Following this introduction, this document is organized into six additional chapters. Chapter 2 explains the background events that gave rise to USAID´s cooperation for financial development in Colombia.

The Diagnostic in Chapter 3, presents the state of financial development in 2005 in order to put the principal bottlenecks that needed to be addressed into context. Chapter 4 presents the strategy that USAID implemented through the four programs to support the GoC. Chapter 5 presents the advances in financial development obtained in the areas of regulation and institutionality, financial infrastructure and product supply. The Pending Agenda in Chapter 6 presents the issues that require further effort in order to continue improving financial development in Colombia. Finally, Chapter 7 presents the principal conclusions. Detailed information about certain results can be found in the annexes at the end of the document.

1 Negotiations were carried out between May 2004 and February 2006. Thereafter, it was submitted to the two countries´ respective congresses for ratification.

2. BACKGROUND

Negotiations for the FTA with the United States, as well as the negotiations for other trade agreements (European Union, MERCOSUR, among others) brought to the forefront the importance of Colombia implementing a series of specific and consistent actions towards creating a definitive and significant increase in its competiveness. Indeed, only to the extent that Colombia´s productive sector could rely on an environment that allowed it to be productive and competitive would it be possible to take maximum advantage of opportunities and minimize any negative impact that liberalizing commerce in Colombia might have.

During the US-Colombia FTA negotiations, the obstacles requiring resolution in order to improve Colombia´s competiveness were identified. Lack of access to financing, primarily for SMEs, which impacted SMEs´ productivity and investment decisions was among those obstacles. Additionally, the areas where the United States Government would support the GoC through cooperation projects financed by USAID with non-reimbursed funds were identified. Further, in the “Roundtable for Trade Capacity Building” (“Mesa de Fortalecimiento de Capacidades Comerciales”) cooperation projects were agreed to with the objective of supporting Colombia´s financial development.

Additionally, it was agreed that these cooperation projects would focus on supporting the areas considered critical to enable the financial sector to mobilize financing resources. Thereby, these financing resources could become a true support for increasing competitiveness, primarily by strengthening the regulatory and institutional framework of the financial system (capital markets, financial intermediaries and risk management) and also by expanding infrastructure and products available.

3. DIAGNOSTIC

In 2005, the World Bank published a memorandum regarding the basics for competitiveness in Colombia. This memorandum highlighted lack of access to financing as one of the factors affecting competitiveness. This report summarized the state of the Colombian financial system as follows:

“The Colombian financial system is now better provisioned, better capitalized, more profitable, and more liquid than during the crisis of the 1990s. But the recovery has not helped to increase loans to parts of the private sector without access to international banks, nor to develop and deepen capital markets. Between 1998 and 2002, loan portfolios declined in real terms and banks increasingly invested in government securities. Since 2003, lending portfolios have been growing in real terms in all segments except housing finance. Private capital markets have developed somewhat, but continue to be characterized by low liquidity and insufficient depth, while the government debt market has developed substantially. Colombia has one of the longest local currency government bond yield curves in Latin America, second only to Mexico. The government is, by far, the biggest domestic bond issuer, representing about 80 percent of the total volume negotiated in the markets. The domestic credit to the private sector in Colombia, as a percentage of GDP, is at very low levels, only slightly higher than Guatemala but one-third that of Chile and one-seventh that of China. The lack of access to financing, especially longer term, forces domestic firms to obtain financing through the use of supplier credit and short-term financing, which limits their growth and expansion.” 2

Indeed, the domestic credit to the private sector as a percentage of GDP was around 21.5per cent in 2004 (Graphic 1), among the lowest when comparing Colombia to other Upper Middle Income Countries (UMIC) (Graphic 2).

Graphic 1 Domestic Credit to the Private Graphic 2 Domestic Credit to the Private Sector in Colombia Sector, Upper Middle Income Countries (UMIC)

Source: Banco de la República Source: World Bank

In 2005, business financing through the capital markets (bonds, corporate shares) did not reach 2per cent of the total resources required to finance activities3 and there were very few investors willing to invest in venture capital such as private equity funds and angel investors. As a result, equity-financing opportunities were very limited. On the other hand, bank loans represented 40per cent of received financing resources, followed by supplier purchase loans and the reinvestment of profits4, limiting long term financing, primarily for SMEs.

