A Spanish-language version of this post follows the English version.

After five months of discussion, Colombia’s Financial Inclusion Bill has been approved by Congress, now only needing presidential sanction to become law. Earlier this year the country’s Minister of Treasury and Public Credit and Minister of Information Technologies and Communications filed the bill in Congress. The bill articulates a framework for the expansion of savings and payment services by engaging a wider range of providers in offering digital services.

The new law would allow for the creation of a new type of financial institution, Organizations Specialized in Electronic Deposits and Payments. These institutions can be established by individuals or legal entities, with a minimum capital requirement of $3 million, approximately 10 percent of the minimum currently required for commercial banks. The new electronic deposit and payment providers can receive capital investments from commercial banks and financial corporations.

Through the Organizations Specialized in Electronic Deposits and Payments Colombians would have access to digital payments and savings accounts, allowing users to save, send, and receive money and make other payments. Although these new organizations will not be allowed to provide any type of credit, the Minister of Treasury and Public Credit affirmed “The new law will give people that have been traditionally excluded the opportunity to build a payments and savings history that can help them access credit in the future.”

If enacted, the law could have a big impact on outreach to clients, especially in remote areas. Previously, non-banks could only issue e-money as long as it didn’t constitute deposit-taking, which meant that mobile banking services had to have partnerships with commercial banks.

The new accounts will have a simplified opening process in which the beneficiary does not have to be physically present and the only information needed is that contained in the individual’s national ID card. Furthermore, payments made from the accounts will be exempt from the 4×1000 Tax or Financial Transaction Tax, which taxes every withdrawal. The IFC identified this tax as discouraging individuals from using formal financial services.

Deposits made to the accounts have to be kept at an account administered by a commercial bank or at the Central Bank and will be guaranteed by deposit insurance through the Financial Institution Guarantee Fund.

Progress on this law is an encouraging step towards the achievement of Colombia’s broader national financial inclusion strategy launched by the government earlier this year, which established five main areas of action:

• Transaction services for excluded populations with the creation of a new simplified financial services account.
• Foster the use of financial services for households through mobile banking, improved product design taking into account specific customer needs, and the promotion of new points-of-sales terminals in commercial establishments.
• Promote access and usage of financial services for the rural sector through the revision of the current subsidy scheme.
• Greater access to credit for small and medium-sized enterprises.
• Define a financial education strategy which builds on the important progress already made.

The bill is expected to receive presidential sanction within the next month and be in operation within the next three months. With this approval Colombia joins Uruguay, whose Congress approved a similar law earlier this summer.

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Proyecto de Inclusión Financiera en Colombia cerca de Convertirse en Ley a la Espera de Sanción Presidencial

Después de cinco meses de discusión, la plenaria del Congreso de la República de Colombia aprobó el proyecto de inclusión financiera que ahora solo necesita sanción presidencial para convertirse en ley. A principios de este año el Ministro de Hacienda y Crédito Publico y el Ministro de Tecnologías de la Información y Comunicaciones del país radicaron el proyecto ante el Congreso. El proyecto establece las bases para la expansión de servicios de ahorros y pagos al ampliar la cantidad de proveedores que pueden ofrecer servicios digitales.

La nueva ley permitiría la creación de un nuevo tipo de institución financiera denominada Sociedad Especializada en Depósitos y Pagos Electrónicos (SEDPES). Estas instituciones pueden ser creadas por personas naturales o jurídicas y requerirían un capital mínimo de $5,800 millones, aproximadamente un 10 por ciento del mínimo requerido para bancos comerciales. Los nuevos proveedores de depósitos y pagos electrónicos pueden recibir inversiones en capital por parte de bancos comerciales y corporaciones financieras.

A través de las SEDPES, los colombianos tendrían acceso a cuentas digitales de pagos y ahorros lo que le permitiría ahorrar, enviar y recibir dinero y hacer otro tipo de pagos. A pesar de que estas nuevas organizaciones, por ley, no podrán ofrecer ningún tipo de crédito o financiación, el Ministro de Hacienda y Crédito Publico afirmo “La nueva ley permitirá la creación de un historial de pagos y ahorro que servirá de base para acceder en el futuro a créditos en entidades bancarias”.

