Expanding Opportunities for Rural Finance in Colombia Report No. AUS10747 Finance and Markets Practice Latin America and the Caribbean Region December 2015 Expanding Opportunities for Rural Finance in Colombia Eva Gutiérrez and Rekha Reddy This note was prepared by Eva Gutiérrez and Rekha Reddy of the World Bank’s Finance and Markets Practice, Latin America and the Caribbean Region. Invaluable inputs and contributions were received from Issam Abousleiman, Diego Arias Carballo, Jennifer Barsky, Pablo García Arabéhéty, Pedro Xavier Faz de los Santos, Douglas Randall, Vanessa Uchiyama, Pablo Valdivia Zelaya, and John Wilson. The authors also thank peer reviewers Juan Buchenau Hoth, Barbara Cunha, and Panos Varangis. © 2015 International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org The findings, interpretations, and conclusions expressed here do not necessarily reflect the views of the Ex- ecutive Directors of The World Bank or the governments they represent. The World Bank does not guar- antee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. 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Cover photo: World Bank Cover design/layout and editing: Nita Congress v Contents Abbreviations vi 1. Context 1 2.  Main Challenges 3 Limited participation of private financial institutions lending in rural areas 3 Public support programs for rural agricultural credit with perverse incentives 5 Lack of agricultural insurance to support risk management and facilitate access to credit 6 Limited range of assets used as collateral 7 Limited credit history and financial education of the rural population 7 3. Recommendations 8 Develop a vibrant ecosystem of private financial institutions lending in rural areas 8 Increase the effectiveness of public support programs for rural agricultural credit 9 Develop agricultural insurance to improve risk management and facilitate access to credit 12 Expand the range of assets eligible as collateral 13 Support the increased creditworthiness of the rural population by developing credit histories and improving financial education 15 Notes 17 Bibliography 18 vi Abbreviations BAC Banco Agrario de Colombia SEDPE sociedad especializada en depósitos y pagos (Agricultural Bank of Colombia) electrónicos (company specializing in BMC Bolsa Mercantil de Colombia deposits and electronic payments) (Colombian Agricultural SES Superintendencia de Entidades Commodity Exchange) Solidarias (Superintendence of FAG Fondo Agropecuario de Garantías Cooperative Institutions) (Public Credit Guarantee System) SFC Superintendencia Financiera de FINAGRO Fondo para el Financiamiento del Colombia (Financial Superinten- Sector Agropecuario (Financing dence of Colombia) Fund for Agriculture) TDA titulo de desarrollo agropecuario (certif- GDP gross domestic product icate of agricultural development) NGO nongovernmental organization VAT value-added tax Expanding Opportunities for Rural Finance in Colombia 1 1. Context borrowed money from a formal financial institu- tion—the same level as in 2010 (figure  1a). This The purpose of this note is to provide policy level of formal rural borrowing is also found in recommendations to improve access to credit Brazil, and is similar to the average of 11 percent for rural populations and small agricultural pro- found throughout the Latin America and Carib- ducers under financially sustainable schemes.1 bean region. It is, however, below the level reported Improving access to finance for these two groups is by Findex for Colombians in urban areas (17 per- essential in reducing poverty and inequality, and in cent). Five  percent of Colombian rural adults re- supporting a sustainable Colombian peace process ported borrowing from informal money lenders. for economic development. The ability of agricul- tural producers and rural households and firms to Although the agricultural sector remains an im- make long-term investments, take risks, and create portant source of employment, agricultural stable income streams is shaped by available finan- credit is a small fraction of the commercial credit cial products and services. When financial services provided in Colombia. The agricultural sector’s are limited, participants in the rural economy may share of Colombia’s gross domestic product (GDP) have to forgo valuable investment and income-gen- has been declining over the past two decades and erating activities and suffer the consequences of ir- accounted for 6.7 percent of value added GDP in regular consumption activities. 2014, having steadily declined over the last two de- cades. Nonetheless, it employs 16.97 percent of the As in much of Latin America, borrowing in rural Colombian population (World Bank 2014). Credit areas of Colombia remains limited. Almost a to the agricultural sector represented 7.3  percent quarter (24  percent) of the Colombian population of total credit issued by regulated financial institu- lives in rural areas (World Bank 2014). According tions in Colombia; this percentage has ranged from to 2014 data collected through the Global Findex 6.8 percent to 7.7 percent between 2002 and 2013 survey,2 13  percent of adults living in rural areas (DNP 2015). FIGURE 1:  International comparison of rural credit a. Percentage of adults borrowing from a b. Agricultural credit as a percentage of the total formal nancial institution in rural areas por olio of the regulated nancial system Colombia 2010 13 Colombia 2009 8 Colombia 2014 13 Colombia 2013 7 Brazil 13 Brazil 9 Peru 11 Ecuador 7 Uruguay 22 Peru 3 Latin America & the Caribbean 11 High-income OECD countries 17 Uruguay 15 0 5 10 15 20 25 0 2 4 6 8 10 12 14 16 Percentage Percentage Sources: Global Findex database 2014; Colombian data—National Planning Department and Banco de la Republica/FINAGRO calculations; Latin American data—Trujillo and Navajas 2014. Note: OECD = Organisation for Economic Co-operation and Development. 2 1. Context The share of agricultural credit in Colombia is to 50,000 inhabitants, and 39 percent in cities with below levels observed in other countries in the more than 100,000 inhabitants (SFC and Banca region. Colombia’s agricultural credit as a share of de las Oportunidades 2013). A combination of fac- the country’s total credit portfolio (7.3  percent) is tors—including the lower income level of the rural below the levels observed in other countries in the population, lack of expertise in lending to small ag- region (figure 1b), including Brazil (8.5 percent) and ricultural producers, and security concerns in some Uruguay (14.5 percent) (Trujillo and Navajas 2014). areas—explain these location patterns. Agricultural credit as a share of agricultural GDP has increased from 11  percent in 2000 to 32  per- Substantial opportunity exists to develop micro- cent in 2013, but is still below the 40 percent ratio of credit in Colombia. Accounting for only 3 percent bank credit to GDP. Moreover, most of the increase of the total credit provided by formal financial in- in agricultural credit has been provided to medi- stitutions as of December 2014 (Banco de la Re- um-size and large producers; small producers still publica 2015), microcredit is underdeveloped in face substantial problems in accessing credit. Some Colombia. In comparison, microcredit accounts estimates suggest that over 75 percent of small ag- for 4.6  percent, 5.5  percent, and 10.1  percent of ricultural producers lack access to formal credit total credit in Peru, Mexico, and Ecuador, respec- (Marulanda Consultores 2013). tively (Trujillo and Navajas 2014). Although there are approximately 104 microcredit institutions in Inhabitants of urban municipalities have Colombia, the microcredit sector is highly concen- 4.5 times as many physical access points to finan- trated in a few large institutions. Although rela- cial institutions as their rural counterparts. Phys- tively small in outreach and volume in rural areas, ical access points include traditional bank branches, two nongovernmental organizations (NGOs) that automated teller machines (ATMs), and third-party provided microcredit services—Banca Mia and agents (corresponsales) such as retail stores or gas sta- Fundación Mundo Mujer Popayan—have trans- tions that execute basic transactions on behalf of formed themselves into commercial banks in order a financial institution. Although the number of to access cheaper deposit funding. As in other Latin physical access points has tripled in Colombia American countries, there is a usury rate on micro- since 2009, at