Procedural requirements to issue financial instruments in the capital markets were complex, slow and costly and as a result created a negative incentive to issue investment instruments. This hindered foreign investment in the market. At the institutional level, the Superintendence of Securities held supervisory control of the capital markets, and the Superintendence of Banking held supervisory control of financial intermediaries. This created information asymmetries and increased transaction costs.

In the case of financial intermediaries, financial institutions (FI) maintained an infrastructure with little to null coverage in remote municipalities with low population density. This was based on branches concentrated in large urban municipalities and medium to high-income zones (73 per cent of banking branches were located in municipalities with more than 100,000 inhabitants). In 2006, 309 of the 1,102 municipalities in Colombia (28 per cent of the total) had no financial coverage (Graphic 3). Banco Agrario de Colombia – BAC, the only government owned bank, primarily served those municipalities that did have coverage. Private banking only had a presence in 281 municipalities whereas BAC had a

2 World Bank (2005), Pág. 50.

3 Fedesarrollo (2004).

4 Fedesarrollo, Business Opinion Survey (Encuesta de Opinión Empresarial).

presence in 689 municipalities. As a result, in 2006 there were only four Points of Service (PoS) for every 10,000 adults and 9.7 PoS for every 1.000 Km2 (Table 1).

Graphic 3 Coverage of Bank’s Branches 2006 Table 1 Coverage Indicators 2006

The supply of financial products for the low-income populations was limited. In 2006, only 51per cent of the adult population (14 million persons, 18 years of age or more) had at least one financial product, primarily savings accounts5 (Table 2). The number of savings accounts was 13.4 million.6 However accounts with balances of less than US $2,600 demonstrated a 50per cent inactivity rate. The principal regulatory barriers for small balance savings accounts were the compulsory investments the FI were required to make, the legal requirements governing money laundering and terrorism financing (ML/TF), and the introduction of the Financial Transactions Tax (FTT) (Box 1). The first two generated high operational costs which were passed through to clients by imposing higher initial minimum balances, higher balances to earn interest, higher fixed account maintenance fees and transaction fees. This made offering small balance savings products financially unviable. The FTT was a cost that must be assumed by the client, and as a result increased the preference for cash.

With respect to financing, interest rates controls and limits on the assets available to be offered as collateral (Box 1) restricted the availability of small loans from regulated FIs. As a result, financing for micro-enterprises was primarily served by microfinance NGOs, limited to urban areas and with low penetration rates. This is due to funding difficulties for non-regulated FIs. Indeed, in 2006 only 191,299 micro-entrepreneurs received first time loans and only 533,000 microloans were disbursed, totaling USD $857 million (Table 2). Microfinance NGOs disbursed 63per cent of the microloans (Graphic 4).

Moreover, the availability of insurance for low-income populations and micro and informal enterprises was practically non-existent and populations that were vulnerable and in extreme poverty had no access to financial services.

5 Asobancaria (2011).

6 Ibid.

COVERAGE INDICATORS 2006

% Municipalities with financial coverage 72% # Municipalities without financial coverage 309 Points of Service for every 10.000 adults 4,0

Branches 1,5 Banking Agents 0,0

ATM 2,5

Points of Service for every 1.000 km2 9,7 Branches 3,7 Banking Agents 0,0

ATM 5,9

Source: BdO with information of Superintendencia Financiera de Colombia. Data at June 2006.

0 100 200 300 400 500 600

0 - 10,000

10,001 - 50,000

50,001 - 100,000

Más de 100.000

Con oficina bancos Sin cobertura

455 98

More than 100,000

With bank's branch Without coverage

Table 2 Indicators for Access to Financial Services Graphic 4 Disbursements of Microloans by type 2006 of Financial Institution in 2006

Although in 2005 Colombia already had a definition of microcredit7, this definition was very restrictive because it defined microloans as loans up to US $8,000. Thus, the micro-entrepreneurs with greater needs had to seek credit through traditional credit lines whose requirements did not match the micro, small business sector’s characteristics, which are largely informal.8 Additionally, the Superintendence of Finance (SFC) certified only one interest rate ceiling that did not distinguish between consumer and microloans, thereby creating a lower interest rate ceiling that restricted access to credit for micro-entrepreneurs.

Difficulties accessing formal financing created the exclusion of activities and populations for purposes of receiving credit, leaving informal credit as the only alternative, at an average 275per cent effective annual rate (EAR) as the only alternative.9 This limited small businesses’ progress and fed a vicious cycle of poverty.