En caso de ser sancionada, la ley tendría un gran impacto en la inclusión de clientes al sistema financiero, especialmente aquellos en áreas remotas del país. Previamente, las instituciones distintas a los bancos podían emitir dinero electrónico siempre y cuando dicha actividad no constituyera captación de recursos. Esto implicaba que para ofrecer servicios bancarios móviles era necesario contar con una alianza con algún banco comercial.

Las nuevas cuentas tendrán un régimen simplificado en donde la apertura se puede hacer de forma no presencial y la única información requerida es la que se encuentra en la cedula de ciudadanía. Adicionalmente, los pagos que sean hechos desde dichas cuentas estarán exentos del impuesto del 4×1000. La IFC identifico este impuesto como uno de los factores que disuaden a las personas de usar servicios financieros formales en Colombia.

Los depósitos que sean hechos a estas cuentas tienen que ser mantenidos en cuentas administradas por un banco comercial o con el Banco de la Republica. Así mismo, los depósitos contaran con la garantía del seguro de depósitos del Fondo de Garantías de Instituciones Financieras.

Esta ley es un paso importante dentro de la más amplia estrategia nacional de inclusión financiera del país, presentada por el gobierno a principio de este año y que establece cinco áreas principales de acción:

• Servicios transaccionales para población no incluida, con la creación de una nueva licencia financiera simplificada.
• Promover el uso de servicios financieros para los hogares, a través de la banca móvil, el diseño de productos a la medida de las necesidades y la promoción de nuevos puntos de uso en establecimientos comerciales.
• Promover el acceso y uso de servicios financieros para el sector rural, mediante la revisión del esquema actual de subsidios en la financiación del sector agropecuario.
• Mayor acceso a crédito para PYMES.
• Definir una estrategia de educación financiera aprovechando los importantes avances que se ha realizado en esa materia.

La ley recibiría sanción presidencial durante el próximo mes y entraría en efecto en los próximos tres meses. Colombia se une a Uruguay, que había aprobado una ley similar a principios de este verano.

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Building up a regulatory framework for the development of a microfinance market is a complex task. It requires taking into account a broad variety of topics as well as country specific needs and features. There are some internationally-applicable recommendations for the design of microfinance regulatory frameworks (CGAP 2012, ASBA 2010, and Basel 2010) but little is known about how different countries have implemented their guidelines or what the effects are of these rules in each market.

In the recently released paper “Microfinance Regulation and Market Development in Latin America,” published by the B.E. Journal of Economic Analysis & Policy, we analyze the relationship between microfinance regulatory frameworks in 17 Latin American countries and the corresponding markets’ levels of development.

One way to characterize microfinance regulations is as either general or specific rules. The general rules are devoted to regulating typical financial system issues, while the specific rules target microfinance products or institutions. Two other regulation classifications are protection rules and promotion rules. Protection rules have the goal of preserving financial system stability or protecting the financial consumer, and promotion rules aim to favor the development of microfinance services or institutions by softening the restrictiveness of the overall regulatory framework.

We find a wide variety of regulatory designs in the Latin American region. Countries such as Chile and Uruguay, for example, stand out for their lack of microfinance specific rules; though their employment of general and protection rules give their regulatory frameworks a base upon which they could build microfinance specific regulation. Other countries such as Honduras, Brazil, and Argentina have included specific or promotion rules in their regulatory frameworks, however either their level of implementation of general and protection rules is below the average of the countries examined in the report, or their frameworks have addressed microcredit but not through the specific criteria the report analyzes.

The analysis between microfinance regulatory frameworks and the level of development of the corresponding markets – which incorporated the size of the microcredit portfolio, number of clients, operative and financial efficiency of institutions, among other variables – enabled us to draw the following conclusions:

1. All four types of regulation rules – general, specific, protection, and promotion – are significantly and positively correlated with bigger microfinance markets.
2. Rules specific for microfinance are related to better MFI financial and operational performance, and better market data.
3. Both general and protection rules are significantly and positively correlated with better developed microfinance markets – specifically in terms of profitability, operational efficiency, and portfolio quality.
4. The implementation of both specific and promotion rules shows a positive and significant correlation with bigger informal, rural, and microenterprises sectors.

So, which would be the elements to consider when designing regulatory frameworks to contribute to the development of a microfinance market?

