Banking the Unbanked in Colombia

Approximately 35 percent of the Colombian adult population has no access to any formal financial services and are considered “unbanked,” according to the Colombian Banking Association. Some 79 percent of adults have no access to credit cards.

The evidence shows that most of the unbanked population earns less than the minimum wage, has higher unemployment levels than those with access to financial services, and is significantly more likely to have lower educational levels and work in the informal sector.

How do such households function? The unbanked use friends, family, or informal money lenders as sources of credit and pay significantly higher interest rates. In Medellin, for example, interest rates on a personal loan from an informal money lender can be more than 100 percent a year, compared to the 20–30 percent that might be typically charged by a commercial bank.

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To change this situation, Empresas Públicas de Medellín (EPM), the city’s utility company, launched the Financiación Social program in 2008 to provide accessible credit lines for its poorest and typically unbanked client base to purchase energy efficient appliances, IT products (e.g. computers and tablets) and undertake home improvement projects.

With support through the IDB’s Opportunities for the Majority Unit, the program uses EPM’s business platform to assess credit risk via clients’ utilities payment records. With long term knowledge of their costumers’ credit histories, EPM provides credit at more reasonable rates to eligible customers and then bills them through their monthly utility bill.

EPM has 1.9 million utilities clients, one of them being Sandra Yanette Echavarria, who used a loan obtained through the program to purchase appliances, including anew refrigerator. When finishing the payments, she plans to take out another loan to buy a water heater, as well as a laptop computer for her children.

The final impact is yet to be measured, but the program is showing good short-term results and long-term outcomes. Since 2008 EPM has issued a total of 90,000 cards and lines of credit. During 2012, Financiación Social had extended a total of $41.6 million in loans to almost 16,000 EPM clients, 84 percent of whom were from the country’s three lowest income strata and 2,000 were banked for the first time. More than half of all beneficiaries were women and around 12 percent of EPM clients had no prior credit history before the program. 

Originally, EPM had expected that clients would mostly use the loans to purchase energy efficient appliances and home improvements, but the actual results have showed that around 36 percent of clients in low-income strata used loans to get access to information technology, perceived as one of their primary needs. 

Repayment performance is reported to one of Colombia’s credit bureaus and thus helping beneficiaries build up a credit history, which should make it easier for them to obtain other forms of financing in the future. For clients like Echavarria, who is upgrading her home and building a formal credit history at the same time, the program has opened up opportunities never before available to improve the quality of life for her family.