the end of 2013, just 27  percent of credit (52  percent as of March 2015). Colombia’s all bank branches and 18 percent of all corresponsales microcredit portfolio expanded by 5.6  percent in in Colombia were in rural areas. All Colombian 2014; this rate was slower than that for prior years municipalities now have some form of financial in- and below the growth rate of the overall credit stitution presence, either a branch or a corresponsale; portfolio (Banco de la Republica 2015). the latter, however, tend to serve remote areas and primarily provide payment and collection services Deposit warehouses and the Colombian Agri- rather than credit underwriting. cultural Commodity Exchange (Bolsa Mercantil de Colombia, BMC) provide funding for agri- Colombian commercial banks have limited cultural activities, but they are underdeveloped credit volume in rural areas, concentrating their compared to regional peers and serve medi- lending activities on more profitable urban pop- um-size and large producers. Currently there are ulations. As of end December 2013, 97 percent of four deposit warehouses (almacenes generales de depo- the commercial credit portfolio balance, 94  per- sito) supervised by the Financial Superintendence cent of consumer credit, and 94  percent of hous- of Colombia (Superintendencia Financiera de Co- ing-related credit were provided to urban areas lombia, SFC). They issue certificates of deposit with more than 100,000 inhabitants. Only Co- (CDs) and offer credit to producers that store prod- lombia’s microcredit portfolio is more diversified, ucts at the warehouse for more than six months. with 13 percent in areas with populations of fewer The BMC offers agricultural producers a platform than 10,000 inhabitants, 38 percent in cities of up for funding options through the sale of crops (spot or Expanding Opportunities for Rural Finance in Colombia 3 forward) and repurchase agreements for securities 2.  Main Challenges issued by the deposit warehouse against products stored there. However, its operations are relatively Despite Colombia’s status as a middle-income small, with a transaction volume of US$2  billion country with a relatively sophisticated financial in 2014. While this volume is far lower than that sector, its challenges in rural finance echo those observed in other large Latin American countries, of most developing countries. This section outlines this is partly due to the fact that Colombia does five key issues Colombia will need to address re- not have a futures market and that other countries lated to its supply of financial services, its public have a more large-scale, export-oriented agricul- policies, and the ability of the general population to tural sector (Arias and Lamas 2012). The BMC is access financial services. mostly used by producers and sellers of agricultural products to register their sales receipts to defer tax Limited participation of private financial payments. Transaction costs, lack of scale, and lack institutions lending in rural areas of information impede its use by small producers. Although private commercial banks operate most Colombia has a relatively developed insurance of the agents in rural areas, the Banco Agrario de sector compared to other Latin American coun- Colombia (BAC), cooperatives, and NGOs op- tries, but agricultural insurance has limited out- erate most of the branches through which credit reach and coverage. In 2013, just 1.4  percent of is provided. As shown in figures 2a and 2b, pri- cultivated land was insured despite government vate banks and the BAC, the public agricultural subsidies and reduced value-added tax (VAT);3 in development bank of Colombia, have the majority comparison, 8 percent of cultivated land is insured of traditional branches in rural areas (65 percent); in Brazil and 27 percent in Mexico. In Colombia, private banks also have the vast majority of agents the main items insured in the primary sector are in rural areas (81 percent). Although far more lim- banana, corn, forest plantations, and rice. The ited in outreach than the banks, the approximately supply of insurance products is expanding: in 2014, 3,600 member-only cooperatives overseen by the three insurance companies offered some type of ag- Superintendence of Cooperative Institutions (Su- ricultural insurance product compared to only one perintendencia de Entidades Solidarias, SES) have company in 2011. Premium values for agricultural 15  percent of the branches in rural areas. Credit insurance nearly tripled between December 2011 NGOs have 51  percent of their branches in rural and 2014; subsidies covered 67.4 percent of the total areas; these entities are not permitted to use agents cost in 2014 (Fasecolda 2014). (SFC and Banca de las Oportunidades 2013). Overall use of mobile- and Internet-based pay- The BAC is the sole provider of financial ser- ment financial products remains low in rural Co- vices in many rural communities and the domi- lombia. According to 2014 Findex survey data, just nant source of rural credit for small producers. 2 percent of Colombian adults report using “mobile The BAC is the 15th largest bank in terms of assets banking,” defined as a mobile platform for making and the largest in terms of number of offices (SFC transactions from an account at a financial insti- and Banca de las Oportunidades 2013), with 742 tution. Use of mobile money products—including branches currently in operation. At least 70 percent DD DEDO, DaviPlata, Ahorro a la Mano, and of the BAC’s bank loan portfolio must be granted Transfer—are similarly reported by just 2 percent to rural, agriculture, livestock, forest product or of adults. Only 6  percent of adults in rural areas fishery (primary sector) activities, or to agribusi- report having used the Internet to pay bills or make ness activities. For this reason, 89 percent of BAC purchases in the past year. These trends are not branches are located in rural areas, accounting for markedly different from those in the rest of the over 50  percent of all bank offices in those areas region. (SFC and Banca de las Oportunidades 2013). In 4 2.  Main Challenges FIGURE 2:  Physical presence of financial institutions in rural areas a. Percentage of total branches b. Percentage of total agents Finance companies, 9% BAC, NGOs, 10% 15% Banks (excluding BAC), SES 33% cooperatives, 15% SFC Banks (excluding BAC), cooperatives, 81% 3% BAC, Finance 32% companies, 1% Source: SFC and Banca de las Oportunidades 2013. 2014, the BAC provided 98  percent of the credit outreach to rural communities. Cooperatives in granted by the banking system to small agricul- Colombia are subject to different regulatory re- tural producers (Marulanda Consultores 2013). At gimes depending on whether they operate with non- the close of December 2013, 98.8 percent of all mi- members and whether they take deposits (table 1). crocredit in rural areas was provided by banks (the Nonmembership cooperatives are supervised by BAC), 0.8  percent by financing companies, and the SFC; the remainder are under the purview of 0.4  percent by financial cooperatives registered the SES. Deposit-taking member cooperatives are with the SFC (SFC and Banca de las Oportuni- subject to prudential requirements under regula- dades 2013). tion, but enforcement is weak given SES resource constraints. In order to increase their outreach to Colombia has a broad range of cooperatives that rural areas, cooperatives need to strengthen their offer different types of financial services, but corporate governance and improve their efficiency the system needs to be strengthened to increase and risk management procedures. TABLE 1:  Types of cooperatives in Colombia Does not take deposits Takes deposits • Specialized cooperatives without saving accounts (372) • Employee funds (1,490) • “Integral” cooperative without savings accounts (119) • Multi-purpose cooperative without saving accounts (1,222) • Specialized auxiliary institutions (38) • Associated workers’ cooperatives (621) • Savings and credit cooperatives (27) • Mutual associations (156) • Representative body (26) • Specialized credit union (144) • Public service cooperatives (15) • Multi-purpose credit union with savings and credit (36) • Economic institutions (12) • “Integral” cooperative with savings and credit accounts (6) • Undefined (11) • Financial cooperatives (5) Note: Number of cooperatives are in parentheses. All cooperatives listed offer services to members only, except for financial cooperatives. Expanding