In the case of the agricultural sector, access to financing and other financial services was even more precarious. Financing operated through the National Agricultural Credit System (Sistema Nacional de Crédito Agropecuario)(SNCA), created in 1990. This system, currently still in effect, involves a development bank (Finagro) that grants second tier loans to financial intermediaries so that they in turn can provide financing to agricultural producers. Finagro’s resources came from the compulsory investments that the financial intermediaries were required to make (Box 1); financial intermediaries were also required to grant loans with subsidized interest rates to clients. Further, a state credit guarantee, provided by the Agricultural Guarantee Fund (Fondo Agricultural de Garantías), was created as a loan guarantee in which the borrower knows and pays the premium cost of the guarantee, and the risk covered was very high (up to 80 per cent), incentivizing adverse risk selection and the risk of default. As a result, the availability of agricultural credit was almost limited to the Colombian Agricultural Bank (Banco Agrario de Colombia) (BAC), the only existing government bank and the principal user of Finagro resources and the state credit guarantees. The loans benefited commercial farmers more than small-scale farmers and the policy focused on agricultural credit, excluding the rural and other financial

7 Law 590/2000.

8 Such as the registration in chambers of commerce and financial statements audited and supervised by an accountant.

9 Econometría (2007)10 Decree 4327 /2005.

COVERAGE INDICATORS 2006

% Adult Population with at least one financial product 51%

# Adults with Savings Accounts 13.438.110

# Microentrepreneurs with loans 612.509

# Microentrepreneurs with first time loans 191.299

# Disbursements of microloans 533.415

Amount of microloans disbursments (in millions of USD) $857

Source: BdO, Asobancaria (2011).

Bancos 34%

ONG

Microfinanciera

63%

Cooperativas 3%

335,990

183,123

13,823 Cooperatives

Banks & FC Microfinance

NGOs services. In addition to the foregoing, state subsidies for the agricultural were linked to loans, such that the only farmers who could access the subsidies were those that had access to credit.

Inadequate and inefficient risk management was added to the above resulting in further obstacles to financing, particularly for the agricultural sector. Hedging instruments to cover price, exchange rate and climate risks, such as derivatives in the basic product markets, and agricultural insurance were only just beginning to be being developed and promoted, or as yet not developed at all.

In conclusion, flaws in the capital markets, in financial intermediation and in risk management made obtaining financing on terms that could assure a constant flow for their businesses difficult for MSME’s and agricultural producers. A high percentage of the population was excluded from the financial system.

It was necessary to resolve these flaws in order to build adequate financing and promote access to a complete portfolio of financial services.

Box 1: Principal Bottlenecks in the Colombian Financial System

Interest Rate Ceilings. The Colombian Commercial Code has established since 1971 that there must be maximum limits on interest rates for debt transactions and those limits are established by the GoC through the Certified Reference Rates (CRR) (interés bancario corriente). In 2005, the maximum interest rate for microloans was 27per cent EAR, which does not allow the FI, particularly regulated FI, to cover costs and risks of granting small amount loans.

Graphic 5 Consumer and Microloan Interest Rates vs. Usury Rate

Source: Marulanda Consultores (2013).

Financial Transactions Tax - FTT. Created in 1998 as one of the measures to control the financial crisis, it began as a transitory measure but become permanent. The rate was fixed at 2 x 1.000 (0.2per cent) of all transactions, but increased in 2003 to 0.3per cent and again in 2004 to 0.4per cent. This tax has increased the preference for using cash to make financial transactions (Graphic 6).

19%

21%

23%

25%

27%

29%

31%

M ay

-0

Au g-

N ov

-0

Fe b-

M ay

-0

Au g-

N ov

-0

Fe b-

M ay

-0

Au g-

N ov

-0

Fe b-

M ay

-0

Au g-

N ov

-0

Fe b-

M ay

-0

Au g-

N ov

-0

CONSUMO

MICROC

USURA

CONSUMER CREDIT

MICROCREDIT

USURY RATE (CRR)

Box 1: Principal Bottlenecks in the Colombian Financial System (Cont.)

Graphic 6 Preference for Cash in the Colombian Economy 1992-2005

Compulsory Investments. In order to direct resources to financing for the agricultural sector, since 1990 the FI must invest in Agricultural Development Securities (Títulos de Desarrollo Agropecuario) (TDA) 7per cent of sight deposits, 5per cent of savings deposits and 4per cent of CDs. These investments create costs and inefficiencies in the management of assets and liabilities for banks, increase intermediation margins and hinder the supply of low balance savings accounts.

