Trial by fire

Award-winning Colombian microlender thrives despite violence, recession

By Peter Bate

If financial institutions must weather a crisis to show their mettle, Fundación Mundo Mujer de Popayán has passed the test–more than once. This Colombian microlender has not only managed to grow in a country that has suffered through two years of recession. It has even survived a 26-day-long siege laid by well-armed guerrillas and irate Indians.

The foundation, which provides loans and related services to microentrepreneurs, is based in Popayán, a small colonial city set in the mountain valley of Cauca. The valley is largely under control of the Communist Revolutionary Armed Forces of Colombia (FARC). In 1999, in one of their frequent displays of force, the insurgents cut off all roads to the city for nearly four weeks. They were joined by indigenous groups that charged that Colombian authorities were not delivering promised aid.

"No one could come in or get out of the city," said FMM de Popayán’s executive president, Leonor Melo de Velasco. No transport meant no deliveries of merchandise. No merchandise meant no sales for many of the foundation’s borrowers. And no sales meant no money to pay back loans. "What could we do? We gathered all our staff to brainstorm over what to do next. And we came to the conclusion that a poor deal is preferable to a strong lawsuit."

In fact, FMM de Popayán had been preparing for a crunch–albeit not one caused by a blockade–drafting strategies to collect payments during hard times, training their staff in negotiation techniques, offering their clients some debt relief, stretching due dates. "We learned to be flexible. We listened to clients to see what they could offer," Velasco pointed out. "Naturally, there are always a few who try to take advantage of these situations, but in general people want to meet their obligations. They know that if they pay us back, they’ll get new loans. They also know that loan-sharks will charge them more than double the interest we offer."

Inspired vision. Foresight appears to be the hallmark of this microlending institution, which was founded by a group of women community leaders after an earthquake hit Popayán in 1983. Inspired by a similar group in the neighboring city of Cali, they embraced the principles of Women’s World Banking, an international organization that helps low-income women build their own businesses and improve their living standards by offering them access to credit, information and markets.

Over the past two decades Women’s World Banking has created a network of affiliated and associated institutions that provide financial services to more than 10 million women in 36 countries around the world. Besides its work with microlenders, WWB has championed reforms at national, regional and international levels to build financial systems that will serve the working poor. In Colombia, the network consists of five WWB institutions located in Bogotá, Bucaramanga, Cali, Medellín and Popayán.

From their modest start with a few thousands of dollars in seed capital supplied by the Canadian embassy in Colombia in 1985, FMM de Popayán has bloomed to become an institution with 21,000 clients, 71 employees, three branches and plans to open five more, including one in Quito, Ecuador. Its rapid growth has not prevented it from posting a remarkably strong financial performance. Even in the middle of a recession, in a region beset by guerrillas, its ratio of delinquent loans does not exceed two percent of its portfolio.

Those achievements, attained under especially trying circumstances, helped FMM de Popayán win an Inter-American Award for Excellence in Microenterprise Development, a distinction bestowed by the IDB on institutions that provide outstanding services to microentrepreneurs in Latin America and the Caribbean.

Stop the bloodshed. In a brief speech after accepting the award at a ceremony held in October in Barcelona’s Palau de la Generalitat, as part of the III Inter-American Forum on Microenterprise, Velasco said she viewed the prize as a message of hope for Colombia. "Through our services, we feel we are contributing to stop our country from being bathed in blood, so that it may be watered with the sweat of our toil, strengthening true values like the equality of opportunities, building the road to development," she said.

Velasco has been part of the project from its very first day. In the beginning, the dentistry practice that she had built with her husband allowed her enough time to lobby for funds and support for the fledgling foundation. But as the pace picked up, she became more and more involved in its operations. In order to improve her management skills and her knowledge of accounting and banking, she went back to school to obtain a master's degree in business administration and total quality control. Eventually she became the foundation’s chief executive officer.

Like other practitioners of microfinance, Velasco’s enthusiasm bubbles over when she describes the wondrous effects that a small loan can generate. Among FMM de Popayán’s first borrowers were the women who run small produce and food stands in the city’s marketplaces. Velasco and her colleagues would tell potential clients that they could borrow as little as $50 to buy supplies at discounted prices, rather than paying the hidden interest charges built into suppliers’ credit.

For example, a tamale seller who used to purchase 10 pounds of corn could now buy 20 pounds and get her sister, her niece or her neighbor to grind it up into cornmeal. Initially that might not be a paid position, Velasco points out, but it represented the embryo of a job. If the borrower did sell more tamales and obtained higher profits, she might think about opening a second stand and employing another person to handle sales. Soon enough, it will become a small family business.