Opportunities for Rural Finance in Colombia 5 Other financial intermediaries such as deposit access several subsidies granted by the Ministry of warehouses and the BMC lack the products Agriculture and other organizations to fund invest- and network to effectively serve the agricul- ments (for inputs, commercialization, adoption of tural sector in an environment where breach of technologies, etc.), and are often targeted at specific contract has been prevalent. Deposit warehouse value chains. However, these subsidies are infre- administrators complain about their limited net- quently linked with credit initiatives, leaving recip- work and strict requirements to obtain credit (UT ients less well positioned to leverage public support. Econometria Marulanda Consultores 2014). BMC forward products require liquid guarantees on the The newly created Rural Microcredit Fund part of the seller, as contracts tend to be breached (Fondo de Microcrédito Rural) is a step in the when the market price exceeds the forward price. right direction, but will not eliminate distortions. These costs, combined with broker fees, can push The Rural Microcredit Fund provides credits for forward costs to about 10  percent of the contract amounts up to 25 times the monthly minimum value (DNP 2014). Defaults in recent years on some wage to finance agricultural and other microenter- securities transacted by the BMC have affected the prise activities in rural areas. Rates are determined institution’s standing, even though investors were by the institutions granting the credit, subject to the compensated for their losses by the exchange. Re- microcredit usury rate calculated by the SFC. In flecting these and other factors, trading volumes in contrast to other FINAGRO-managed resources, the BMC have declined dramatically. unregulated financial institutions such as credit co- operatives and microcredit institutions will be able Public support programs for rural to access the Rural Microcredit Fund. Regulations agricultural credit with perverse incentives have not yet been issued that would allow the fund to operate with its seed capital—a relatively small The current system of public support for agri- Col$7.4 billion (US$2.3 million). However, a decree cultural rural credit is rather outdated and re- issued in December 2015 (Number 2370) enables sults in subsidized lending for a small number FINAGRO to access additional funding sources of producers.4 The system includes mandatory (such as grants and loans from national, interna- investments, credit rate ceilings, and public credit tional, and multilateral organizations) to add to this guarantee schemes. Commercial banks, except for fund. the BAC, are obliged to invest a certain percentage of their deposits in certificates of agricultural de- The sustainability of the current public support velopment (titulos de desarrollo agropecuario, TDAs) re- system is questionable. Lending to small pro- munerated at below-market rates. The resources ducers is handled almost exclusively by the BAC, are made available by the Financing Fund for Ag- using TDA resources from FINAGRO. However, riculture (Fondo para el Financiamiento del Sector private banks are reducing their mandatory invest- Agropecuario, FINAGRO), a public second-tier ments on TDAs (as a share of their deposits) and agricultural development bank, to financial institu- increasing direct lending to agricultural rural pro- tions for lending to the rural agricultural sector— ducers—primarily to medium-size and large pro- particularly small producers—at subsidized rates. ducers.5 Nevertheless, due to the increase in bank Banks can also lend under the same conditions di- deposits, TDA resources are increasing (albeit less rectly to the sector instead of investing in TDAs, than the demand for those resources), straining but interest rate ceilings induce commercial banks FINAGRO’s solvency. to ration agricultural rural credit. Public banks partially fill the gap, but at a cost to the public The public partial credit guarantee fund in- sector (see discussion below on partial credit guar- duces moral hazard and often duplicates cov- antees), and relatively few producers capture sub- erage provided by agricultural insurance sidies and credit. In addition, small producers can products. FINAGRO administers the Public 6 2.  Main Challenges Credit Guarantee System (Fondo Agropecuario liability management. The BAC largely limits itself de Garantias, FAG). About 97 percent of FAG re- to lending at subsidized rates (particularly for small sources provide guarantees to small producers’ producers) against guarantees with FINAGRO credit; this is granted mostly by the BAC, a public funds and investing in government securities de- entity. In many cases, these guarantees are comple- posits for which it does not compete. Substantial op- mented by additional public credit guarantees pro- portunities for BAC improvement exist in the areas vided by subnational governments. This system has of risk management and corporate governance. reduced incentives for proper credit risk assessment and monitoring by the BAC. In addition, borrowers Lack of agricultural insurance to support are aware that their credits are covered by a guar- risk management and facilitate access to antee—which is misunderstood as insurance—fur- credit ther affecting the payment culture and reducing the demand for agricultural insurance. Default rates in Compensation provided with fiscal resources to credits guaranteed by the FAG reached 6 percent producers in catastrophic events and FAG cov- in 2014. As fees for FAG guarantees are subsidized erage limit demand for agricultural insurance. and do not cover expected losses, the fund is de- Natural disasters are the second largest source of pleting its capital, despite its annual allocation of contingent liabilities in Colombia, with annual 25 percent of FINAGRO’s earnings. losses expected of approximately US$490 million, or 0.7 percent of the national budget (World Bank The FAG needs reform beyond the recently intro- 2013). Yet catastrophic risk management products duced administrative reforms. A reform of the FAG are still relatively limited in Colombia. The gov- introduced in 2014 will prevent use of FAG resources ernment spends substantial resources on payouts with other credit guarantees and reduce access to re- after disasters rather than on financial products to sources for institutions with poorly performing port- mitigate and transfer risk before disasters. As dis- folios. It will also facilitate guarantee collection and cussed earlier, the FAG provides coverage for credit streamline administrative procedures. However, it losses, including in the event of crop losses due to will not reduce moral hazard behavior on the part of climate-related events. Thus, banks do not have the borrower, and it remains to be seen if the changes the incentive to request that borrowers purchase will promote financial sustainability. agricultural insurance, and borrowers mistake the credit guarantee (which does not eliminate obliga- The BAC has enormous potential to increase fi- tion of repayment) for insurance. nancial service penetration in rural areas given its branch network and low funding costs, but Developing the supply of agricultural insurance lacks incentives to innovate and largely operates requires government support through the provi- as a government development agency. The BAC sion of public goods and services. There is room is primarily located in rural areas largely under- for improvement in the collection, processing, and served by financial providers. Lack of competition availability of agroclimatic and price data; and provides access to cheap funding resources through development of accessible information systems re- customer deposits. In addition, all judicial deposits lated to weather, prices, and agricultural yields. have to be placed in the BAC;6 the bank also has The relevant data are not yet provided systemati- access to inexpensive FINAGRO funds, of which cally, and agricultural industry groups often have it is the largest user. However, the BAC’s securities useful historical series on costs, yields, and perfor- investments amount to about 46 percent of its total mance that are not captured centrally or available assets, which is well in excess of the average for all publicly. The fragmentation of data on weather, private banks (18 percent). Moreover, virtually all agricultural production costs, and yields impedes the BAC’s