Restrictions on Pension Fund Investments. Resources accumulated by the Pension Fund Managers (Administradoras de Fondos de Pensiones) (PFM) during the years 1995-2006 were almost 17per cent of GDP such that the PFM became the party in interest with the greatest capacity for seeking resources from the capital markets.

However, PFM investment portfolios were limited by restrictions on permitted risks and, as a result, a large percentage of those resources (47per cent) were invested in GoC debt instruments (TES) as opposed to serving as sources of funding for the private sector.

Limited and Inefficient Legal Framework for Secured Transactions that restricted the assets susceptible of being granted as collateral mainly to real property; hindering access to credit for MSMEs and small-scale farmers.

Additionally, the absence of a well-functioning and unified collateral registry and the slow and costly procedures to enforce security rights in the event of a default by the debtor increased the risk and costs of lending for FIs. This resulted in a ranking of 83 out of 175 for Colombia among the countries in which micro-enterprises experience difficulties in getting credit (Table 3).

Table 3 Ease of Doing Business Colombia

Operational and Money Laundering Risk Requirements were so disproportionate that they rendered offering low cost products unviable for regulated FI, even savings and transactional products and services.

FI Lack of Knowledge about the market at the pyramid base and how to serve it: how to structure appropriate products for this population and how to evaluate risk for informal clients with no credit history or collateral to offer.

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Efectivo/M3 9,2% 8,7% 7,9% 7,4% 6,8% 6,7% 6,4% 7,3% 9,1% 10,2%11,5%12,1%12,5%12,6%

5%

6%

7%

8%

9%

10%

11%

12%

13%

Cash

Doing Business Rank

2007* Ease of Doing Business Rank 79

Getting Credit 83 Source: World Bank, Doing Business Report 2007.

* Among 175 economies

4. ESTRATEGY

With the goal of supporting financial development in Colombia, USAID’s strategy consisted of supporting the GoC in the development and implementation of public policy because it is under the direct control of the governmental authorities. Thus, such cooperation was focused on supporting the agenda of key pending reforms in the financial sector and in supporting the implementation of policy instruments that would facilitate the implementation of reforms. This strategy was complemented by technical assistance (TA) to the FI in the expansion of infrastructure and in the implementation of adequate financial products targeted for the unbanked population’s needs.

The strategy focused on three levels:

Regulation and institutionality Infrastructure Products

Regulation and institutionality consist of the development of an adequate regulatory framework with solid institutions and coherent long-term policies regarding financial development. It involves all stakeholders: GoC (policy makers), finance sector (capital markets and financial intermediaries) and end users (investors and clients).

The infrastructure refers to expansion of the FIs’ coverage, primarily through innovative low-cost channels, such as Banking Agents (BA) and Mobile Banking.

The products are the availability of financial products structured around the characteristics and needs of small businesses and the unbanked population, using appropriate methodologies, based on best practices, that are reflected in simple, low-cost financial products.

During the 2004-2013 period, USAID implemented the strategy through four cooperation programs with non-reimbursable resources:

Trade Capacity Building Support Program - TCBS (December/04 - December/06).

Investment for Sustainable Alternative Development Program – MIDAS (2006 – 2009) –

Microfinance Program.

Areas for Municipal Level Alternative Development Program – ADAM (2006 – 2009) -

Microfinance Program.

Public Policy Program – PPP (2010-2013) – Access to Finance Component.

The support strategy for each program was agreed to with the GoC and was based on joint work with the GoC, complementing its actions and focusing on the areas where cooperation would yield higher added value.

Box 2 USAID Cooperation Support Instruments

5. RESULTS

This chapter sets forth the advances in Colombia´s financial development for the 2004 – 2013 period, achieved with the support of the four cooperation programs. Results are divided into: regulation and institutionality, infrastructure and products.

The regulation and institutionality results refer to: i) capital markets, those sources of financing other than the extension of credit; ii) supervised financial intermediaries (banks, finance companies and cooperatives) and non-supervised financial intermediaries (NGO micro financing entities); and iii) risk management. These results consist primarily of laws, decrees and resolutions, as well as policy documents developed with USAID cooperation.

The results in infrastructure refer to the expansion of financial coverage thanks to the development of required regulation and the implementation of policy instruments that permitted the FIs to provide services through innovative channels such as Banking Agents (BA) and Mobile Banking. The results are reflected in the implementation of such channels and the advances in coverage expansion.

The strategy was implemented using the following instruments:

Studies and Diagnostics were made and were used by the GoC to make informed decisions.