FMM de Popayán advertises its services on radio and leaflets, but even today most of its clients are referred by other clients. The foundation also sends its analysts into neighborhoods to carry out door-to-door campaigns to enlist clients.

Their loan requirements are few and simple: borrowers must be at least 18 years old, they must own their business and they must have a one-year track record. Credit analysts figure out the businesses’ cash flow and assess the value of microentrepreneurs’ home appliances to see what sort of collateral can guarantee the loans. Clients who pay back punctually their first few loans are offered automatic renewals and, as their businesses grow, they can apply for larger loans.

Individualized attention. Popayán’s well preserved colonial buildings and its celebrations of religious and traditional holidays are a regional tourist attraction, although the FARC’s mass kidnappings have discouraged many Colombians from venturing into guerrilla-controlled areas. Nevertheless, the foundation offers its clients seasonal loans to help them stock up on wares at key times of the year. And, for its best borrowers, FMM de Popayán boasts special individualized services that could be described as microlending’s answer to private banking.

With the aid of modern software and technologies, Velasco plans to introduce new services such as smart cards, factoring, post-dated checks management and home improvement loans.

One of FMM de Popayán’s most successful products is its line of loans secured by gold guarantees. In Colombia’s highland towns, like in many other places in the developing world, people traditionally have favored gold jewelry. At its branches in Popayán, Santander and Pasto, the foundation offers clients loans against their jewels. Granted, pawnshops have been doing this for centuries. But there are several differences. First of all FMM de Popayán insures the jewels against theft and fire. Second, its interest rates are less than half the prevailing ones at pawnshops. And third, rather than appraising each piece’s value the foundation’s loans represents 65 percent of the jewel’s weight in gold.

"The idea is that borrowers will feel that they got so little for their jewels that they will strive to pay back the loan and recover their property. That way you can use it again and again, whenever you need liquidity," Velasco says.

Boosting efficiency. Separately from its lending activities, the foundation also offers nonfinancial services that are largely subsidized by external donors. These services are aimed at helping their borrowers become more efficient in making and marketing their wares.

For instance, for microentrepreneurs in the apparel industry they organize meetings with suppliers, technical workshops and buying fairs to acquaint them with the latest machines, buttons, threads and needles. They encourage them to form alliances in order to compete effectively for contracts from assembly plants known as "maquilas." They teach them how to finish and pack pieces of clothing carefully, to figure out costs, to participate in a trade show and close a deal.

"We use our client database to offer these marketing services in order to help our borrowers help themselves," says Velasco. "They cover part of the cost and the institution provides the infrastructure. Eventually they will sell more goods, hire more people, and request larger loans. It’s like a chain of development."

This zeal for boosting productivity is applied to FMM de Popayán’s own operations. Its staffers regularly attend training courses and those who have received training must replicate the courses for their colleagues. Employees are offered bonuses on top of their salaries. There are bonuses for those who bring in the most clients and for those whose clients are punctual with their payments. Employees themselves can propose bonus targets, such as reducing their number of delinquent loans, or coming up with marketing ideas such as holding raffles with prizes for clients who pay on time.

The next step. Velasco believes that the logical next step for FMM de Popayán would be to become a regulated microfinance institution. The catch, however, is that Colombia still lacks a regulatory framework for microlenders. As a foundation, FMM de Popayán and its sister institutions can only offer loans but cannot take deposits. Naturally, this prevents them from tapping clients’ savings to fund their lending programs. While this represents a challenge in the best of times, in a country in crisis like Colombia, microlenders are fighting with one hand tied to their back.

The IDB is currently funding an analysis of the conditions needed to create appropriate regulatory frameworks for microfinancial institutions in Colombia, Paraguay and Peru. Velasco and her colleagues are keeping close tabs on that project, which is due to be completed by the end of 2001.

In the meantime, FMM de Popayán and the other WWB institutions in Colombia are involved in a program of the IDB’s Multilateral Investment Fund that encourages non regulated microlenders to bring their operations up to the standards expected from regulated institutions in terms of efficiency indicators, introduction of new technologies, operation manuals, accounting standards, information systems and internal controls.

"The goal is that we should behave like a bank, even though the sign on our door says we are a foundation," Velasco says. "While we will never forget that our mission is to help microentrepreneurs, we are training for the day when that change comes."

Date posted: January 2001