lending portfolio is covered by credit the proper design and pricing of insurance prod- guarantees, reducing its incentive for effective asset ucts. Additionally, comprehensive investments are Expanding Opportunities for Rural Finance in Colombia 7 needed in irrigation, gutters, reservoirs, and other and recorded. Under the new law, rural producers public infrastructure that mitigate the impact of may use present and future goods as collateral for climate events. a loan, including farm equipment, crops, livestock, and their proceeds. Once the goods are in transit, The Directorate of Finance and Risk in the Min- are on deposit, or have been sold, rural producers istry of Agriculture has insufficient staff for anal- may use documents of title, deposit receipts, ac- ysis. The directorate is thinly staffed to fulfill an counts receivable, or deposit accounts as security ambitious mandate, and currently staff are pri- for the original loan; for new disbursement under marily focused on supervising agricultural credit the loan or line of credit; or to secure an entirely and insurance subsidies. Very few human resources new obligation. are dedicated to work related to risk analysis. Although the new secured transactions law per- Limited range of assets used as collateral mits the borrower to finance its entire business/ag- ricultural cycle, banks are only accepting vehicles Legal uncertainty regarding land ownership re- as movable collateral. And 2015 data from Con- stricts access to finance, especially for medi- fecamaras, the Colombian network of chambers um-size and large agricultural producers which of commerce, show that less than 1 percent of the are more likely to receive loans against immov- 1.5 million guarantees registered are for an activity able collateral. Many rural borrowers do not own supporting agriculture or livestock. Most of the col- the land on which they grow crops. Even when they lateral registered are vehicles, which were already do own the land, they may have already mortgaged being used to secure loans and thus are not trig- the land to finance its acquisition. In either case, gering much new lending. the borrower cannot use the land as collateral to fi- nance its agricultural activities. Moreover, even in Uncertainty exists regarding the enforcement cases where the farmer has possession of and rights system in case of default, because it has not yet to the land, the land tenure and titling requirements been tested in court. Although the recent reform may be inadequate for financial institutions— will enable extrajudicial execution of collateral which consider real estate property unacceptable once it is fully implemented, this process could be due to an absence of effective land titling and a lack challenged in court; as such, it does not yet have of clear definition in the legislation and regulations. the confidence of the financial industry. Tradi- In such cases, gathering documentation that guar- tional collateral enforcement remains challenging antees the property or rental agreement can be one in both urban and rural areas. Doing Business data of the most time-consuming aspects of obtaining for 2014 show that legal enforcement of collateral credit in rural areas. Rural clients often must travel takes an average of 1,288 days in Bogota.7 Sub- to regional registry offices to gain access to the re- national Doing Business data available from 2010 quired documentation. show a similarly lengthy period needed to execute contracts in smaller cities such as Pasto, taking up Movable collateral reform has great potential to 1,410 days. Issues of violence, drugs, and cost to unlock credit for rural micro, small, and me- of traveling to physically isolated places further dium-size enterprises, but is not yet being used impede the execution of collateral. to its full potential. Most assets used as collat- eral by rural producers to secure a loan are mov- Limited credit history and financial able property. In the past, the use of movable assets education of the rural population was limited due to an antiquated legal framework. The new Colombian secured transactions law, ef- Given the low penetration of mobile- and Inter- fective March 2014, changed the manner in which net-based payments in rural Colombia, nearly all security interests in agricultural goods are created bills are paid in cash. Findex data for 2014 show 8 3. Recommendations that 99 percent of utility payments were made using Geographic dispersion, long distances, and low cash and just 1  percent through a financial insti- population density increase the costs of tradi- tution, inhibiting the creation of a credit history tional financial education in rural areas. Although for much of the population. Just 6 percent of rural the youth population can be taught financial edu- adults report having used the Internet to pay bills cation in schools, the cost of providing training to or make purchases in the past year. The prevalence adults in a formal classroom environment is pro- of cash-based payments in rural areas reduces the hibitive, particularly in rural areas. Technological information available to develop scoring models advances could be harnessed to provide financial and other tools to access credit. A new framework education in a cost-effective manner. designed for companies specializing in deposits and electronic payments (sociedades especializadas en depó- sitos y pagos electrónicos, SEDPEs) is expected to facili- 3. Recommendations tate financial transactions. However, even with the draft regulation,8 SEDPEs are not in a position to Policy recommendations to address the challenges provide a full range of transactional services (such detailed in this section are described below and as payroll) under equivalent conditions to those for summarized in table 2 on p. 16. other financial institutions due to distortions pro- duced by the financial transactions tax (gravamen Develop a vibrant ecosystem of private a los movimientos financieros, GMF). This tax financial institutions lending in rural areas applies to both banks and SEDPEs, but the latter are required to move money out of the wholesale Promote the transformation of rural coopera- SEDPE system in order to use it for anything else tives into a highly integrated federated network (payroll, for example), constituting an additional that operates as a rural cooperative bank system taxable step banks are not obligated to take. and is regulated prudentially by the SFC. Finan- cial authorities could identify cooperative institu- Deficiencies in the financial capabilities of the tions, or an association of cooperative institutions, Colombian population hamper demand for fi- with a strong rural presence that share a common nancial services and decision making on finan- vision and willingness to associate with other in- cial products. In addition to being less likely to use stitutions. The ultimate goal would be to establish certain financial products, those who live in rural an organization like the Dutch Rabobank or the areas are, according to data from the 2012 World Brazilian Sicredi network. Box 1 on p. 10 de- Bank–Government of Colombia Financial Capa- scribes different models of government support for bility Survey, much less likely to engage in detailed creating financial cooperative networks. financial planning behaviors than those who live in urban areas: 44 percent versus 62 percent (Reddy, Establish a program to support the transforma- Bruhn, and Tan 2013). Rural residents had slightly tion of nonregulated institutions into pruden- weaker skills in basic numeracy, less understanding tially regulated ones. Currently, there are no of the time value of money, and were less able to public programs to support the transformation of calculate simple and compound interest rates. Only credit cooperatives or microfinance institutions 24  percent of rural respondents reported being into credit and savings cooperatives. Banca de las taught by someone (a parent, relative, teacher, etc.) Oportunidades only works with regulated institu- to manage their money as opposed to 36  percent tions. The Rural Microcredit Fund managed by of urban respondents. And a 2015 survey of micro, FINAGRO could be a useful tool in this regard if small, and medium-size enterprises found self-ex- granted sufficient budget for technical assistance clusion to be the main reason cited for not utilizing activities to these institutions to obtain borrowing formal credit (Banca de las Oportunidades