International and Local Experts were engaged to support the process of drafting proposals and making policy recommendations, as well to provide TA to the FI and the GoC.

Pilot Programs were implemented to promote the expansion of infrastructure and the supply of innovative financial products. Lessons learned were useful to the GoC and other market participants.

Strategic Alliances were created between the public and private sectors that facilitated bringing in the private sector and leveraged resources.

Research and Knowledge Management to adopt best practices and lessons learned from international experiences, recommending adaptations to the Colombian context through research, study missions and international seminars.

Synergies with other Government Programs focused on marginalized populations living in poverty as a priority such as Familias en Acción, Red Juntos, and assistance for victims in order to introduce new products and distribution channels.

Synergies with other USAID Programs to carry out pilot programs and strategic alliances that benefit the populations USAID serves, such as ethnic groups.

Host Sessions to Present and Discuss Proposed Reforms to interested parties - GoC, congress and civil society - in other to build consensus.

The results in products refer to the achievements in financial product implementation and diversification focused on improving financial inclusion.

5.1. REGULATION AND INSTITUTIONALITY

The support for reforms to promote financial development was the principal focus of the USAID cooperation for the GoC. Such support was provided primarily to the Ministry of Finance (MoF) and the Superintendence of Finance (SFC) because they are the institutions responsible for the regulation and supervision of the financial system. The reforms were intended to increase flows and sources of financing for productive activities through the capital markets, the FI and the strengthening of the risk management.

5.1.1. CAPITAL MARKETS

USAID efforts were concentrated on supporting institutional strengthening and the development of a regulatory framework that would allow invigoration of the capital markets.

5.1.1.1. STRENGTHENING INSTITUTIONS

Promotion of the capital markets would require a new institutionality that was capable of carrying out the necessary reforms and adequately supervising the market. Between 2005 and 2006 USAID supported the MoF with the creation of the Superintendence of Finance (SFC)10 and of the Securities Self Regulatory Entity Autorregulador del Mercado de Valores (AMV)11, as well as in the strengthening of the supervisory capabilities of the recently created SFC.

The new SFC was the result of the merger of the Superintendence of Banking with the Superintendence of Securities. In addition to the merger, a new framework for a supervisor that would respond to new realities of the Colombian financial system was created. Its mission was to preserve public confidence and the stability of the financial system, maintain the integrity, efficiency and transparency of the capital markets, and safeguard respect for the rights of financial consumers and the due provisions of service.

With the AMV, a self-regulation model was implemented whereby the AMV functions as an independent regulator to supervise participants in the capital markets.

To strengthen supervisory capacity, between 2006 and 2008, USAID provided TA to the new SFC with respect to strengthening market supervision and supervision of the agents participating in the market, incorporating supervisory best practices. As a result, monitoring and vigilance of the capital markets was strengthened. The following should be highlighted:

Creation of a Market Monitoring Unit within the SFC.

Regulations related to the improper use of insider trading, market manipulation using false and misleading information and protection of client investors in the capital markets was issued.12

10 Decree 4327 /2005.

11 Decree 1565 /2006.

12 Decree 1121 /2008.

Additionally, supervisory practices aimed at preventing and detecting these occurrences were implemented.13

Vigilance capabilities were introduced for the capital markets within respect to conducts such as the improper use of client assets and monies, improper advice, improper sales practices, non-secure or unauthorized practices that could affect the integrity of the markets.

Regulation of broker and capital market intermediary activities were issued.14

5.1.1.2. STRENGTHENING OF THE CAPITAL MARKETS

USAID supported the issuance of legal requirements to promote Private Equity Funds (PEF), to make permitted investments by pension funds more flexible and to stimulate the equity markets in order to increase liquidity in the capital markets and allow for the development of long term financing instruments to facilitate providing financing for SMEs.

Promoting Private Equity Funds

In 2007 the decrees facilitating the development of PEFs by simplifying their creation and promoting foreign direct investment through them were issued15.16 As a result, resources invested in PEFs went from US$79 million in 2006 to US$3,394 million in 201217 (Graphic 7). Additionally, the GoC promoted the creation of a “fund of funds” called the Co-investment Fund (Fondo de Coinversión) with US$30 million earmarked to invest in venture capital funds that themselves invested in small and medium businesses; and Fomipyme, a fund earmarked to promote entrepreneurship through the investment of venture capital and seed capital with US$1.5 million. At August 2013, 41 were registered with the SFC and various SMES have obtained financing through PEFs.