Of course there is no one formula to apply across countries, as markets and contexts differ. And more analysis (as well as more industry data) is required. However the report indicates that analyzing whether a financial system’s regulation includes ample general and protection rules is crucial for the better development of the microfinance market, preserving stability and the well-being of its clients. Introducing specific rules on microfinance services and institutions, considering the particular features of microfinance activities, could very well support institutional solvency and the employment of adequate risk management procedures. And promotion rules should be considered as a mechanism to favor market development. Regulators must be open to evaluating new actors, technologies, and methodologies for the provision of microfinance services, considering the possibility of granting them individualized treatment – in some cases lowering the usual standards for a short period of time.

To learn more about the analysis and to access the full report, click here.

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> Posted by Amanda Lotz, Financial Inclusion 2020 Project Coordinator, CFI

The Financial Inclusion 2020 campaign at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. Accordingly, this blog series will spotlight financial inclusion efforts around the globe, share insights coming out of the creation of a roadmap to full financial inclusion, and highlight findings from research on the “invisible market.”

Just imagine for a minute. You are in your late 20’s and about to go on a second date. You are really looking forward to it; after all, your date is attractive and shares your interests. Everything seems to be going great, until your date brings up his/her excellent credit score and then asks about yours. What do you say?

A recent article in the New York Times, “Perfect 10? Never Mind That. Ask Her for Her Credit Score,” inspired this scenario. When my boyfriend and I applied for our lease, naturally we talked about credit scores, as it was a part of the application process. Luckily, we were okay. But, I can see how this could be contentious for a couple if one person has a poor credit score.

While a credit score should not be a “deal-breaker,” as one interviewee suggests, this article provides evidence that the perceived value of a credit score is taking unexpected turns among younger adults in the United States.

This is good news and bad news for champions of credit reporting. On the one hand, it shows increasing awareness of the importance of a credit score. On the other hand, credit bureaus don’t want to be seen as the bad guys. For those who are pushing to use credit reporting to include people in financial systems, it doesn’t help to have a bad rap about the ways negative credit reporting can kill not only a financial dream but now a dating relationship as well! Champions of credit bureaus would much rather focus on how a credit history can be used to give people access to credit and protect them from over-indebtedness.

But what about those who have no credit history?

There is hope, according to Michael A. Turner, Ph.D., President and CEO of Policy and Economic Research Council (PERC) and a member of CFI’s Credit Reporting Experts’ Working Group. Michael points to the use of alternative data sources to build a credit history, saying that “technology and data on clients are there.” PERC and the Brookings Institution together have identified that in the U.S. utilizing positive credit reporting increased credit access by 22 percent for Hispanics and Blacks and by 14 percent for young and elderly Americans.

What potential could a similar approach hold for the underserved around the world? In one example from the Consultative Group to Assist the Poor (CGAP), many low-income clients “have access to retail credit or to post-paid utilities” long before they have access to formal credit. Including these providers in credit reporting can be highly beneficial in establishing credit histories for those who have not had access to credit. For example, the use of utility bills already occurs in some countries across Latin America, as retailers have a history of collecting and sharing payment data on both individuals and firms. Rather than using poor behavior to blacklist people, positive credit reporting— such as tracking payments of utility or telephone bills on time—offers an opportunity to further build a credit score instead of harming it. Typically, negative behavior is given much more attention than positive behavior. This demonstrates a shift to positive reinforcement.

Simple, a financial services startup, offers clients an online platform for free checking, and an extensive data analysis of client transactions and spending habits are actually shared with the client. That’s a topic for another blog post, but it underlines the influence of big data. Another financial services startup, DemystData, uses alternative data from over 50 sources to assist financial institutions in a more comprehensive credit evaluation of prospective clients. Along with financial data, they also utilize social media data sources which include Myspace, LinkedIn, Facebook, Google Plus, and Twitter.

Some see this as creative, cost-effective, and the great hope for millions of excluded people. Others see it as creepy.  Romantic partners use their intuition to decide when and how to broach potentially sensitive topics. Businesses, however, must follow clear and transparent standards of client protection and confidentiality. Alternative data sources for credit reporting can help provide a path to inclusion for many, but these innovations must go hand in hand with protecting clients from intrusive uses of data.

For more information on Financial Inclusion 2020, sign up for campaign updates.

Image credit: On Your Side Debt Relief

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