and accreditation. FINAGRO could also look into de- SFC 2015). veloping a technological platform for use with these Expanding Opportunities for Rural Finance in Colombia 9 institutions. The BAC could provide funding on Increase the effectiveness of public a second-tier basis to institutions receiving tech- support programs for rural agricultural nical assistance with a view to supporting their credit expansion. Interest rate ceilings for small agricultural pro- Provide regulatory incentives to the transfor- ducers should be phased out and substituted mation of institutions supervised by the SFC. with interest rate subsidies to financial institu- To ensure overall financial stability, particularly tions or an increase in mandatory TDA invest- within the cooperatives sector, credit cooperatives ments. Interest rate ceilings contribute to the exceeding a certain asset size should be supervised current market equilibrium in which few producers by the SFC. Currently, some credit cooperatives su- get loans at low rates, leaving most of the segment pervised by the SES are larger than the small banks underserved. To provide incentives for private fi- subject to the stricter regimen of SFC supervision. nancial institutions to service the segment, these While these cooperatives only take resources from ceilings need to be removed progressively. It is im- members and not from the public, the distinction portant to ensure that increases in rates are not between a depositor and a member is not always passed onto the final borrower—and/or that they clear to the public. At a minimum, an auxiliary su- are accompanied by an increase in the lending pervisory advisory model could be designed under supply to the sector—so as to secure political and which the SFC supervises cooperatives on behalf of social support of these reforms. the SES, with standards in line with those applying to banks. Concurrently, the deposit insurance cov- Introducing a subsidy in lieu of interest rate ceilings erage for these cooperatives could be increased to for institutions that decide to service the segment the same level as for banks.9 would create incentives for private financial institu- tions to increase the supply of credit. The subsidies Improve the range and quality of services pro- could be allocated through auctions depending on vided by the BMC, including attracting noted the rate charged to the final borrowers. Alterna- international investors. Initially, the BMC could tively, and in the absence of fiscal space to intro- concentrate its efforts on developing deeper spot duce subsidies, mandatory investments on TDAs and forward markets before venturing into the de- for lending to small producers could be increased velopment of new products. To that end, the BMC progressively, allocated by FINAGRO through a should expand its commercialization efforts. To system of reverse auctions. To help new players in- reduce broker fees on spot contracts, it could con- terested in lending to the segment access those re- sider creating a license for brokers that do not deal sources, FINAGRO should set the same limits on with financial products that has lower capital re- lending to credit and savings cooperatives as apply quirements and is harmonized with the require- to other public banks.10 Consideration should also ments of regional peers. The BMC could also be given to allowing FINAGRO to channel re- explore replacing current liquid guarantees on sources through microfinance and other nonregu- forward contracts with future crops registered in lated institutions, as it gains experience in operating the movable collateral registry or other movable with these intermediaries through its Rural Micro- guarantees, or an even more flexible approach in credit Fund. which the transacting parties mutually agree on acceptable guarantees. As these markets deepen Undertake an integral reform of the FAG, mi- and trading and BMC profitability increase, the grating it toward a portfolio guarantee scheme situation could attract international operators and and auction-based pricing. Generous FAG cov- noted investors; these could subsequently transfer erage limits the incentives for the BAC to conduct know-how and support the development of deriva- effective credit risk assessment and risk pricing even tive products. if interest rate ceilings were removed. Moreover, 10 3. Recommendations BOX 1:  Government support for the creation of financial cooperative networks Financial cooperatives have adopted different integrative models around the world with the goal of achieving economies of scale that will support viability while offering a wide range of services to cus- tomers. Adopted structures range from the atomized-competitive network model to the feder- ated network model. In the first model, integration is largely limited to shared publicity, lobbying, and representation. Resources are sometimes shared but without centralization. In the federated net- work model, resources and decisions are centralized, and the customer sees the network as a single entity. The federated network model of organization offers greater advantages to its members than the atomized-competitive model, and most federated financial cooperative networks outperform at- omized-competitive networks in terms of stability, financial efficiency, and market penetration (DID 2005). In fact, Rabobank and Desjardins—both federated networks—not only outperform atom- ized-competitive networks but also commercial banks. In the federated model, the cooperatives share resources and access to support (back office) ser- vices provided by a second-tier institution (the federation) which is owned by them. Integration into a network also facilitates standardization of operational systems (such as accounting and data pro- cessing), policies and norms, products, and the institutional image. Standardization contributes to better performance by promoting comparison among base units. In a federated network, contractual solidarity binds members on issues such as the regional area of operation, member size, dues, group borrowing, and cross guarantees. The most integrated networks such as Rabobank appear to be a uni- fied institution. Federated networks strengthen governance of their members through internal regulations and strategies. Network structure is characterized by democratic representation and centralized authority by an apex organization whose roles and responsibilities complement those of the base units. The federation has a surveillance function over its members, and there are established mechanisms for af- filiation and disaffiliation. The federation trains, supervises, advises, develops products, and ensures monitoring of the base units. Finally, a federated network of cooperatives often has shared ownership (continued) as rates are liberalized, more players could access para los Pequeños Empresarios, FOGAPE) auc- FAG guarantees. To limit moral hazard behavior tions guarantees at a fixed cost, letting lenders bid on the part of the borrower and the lender, the FAG based on the coverage ratio. Mexico’s development should be reformed. Migration toward a scheme bank, Nacional Financiera (Nafinsa), which sup- under which portfolios of loans—rather than indi- ports small and medium-size enterprises, auctions vidual loans—to small producers are covered by the guarantees under the portfolio approach model.11 guarantee mitigates moral hazard on the part of the borrower. Allocating guarantees through auctions FAG coverage should also be modified to incentive on the basis of the coverage requested and interest the use of mobile guarantees and agricultural insur- rate applied to the borrower would provide incen- ance. For small producers, the current guarantee tives to institutions to improve risk assessment and coverage could be modified to include only loan credit collection. For example, Chile’s Guarantee cancellation in the face of severe adverse weather Fund for Small Enterprises (Fondo de Garantía or catastrophic events that are clearly defined ex Expanding Opportunities for Rural Finance in Colombia 11 BOX 1:  Government support for the creation of financial cooperative networks (continued) in a central agency, a security fund, an insurance firm, or a brokerage that generate products, services, or other inputs which are delivered to members at the base level. Governments in many countries have actively supported the formation of cooperative networks to foster financial stability and/or maintain