Graphic 7 Resources Invested in PEFs in Colombia (in millions of USD)

Fuente: Bancoldex

13 Decree 1802 /2007.

14 Ibid.

15 Decree 2175 /2007.

16 Decree 2466 /2007.

17 Bancoldex (2012).

Making Pension Fund Investments More Flexible

In 2008 and 2009 USAID supported the development of the regulation that allowed the Pension Fund Managers (PFM) to take greater risk and further diversify Pension Fund portfolios, investing a greater portion of their resources in the capital markets18 (Box 1). The Financial Reform Law19 allowed the PFM to invest in the capital markets through a “Multifondos” framework.20

Thanks to this new regulation, financing sources available from the capital markets increased. This is reflected in the change in composition in pension fund portfolios: equity investments made by PFM regarding obligatory pension funds21 increased from 17per cent of their portfolios in 2005 to 40per cent in 2013 (Graphic 8); the percentage invested in corporate shares increased from 11per cent in 2005 to 26per cent in 2013; and investments in national and international PEFs was 4per cent of their portfolio in 2013. Percentage of portfolio investments in government debt instruments (TES) was reduced from 47.3per cent in 2005 to 40.5per cent in 2013 (Graphic 9).22

Graphic 8 Obligatory Pension Funds Investments Graphic 9 Obligatory Pension Funds Investments in

In Debt and Equity Government Debt Instruments, Corporate Shares 2005 vs. 2013 and PEF 2005 vs. 2013

Source: Calculations made with information of the SFC. Source: Calculations made with information of the SFC.

Development of Corporate Shares Market

Requirements for investing in corporate shares were relaxed for the foreign capital PEFs, promoting the development of a market in Colombian corporate shares.23 Also, requirements to list on the Colombian

18 Circular 5 /2008, SFC.

19 Law 1328 /2009.

20 The Multi-Fund Framework (Esquema de Multifondos) allows the PFMs to manage the different pension funds in accordance with the ages and risk profiles of their respective affiliates.

21 An “obligatory” pension is a compulsory payment that every worker, whether salaried or independent, must make throughout his or her life prior to retirement. The savings resulting from such compulsory payments will allow said worker to receive a monthly payment upon reaching retirement age.

22 Calculations performed with information from the SFC “Obligatory Pension Funds, Investment Portfolio”, https://www.superfinanciera.gov.co/jsp/loader.jsf?lServicio=Publicaciones&lTipo=publicaciones&lFuncion=loadConte nidoPublicacion&id=9118 23 Decree 3264 /2008, amended by Decree 3913 /2008.

https://www.superfinanciera.gov.co/jsp/loader.jsf?lServicio=Publicaciones&lTipo=publicaciones&lFuncion=loadContenidoPublicacion&id=9118 https://www.superfinanciera.gov.co/jsp/loader.jsf?lServicio=Publicaciones&lTipo=publicaciones&lFuncion=loadContenidoPublicacion&id=9118

Securities Exchange (Bolsa de Valores de Colombia) (BVC)24 and requirements for internal controls for corporate equity issuers25 were also relaxed in order to facilitate listings for the SME.

5.1.2. FINANCIAL INTERMEDIARIES

In 2005 USAID supported carrying out a diagnostic regarding the state of access to financial services in Colombia, which was used by the GoC as one of the basis to design the financial inclusion policy.

Afterwards, USAID supported the institutionalization of such policy and the development of regulation to facilitate expanding FI infrastructure, and the implementation/expansion of financial products targeted towards micro-enterprises and low-income sector, primarily, savings products, transfers/payments and credit, as explained below.

5.1.2.1. POLICY TO PROMOTE FINANCIAL INCLUSION

In 2006 the GoC’s priority was to facilitate access to financial services, particularly to microcredit.

Various alternatives were analyzed, including: the creation of a new bank, the creation of a company to operate the technological platform to support the operations of microfinance institutions (MFI) in Colombia, as well as the creation of an integral public policy to promote a favorable environment for the GoC and public and private FIs to operate actively. This was the most efficient and sustainable mechanism to achieve promotion of financial inclusion. The former alternative was that recommended by USAID and adopted by the GoC.

In September 2006, the Investment Program for the Opportunity Banking (Programa de Inversión Banca de Las Oportunidades) (BdO) was established as the executory program for the financial services access policy in Colombia26. BdO’s objective is to promote access to financial services, emphasizing low-income families to stimulate the country’s development, always seeking social equality27. Further, BdO made strategic alliances with the FI to expand access to financial services, for which the GoC made a commitment to create a sound regulatory environment and the FI made a commitment to expand their infrastructure and financial products. The principal goals of the alliance were the following:

Achieve coverage in all municipalities in Colombia.