financial inclusion in remote areas typically served by small rural providers. In many cases, governments have raised minimum capital requirements for coopera- tives to force mergers in the sector with a view to reach scale. They have also introduced differentiated capital requirements for cooperatives in a federated network. For example, in Brazil, the minimum capital requirement for cooperatives is 13 percent, compared to 11 percent for cooperatives in a fed- erated network. Examples of financial cooperative networks created by governments and multilateral donors include the following. Albania. In the late 1990s, Albanian authorities, through a World Bank loan, supported the creation, training, and monitoring of 92 operationally sustainable financial cooperatives and their organization into a network. They also created a second-tier institution owned by the cooperatives—the Albanian Union of Savings and Credit Associations—to provide services to the network, and developed net- work procedures, governance arrangements, and methodologies. The union’s main functions were to train its members, provide funding, and collect and monitor data on behalf of the official supervisor. Austria. In the 1890s, the Austrian government took measures to support the creation of a three-tier cooperative network, Raiffeisen Zentralbank. Moldova. A World Bank loan financed the creation of rural financial cooperatives and a federation of such cooperatives in Moldova in the early 2000s. The Netherlands. In the 1890s, the Dutch government supported the creation of credit cooperatives through subsidies, later changing the policy to provide subsidies to two apex cooperative institutions; these later became Rabobank. ante. This would ensure that financial institutions would allow FINAGRO to play a role in mobi- have only covered tail risks, providing incentives lizing capital market resources similar to that of to use mobile guarantees. On the other hand, for the National Development Finance Institution (Fi- medium-size and large producers, the guarantee nanciera de Desarrollo Nacional) for infrastruc- could cover only risks other than those arising from ture. FINAGRO’s capital is already close to the weather or catastrophic events, inducing banks 10  percent minimum capital requirement cur- to require agricultural insurance to access credit. rently in place for banks in Colombia. An increase Authorities could consider subsidizing part of the in the mandatory TDA investments as proposed insurance premium, as is the case in Mexico for above may not be intermediated by FINAGRO, certain types of credits. given current capital constraints. Moreover, with additional capital, FINAGRO could expand its Capitalize FINAGRO to increase its ability to range of products to include enhancements to se- catalyze resources to the rural sector. This curitizations of agricultural or microrural credits. 12 3. Recommendations Through securitization, capital market resources regularly. Conducting technical meetings could could be mobilized to introduce competition to improve coordination of public and private efforts banks and lower interest rates for small producers. at earlier stages.12 And, by providing guarantees to the final investor as opposed to the credit originator, moral hazard Develop agricultural insurance to improve could be reduced provided the originator retains risk management and facilitate access to the equity tranche of the transaction. Securitiza- credit tion would also allow expanded credit channels to small producers by alleviating capital constraints of In addition to reforming the FAG as discussed on credit cooperatives and other small niche players p. 9, the public sector could support the devel- operating in the segment, who would obtain cap- opment of agricultural insurance products by de- ital relief through portfolio securitization. The veloping an improved agricultural information World Bank, in a project supported by the Swiss system. In some cases, producer associations and Economic Cooperation and Development Organi- other industry groups have data series on yields zation (SECO), is working with FINAGRO on pi- and prices for particular crops that could be aggre- loting one such transaction. gated with public data for a more complete picture of agricultural performance. Efforts under way The BAC needs modernization, which could be by FINAGRO to provide a central clearinghouse supported by new investors with expertise in the for data on agricultural insurance are promising. sector. The BAC’s corporate governance; credit Uruguay’s National System for Agricultural Infor- origination, credit recovery, and second-tier ser- mation (Sistema Nacional de Informacion Agrope- vices; and portfolio and market risk management cuaria) offers a good model in this regard, with a offer substantial opportunities for improvement. strong regulatory framework to access and secure The BAC is currently receiving technical assis- information, established protocols for inter-institu- tance in those areas from foreign institutions with tional coordination, political support to achieve in- substantial expertise in rural lending. However, ter-institutional cooperation, and financial support reform of current agricultural credit policies in the from the national government. dimensions discussed on p. 5 is needed to pro- vide adequate incentives to the BAC, including by Improve public sector risk mitigation strategies facilitating the entrance of capital from investors. by adjusting subsidies for insurance. High insur- In the context of the current peace process, the ex- ance prices prevent certain markets from being in- perience of Guatemala’s Banrural could provide a sured. To reduce these prices, resources should be blueprint for the BAC that would enable it to main- shifted from subsidies to producers to the provision tain its rural character and continue its service to of public goods that mitigate risks such as drains, marginalized segments while ensuring its financial reservoirs, and irrigation systems. To further im- sustainability (box 2 on p. 14). prove the market, a public-private partnership on agricultural insurance should be established, which Create a technical committee to improve coor- could provide training to both insurance compa- dination and cooperation between government nies and regulators on issues related to losses and entities with competencies in rural and agricul- reserves. Also, to enhance the capabilities of the Di- tural financing. Several public institutions in Co- rectorate of Finance and Risk in the Ministry of lombia have rural financing responsibilities. While Agriculture, staff skilled in risk mapping, proba- the heads of many of these institutions meet as bility mapping, and agroecological zoning should members of the National Agricultural Credit Com- be hired or trained. mission (Comisión Nacional De Crédito Agrope- cuario), meetings at the technical level to explain Make catastrophic insurance available to in- ongoing initiatives and strategies do not occur crease Colombia’s financial resilience and Expanding Opportunities for Rural Finance in Colombia 13 BOX 2:  Privatizing agricultural development banks: the case of Banrural, Guatemala Banrural S.A. was created in 1998 with the restructuring of the Guatemalan National Agricultural De- velopment Bank (Banco Nacional de Desarrollo Agrícola, Bandesa), a state-owned bank with extensive presence in rural areas and 86 percent of its loan portfolio in the agricultural sector. The transforma- tion from Bandesa to Banrural was part of the modernization process of the Guatemalan state and fi- nancial system approved by the Guatemalan Congress in 1997 (Alfaro-Gramajo 2003). Banrural was established as a joint public-private venture, with 30 percent of its capital provided by the state and 70 percent by the private sector (Alfaro and Alfaro 2010). Its ownership structure was designed to facilitate the active participation of civil society groups involved in the rural sector and with a strong social commitment. Its private shareholders include community groups, cooperatives, and organizations. The bank focuses on providing a wide range of financial services that facilitate pro- ductive social, investment, and consumer activities in rural areas, as well as servicing social sectors not traditionally served by the financial system (for example, indigenous groups). Banrural seeks to foster economic activity in rural areas of the country in a way that is profitable and sustainable for its shareholders, while maintaining a development objective with an entrepreneurial vision. Today it is Guatemala’s most profitable bank, and its second largest bank in terms of assets, valued at US$5.9 billion at the end of 2014 (Superintendencia de Bancos de Guatemala 2015). The bank relies on an extensive network of agents and has over 900 offices serving more than 5.7 million customers around the country; it has recently expanded to Honduras (Banrural website). Banrural offers a diverse array of products, including microenterprise credit, corporate credit, sec- ond-tier lending, and international operations, as well as a number of payment services (water, elec- tricity, telephone). First-tier lending is provided by a specialized microfinance unit, which lends through different methodologies including individual loans, solidarity groups, and communal banks. Other loan products are designed for small and medium-size farmers, consumer needs, and housing renova- tions and expansions. improve fiscal risk management for supporting fiscal losses for tail events. Alternatively, the issu- the rural sector in catastrophic events. Im- ance of catastrophe bonds could be explored.13 proving fiscal risk management could provide ad- ditional space for some of the reforms proposed Expand the range of assets eligible as in this note. The government should rethink the collateral subsidy to agricultural insurance as a percentage of the premium, and place more of an emphasis Explore the feasibility of title insurance. Title in- on subsidizing the catastrophic layer and focusing surance protects an owner’s or a lender’s financial on those most vulnerable to natural disasters. A interest in real property against loss due to title de- government institution (for example, FINAGRO) fects. It defends against a lawsuit attacking the title, could work with the Colombian Federation of In- and reimburses the insured for the actual mone- surance Providers (Federación de Aseguradores tary loss incurred up to the amount covered by the Colombianos, Fasecolda) to develop and demon- policy. Title insurance was developed in the United strate the use of an insurance product to cover States in response to deficiencies in the land titling 14 3. Recommendations system.14 Development of such a product could be the guarantee for provisioning requirements. Reg- explored in Colombia, offering protection on land ulations for provisions could be developed by de- titles that have reached certain milestones toward termining the expected loss by type of guarantee establishing property rights. Public resources could provided for commercial credit, using international offer reinsurance protection to insurers. Title in- experiences, with a haircut, until local data are surance could unleash credit to put such land into available. To gather this information, a field could production by providing protection of mortgages be included in the movable collateral registry with (box 3 on p. 16). the liquidation value of the guarantee in the event of credit default. Finalize the issuance of decrees and regula- tions supporting movable collateral reform. Ex- The BAC could stimulate the use of mobile guar- panding the range of assets that can be used as antees by being a first adopter in accepting collateral will be helpful in channeling credit to mobile guarantees other than vehicles. Banks rural areas, particularly to small rural firms. The have been resistant to register guarantees other decree regulating the enforcement of security inter- than automobiles, and the BAC could provide a ests registered in the movable guarantee registry demonstration effect to other financial institutions still needs to be issued. Also, the SFC still has to by using types of guarantees common in rural areas issue a regulation recognizing movable assets as el- in a way that improves underwriting processes. The igible guarantees and determining the treatment of BAC may consider issuing partial credit guarantees, BOX 3:  Land transfer and title insurance Where uncertainty exists over land title due to fraud or error, a legal system can protect either the cur- rent (innocent) owner or a previous owner who claims the title. The U.S. system generally awards title to the latter in the event of a legitimate claim. Thus, current owners frequently purchase title insurance to provide indemnification in the event of a loss. Alternatively, a title system could be structured such that, in the event of a claim, the current owner retains title to the land, and the claimant is indemnified. The Torrens system, which has been used in some U.S. states including Massachusetts and Minnesota, is an example of such a system. Under the Torrens system, current owners register their property with the government, at which time an exam- ination of the title is conducted. If no claims are made, title is declared to reside with the owner against all future claims, and a public fund is established from registration fees to be used to compensate le- gitimate claimants who subsequently appear. Miceli and Sirmans (1995) maintain that if land transaction costs are low, both systems are equally ef- ficient; but if they are high due to high notary fees and taxes, the Torrens system is more efficient as it allocates land to who values it more. Several U.S. states have experimented with the Torrens or other title registration systems at one time or another, but most have retreated to title recording under pressure from title insurers. Llewellyn (2008) notes that one Torrens title on a lot in New York City can render the entire block unavailable for large-scale improvement, as no lender will finance the purchase of such a lot because no New York title insurer will guarantee a Torrens title. Expanding Opportunities for Rural Finance in Colombia 15 which require that the borrower provide movables opportunity to strengthen deficiencies in financial as collateral under the new Colombian law. Doing planning and financial knowledge that are particu- so would allow the BAC to leverage its assets and larly striking in rural areas. Key competencies and incentivize the use of the new law. The BAC’s pilot standards defined should include basic financial efforts would also allow the banking regulator to concepts—such as the time value of money, cal- obtain important information on the functioning of culation of interest rates, and portfolio diversifica- the new system without creating an overall systemic tion—that are needed in choosing and managing risk for all financial institutions. financial products effectively. To improve the pi- lot’s impacts, its effects on key population segments Support the increased creditworthiness such as rural youth should be rigorously evaluated of the rural population by developing and the programming adjusted as necessary. credit histories and improving financial education Colombian authorities and other stakeholders could consider scaling up mass media interven- Introduce a general value-limit exemption for tions to disseminate key messages related to fi- balance and transaction volume for wholesale nancial capability. Providing educational content e-accounts to incentivize the use of electronic for adults in rural areas can be costly. Numerous payments. This general exemption, instead of a countries have provided financial education con- service line–specific exemption such as the one de- tent to adults through media messaging (radio, signed for bill payment collection, would enable telenovelas, text messages) as well as through en- SEDPEs to potentially compete with a full range tertainment programming, with the goals of in- of transactional services—for example, payroll creasing knowledge and promoting cultural services in rural areas. This change would alle- change. For example, those who viewed financial viate regulatory and lobbying efforts that would education messages on debt management provided be required for SEDPEs to provide additional ser- through a popular South African soap opera had vices. It would also level the playing field between significantly more financial knowledge and were SEDPEs and banks, and ideally increase compe- almost twice as likely as those who did not view the tition for a wider range of services, such as bulk soap opera with its educational messages to borrow payments, payroll, and business to business (B2B). from formal sources; they were also less likely to By so doing, the use of these services among rural gamble (Berg and Zia 2013). Banca de las Oportu- populations could be increased, and an alternative nidades has been supporting live events with some credit history for many potential borrowers cre- financial education content using popular enter- ated. Increased competition from the full partici- tainment personalities; it could consider supporting pation of SEDPEs is likely to have a positive impact a larger-scale intervention through television or for consumers and fuel innovation and ultimately radio. In addition, providing content at teachable rural financial inclusion.15 moments—when people are seeking information about financial decisions (for example, when bor- Increase knowledge of rural youth through rowing for education or for the purchase of a new school-based financial education. As the Min- home, or when preparing for the birth of a child)— istry of Education prepares to pilot national school- has been shown to have good effects, although based financial education programming across these vary based on recipient characteristics (Doi, several grade levels in Colombia, this presents an McKenzie, and Zia 2012). 