Increase the number of persons with savings accounts by 3 million.

Disburse 5 million loans to micro-enterprises.

Increase the number of persons accessing the financial system for the first time.

During the 2007-2013 period, a large part of USAID cooperation was concentrated on providing TA to BdO in the structuring of the instruments through which policy was executed. Those instruments consisted in incentivizing the FI and they were structured under the following three modalities:

24 Circular 28 /2009, BVC.

25 Circular 38 /2009, SFC.

26 Decree 3078 /2006.

27 Banca de las Oportunidades, “Qué Somos”, http://www.bankingdelasoportunidades.com/contenido/contenido.aspx?catID=298&conID=673 http://www.bancadelasoportunidades.com/contenido/contenido.aspx?catID=298&conID=673

Subsidies for the expansion of infrastructure and supply of financial products

Project co-financing Capacity building

The objective was to facilitate expansion towards new market niches for the FI. This would reduce the start-up costs and build capabilities and knowledge. The ultimate goal was to achieve sustainable long-term supply of financial products.

USAID also supported the organizational structuring and institutional strengthening of the recently created BdO. During the 2006-2013 period, USAID provided continuous support, transferring knowledge and creating solid institutional capabilities.

The following should be highlighted:

The initial years strategic and action plans.

Regulations regarding statistical information provided by the FI, thanks to which timely and reliable statistics are available.

The design of indicators to follow up on the financial inclusion policy’s impact. As a result, since

2012, BdO publishes the Financial Inclusion Annual Report (Reporte Anual de Inclusión Financiera), using indicators that allow making international comparisons.

BdO ha tenido un impacto fundamental en la expansión del acceso a servicios financieros en Colombia y se ha convertido en una política reconocida internacionalmente como ejemplo a seguir, por sus logros y por el enfoque integral de intervención que ha utilizado (Box 3). Todos los instrumentos de política dirigidos a expandir la infraestructura y la oferta de productos que se presentan más adelante en este documento corresponden a los resultados de la ejecución de BdO.

Box 3 BdO, An Effective Policy that Generates Recognition

Principles of Direct Incentives to Offer Products

Transparency: all incentives are assigned through open invitations to bid using quantifiable evaluation criteria.

Sustainability: the FI contribute resources; make commitments to goals and to operational continuity.

Synergies: with GoC programs directed to the poor population.

…. the Banca de las Oportunidades policy, together with the efforts of the finance sector, by improving and creating innovations in its distribution channels and by structuring products better adapted to the needs of the low-income population has increased the bancarization rate and the population’s access to financial services: between July 2006 and March 2007, more than a million and a half Colombians accessed financial services for the first time, and among them, almost 550 thousand received loans (Asobancaria, 2007). Chap 5 “Availability of Financial Services and Effective Saving Allocation”, “National Report on Competitiveness 2007 – 2008”, Colombia Compite.

Cooperation……… A Colombian government program aimed at fostering financial inclusion known as “Banca de las Oportunidades” (“banking opportunities”) successfully coordinated with the tax authority and the banking sector to exempt transactions between banks and their agents from a tax imposed on financial transactions. This avoids a double tax that would likely have rendered doing business through agents unprofitable or simply too complex for either agents or banks to be bothered with. Banca de las Oportunidades also successfully coordinated with the tax authority to exempt low-value financial transactions on simplified savings accounts, such as mobile phone-based accounts. This is an example of inter-authority coordination to overcome a specific, significant regulatory barrier. G20 Financial Inclusion Experts Group-ATISG Report, Innovative Financial Inclusion: Principles and Report on Innovative Financial Inclusion from the Access through Innovation Sub-Group of the G20 Financial Inclusion Experts Group, May 2010.

Box 3 BdO, An Effective Policy that Generates Recognition (Cont.)

5.1.2.2. REGULATION TO FACILITATE INFRASTRUCTURE EXPANSION

USAID advised the GoC on the development of regulation to allow the FI to provide services through Banking Agents (BA) and Mobile Banking.