16 3. Recommendations TABLE 2:  Matrix of recommendations Development Responsible challenge Recommended policy option institution Time frame Impact • Promote the association and transformation of MHCP (in Medium term High rural cooperatives into a rural cooperative bank coordination with prudentially regulated by the SFC SES and SFC) • Develop a program to support the transformation of FINAGRO, Medium term Medium nonregulated institutions into prudentially regulated Banca de las Develop a vibrant ones including through provision of technical Oportunidades ecosystem of private assistance and back office services MHCP financial institutions lending in rural areas • Transfer supervision of large cooperatives under MHCP Medium term Medium the SES to the SFC and equalize deposit insurance coverage between cooperatives and banks • Improve the range and quality of services provided BMC, MADR Short term Low by the BMC including through attracting reputed international investors • Phase out interest rate ceilings for small agricultural MHCP, MADR Short term High producers and replace with interest rate subsidies to financial institutions or an increase in mandatory TDA investments • Reform the FAG including (i) moving to a portfolio MHCP, MADR Short term High scheme and pricing base auction, (ii) offering Increase the credit enhancements on loan securitizations, and effectiveness of public (iii) reducing coverage events to avoid duplication support programs for with agricultural insurance and incentive mobile rural agricultural credit guarantees • Capitalize FINAGRO to support new product MHCP, MADR Short term High development and increased role • Reform the BAC to improve its performance, MHCP, MADR Short term High including changes in ownership structure • Create a technical committee to improve MHCP, MADR Medium term Low coordination and cooperation among public entities • Reform the FAG as previously discussed MHCP, MADR Short term High Develop agricultural • Adjust the subsidy to agricultural insurance as a MHCP, MADR Medium term High insurance to improve percentage of the premium, to place more of an risk management and emphasis on subsidizing the catastrophic layer facilitate access to credit • Develop a central clearinghouse of public and FINAGRO Short term Medium private data to improve risk mitigation • Explore the feasibility of developing a land title Fasecolda Medium term High insurance product Expand the range • Finalize the issuance of decrees and regulations SFC, MHCP Short term High of assets eligible as supporting movable collateral reform collateral • Provide a demonstration effect of how movable BAC Medium term Medium collateral other than vehicles can be registered Support the increased • Provide a general value-limit exemption from the SFC Medium term Low creditworthiness of financial transactions tax for all wholesale e-accounts the rural population • Increase financial knowledge of rural youth through Ministry of Medium term High by developing school-based financial education Education credit histories and • Promote cultural change related to financial Banca de las Medium term Medium improving financial products through mass media messaging, such as Oportunidades education entertainment education Note: Fasecolda = Colombian Federation of Insurance Providers (Federación de Aseguradores Colombianos), MADR = Ministry of Agriculture and Rural Devel- opment (Ministerio de Agricultura Desarrollo Rural); MHCP = Ministry of Finance and Public Credit (Ministerio de Hacienda y Crédito Público). Expanding Opportunities for Rural Finance in Colombia 17 Notes 1 The Colombian statistical authority (Departa- Cooperativas, FOGACOOP) highlighted that mento Administrativo Nacional de Estadísticas) de- there is scope for the deposit insurance fund to in- fines rural areas as having dispersed arrangements crease deposit insurance coverage and eliminate of homes and farms and generally lacking the for- coinsurance. mally named streets, avenues, and public services 10 Currently, FINAGRO can only lend credit and typically found in urban areas. Colombia defines savings cooperatives up to 10 percent of the given small agricultural producers as individuals whose cooperative’s capital. Bancóldex, the public bank total assets (including spousal assets) are less than supporting exporters, can lend up to 10 percent of 145 times  the monthly minimum wage and are at its capital to each institution. Regulation to address least 75 percent agricultural, or at least two-thirds this situation is currently under consideration. of whose income is of agricultural origin. 11 See OECD (2013, 30) for a description of allocating 2 Global Findex, http://www.worldbank.org/en/ guarantees through auctions. programs/globalfindex. 12 The commission’s membership consists of the ag- 3 Government subsidies range from 60 to 80 percent ricultural minister, the director of the National depending on the producer’s size and whether it has Planning Department (Departamento Nacional credit funded by public banks. VAT on insurance de Planeación), the manager of the Central Bank premium ranges from 2 to 5 percent, depending on (Banco de la Republica), two presidential appoin- whether the insurance is paid electronically. tees, and a representative of the financial institutions 4 Rural credit as used here refers to crédito agropecuario operating in the agricultural sector. FINAGRO is rural, which in Colombia is understood as credit the commission’s technical secretariat. used in the various phases of the production of agri- 13 Catastrophe bonds transfer the risk of a natural di- culture, livestock, and fishery goods; their transfor- saster to investors by allowing the issuer to not repay mation or commercialization; as well as credit for the bond principal if a major natural disaster occurs. mining, rural tourism, jewelry, and crafts. The World Bank has developed the MultiCat Pro- 5 In 1996, 91 percent of agricultural rural credit was gram, a bond issuance platform that transfers diver- granted with TDA resources compared to 26 per- sified risk to private investors. Under the program, cent in 2013 (DNP 2014). Mexico issued a four-tranche catastrophe bond (to- 6 Judicial deposits are those required by judicial taling US$290 million) with a three-year maturity order. in 2009, which was oversubscribed. 7 Doing Business, http://www.doingbusiness.org/data. 14 Title insurance is available in other countries as 8 For the draft SEDPE regulation, see http://www. well—throughout Europe and the Commonwealth, urf.gov.co/portal/page/portal/URF/Proyecto- and in Mexico—to U.S. citizens or corporations Decreto/2015/Proyecto%20de%20decreto%20 purchasing property there through U.S. insurance Reglamentacion%20SEDPES.pdf. companies. 9 A recent World Bank technical assistance engage- 15 Source: Consultative Group to Assist the Poor ment with the Cooperative Institutions Guar- (CGAP) internal commentary note on SEDPE reg- antee Fund (Fondo de Garantías de Entidades ulation, May 2015. 18 Bibliography Alfaro-Gramajo, Luis Noel. 2003. “Reverting the Marulanda Consultores. 2013. “Propuestas para Tendency in Developing Finance: The Case of Fomentar el Acceso al Financiamiento de Banrural S.A. in Guatemala.” Paper presented Pequeños Productores.” USAID Colombia, at Paving the Way Forward for Rural Finance: Bogota. 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