Banking Agents (BAs)

FI could only provide their services in Colombia through bank offices until 2006. This limited private FI coverage to large urban centers. Keeping in mind the BA’s potential to expand infrastructure, between 2006 and 2007 USAID advised on development of a regulatory framework to govern the implementation of the BA.28 This framework authorizes the FI to provide their services through this channel and regulate their operation and monitoring.29 In 2008, the elimination of the FTT was achieved for FI transactions carried out through BA, thereby reducing the BA transaction costs and promoting their usage.30 In 2009, USAID advised on the issuance of additional legal norms to include the possibility of opening accounts through the BA31, and later in 2012, the authorization of another type of FI to utilize this channel32 (Investment Management

28 BAs are businesses, such as retail stores or drugstores that serve as distribution channels for the provision of financial services on behalf of the FI. In this case, the FI enters into an agreement with the business to act as its BA.

29 Decree 2233/2006, External Circular 26/2006, SFC and Decree 3965 /2006.

30 Decree 086/2008.

31 Decree 1121/2009.

32 Circular 26/2011 SFC

Dissemination of Best Practices

USAID organized and co-financed two missions for GoC officials and FI executives to study the BA experience in Brazil in 2007 and two missions to study the successful mobile banking models in the Philippines (in association with the USAID MABS Program), and in South Africa in 2008.

It engaged international and local experts to advise banks, transactional and payment networks in the implementation of BA and developed an operating manual.

It supported the organization of seminars to demonstrate international experience with the mobile banking model and present its benefits among authorities, FI and cellular telephone companies.

“Colombia Incentivizes Banks to Expand Footprint to Rural Communities: Beyond leveraging public infrastructure and coordinating multisector efforts around financial access, targeted interventions to stimulate private-sector activity where market failure exists can be effective, but they must take great care in ensuring sustainability in its design. One promising case of such an approach is currently being implemented by Banca de las Oportunidades, a public-private alliance to increase financial inclusion in Colombia. Banca de las Oportunidades is spearheading an innovative program to incentivize banks to open agents in rural areas, where financial exclusion is most acute. Mireya Almazan, Bill and Melinda Gates Foundation, “Beyond Enablement: Harnessing Government Assets and Needs”, November 2010.

“Colombia and its Banca de las Oportunidades: the importance of a Comprehensive Vision - A successful strategy to promote access to microcredit should be a comprehensive and long term strategy. This is especially true for countries with underdevelopment of microfinance. The Banca de las Oportunidades Program of Colombia is a good example of such”. p 222, CAF, “Servicios Financieros Para El Desarrollo: Promoviendo el Acceso en América Latina”, April 2011.

Companies (Sociedades Administradoras de Inversión), Securities Brokerage Companies (Sociedades Comisionistas de Valores), Pension Fund Manager Companies (Sociedades Administradoras de Fondos de Pensiones), Fiduciary Companies (Sociedades Fiduciarias) and foreign exchange market intermediaries.

This regulation has been fundamental to achieving infrastructure expansion.

At December 2013, 23 FI provide their services through more than 49,181 BAs and financial coverage increased from 72per cent of Colombian municipalities to 99.7per cent. This can be observed in detail in section 5.2.1.

Bancolombia was the first bank to provide financial services through BAs in August /2006.

Photograph courtesy of the MIDAS Program.

Mobile Banking

Cellular telephones presented a great opportunity to expand access to financial services, especially in rural areas given that the penetration of cellular telephones in Colombia was almost one cellular telephone per inhabitant. Between 2010 and 2013, USAID advised on the adaptation of existing regulation to facilitate the development of mobile banking, primarily:

The authorization to introduce “over the air” (OTA) products, which permit opening accounts in a mobile telephone without the need to go to a bank office. (Graphic 11) The authorization to use USSD technology for small amount transactions, which is fundamental for mobile banking penetration in low-income populations with basic cellular telephones. 33 The introduction of rules for providing financial services through the BAs, utilizing the mobile banking channel.34

As a result, three FIs, Davivienda, Bancolombia and AV Villas, are respectively offering the following products: Daviplata, Ahorro a la Mano and Transfer Aval, each especially structured to open accounts and process transactions through cellular telephones.

33 External Circular 42/2012.

34 External Circular 53, November/2009.

5.1.2.3. REGULATION TO FACILITATE DEVELOPMENT OF ADEQUATE PRODUCT

SUPPLY

USAID’s efforts were focused on supporting the development of regulation that facilitated the supply of microcredit, small balance savings accounts and electronic deposits.

Microcredit

USAID supported the GoC in the implementation of several measures to stimulate microcredit lines:

the certification of an interest rate limit for microloans, the improvement of the…