Alternate information SME microfinance
Alternate information SME microfinance
Business Model Description
Take advantgae of emerging financial technology and innovations in traditional business models for the information generated by the growing social and economic activities (e.g., e-commerce transactions, invoice data, and customer surveys) to support credit scoring, financial education to expand SMEs' access to credit.
Expected Impact
This initiative intends to support credit scoring and financial education to expand SMEs' access to credit.
How is this information gathered?
Investment opportunities with potential to contribute to sustainable development are based on country-level SDG Investor Maps.
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Country & Regions
Sector Classification
Financials
Development need
> Financial inclusion contributes to society's progress, offering solutions to meet the needs of individuals and companies. In 2019, 31M adults had at least one financial product, but usage rates (71.8%) and rural penetration (63.8%) were still low (11).
Policy priority
> Banca de las Oportunidades is a program created by the National Government, administered by Bancoldex, to promote access to financial services for families in poverty, micro-entrepreneurs, SMEs to reduce poverty, promote social equality and stimulate economic development
Gender inequalities and marginalization issues
> 0.2% of women living in rural areas work for financial intermediation, while for urban areas, this percentage is 2.3%.
Investment opportunities
> New business models leveraged on technology give rise to new forms of financial products. Currently, the FinTech industry poses investment opportunities, such as cryptocurrencies, sending money abroad, InsurTech, among others (13).
Key bottlenecks
> Agents do not know the products they need or do not understand them, or do not meet the traditional credit standards. Financial institutions do not have tailored products to meet the needs or cannot offer them due to risks and costs (16).
Corporate and Retail Banking
Development need
> SMEs face a scenario of low credit supply and high-interest costs. For example, microcredits have decreased by 3.73% over the past five years (2).
Policy priority
> The national government created the National System of Support for SMEs to strengthen access to credit for 334,875 companies each year with an investment in non-reimbursable resources and refundable and guarantees for approximately USD$ 7B (17).
Gender inequalities and marginalization issues
> 625k female founders/leaders of SMEs (36).
> 1.5M of informal SMEs that could formalize their operations in order to have access to the financial system (37).
Investment opportunities
> The IDB has identified 703 projects that use technology to work with small and medium-sized enterprises and with excluded or underserved consumers for credit lending and microfinance in LatAm (Brazil 230, Mexico 180, and Colombia 84 initiatives) (14).
Key bottlenecks
> 8% of SMEs do not keep accounting records, nor separate accounts of the owner's money, nor apply strategic financial planning. This informality is incompatible with banks' traditional risk analysis creating a barrier for credit access (15).
Consumer Finance
Pipeline Opportunity
Alternate information SME microfinance
Take advantgae of emerging financial technology and innovations in traditional business models for the information generated by the growing social and economic activities (e.g., e-commerce transactions, invoice data, and customer surveys) to support credit scoring, financial education to expand SMEs' access to credit.
Business Case
Market Size and Environment
> USD 1 billion
10% - 15%
> 70% of SMEs use electronic invoices. The transactions generated represent 5.4% of the Colombian GDP (USD$ 333B). Therefore alternative financing market in Colombia is a USD$ 17B opportunity (20)
> Latin America has the most considerable CAGR for factoring in the world (11%), followed by Europe, the biggest market (18). Furthermore, the total insurance market in Colombia is expected to grow 11.7% (19).
Indicative Return
> 25%
According to investors interviewed, an expected return profile would result in an IRR between 30% and 50% for a 7 to 10-year investment.
Investment Timeframe
Medium Term (5–10 years)
According to local investors interviewed, an expected holding period for SMEs' investments in microfinance would be between 7 to 10 years.
Ticket Size
USD 1 million - USD 10 million
Market Risks & Scale Obstacles
Market - Highly Regulated
Impact Case
Sustainable Development Need
> In Colombia, there are 2.5M SMEs (90% of existing companies), produce 30% of GDP, and employ more than 80% of the workforce. 50% of them will fail after the first year, and only 20% will survive its 3rd year because 62% do not have access to loans, the key to their growth (1). SMEs face a scenario of low credit supply and high-interest costs. According to Colombia's Financial Superintendence, microcredits have decreased by 3.73% over the past five years (2).
> Traditional information (e.g., sales, growth potential, among others) is not sufficient for banks to assess the creditworthiness of SMEs, and banks incur economies of scale when evaluating loans for SMEs (3).
> Colombia Responde is a program that offers the tools for SMEs to improve their liquidity issues due to COVID-19. But those that have accessed these credit lines were those in the financial system (5).
Gender & Marginalisation
> 625k female founders/leaders of SMEs (36) would benefit from a microfinance model.
> 1.5M of informal SMEs could formalize their operations to have access to the financial system (37).
Expected Development Outcome
> Raise SME's 5-year survival rates from 43% to 80%, a notable impact for the national productive apparatus (4).
> Enhance firm productivity as SMEs that have access to loans could improve its Total Factor Productivity (TFP) by 8.0%-9.0% (6).
> Bancoldex has been in charge of providing these tools for the Colombia Responde program, providing credits against cycles. Like this initiative, many other financing modalities may arise for SMEs, especially after the arduous process that has been social distancing.
Gender & Marginalisation
> Women founders or leaders of SMEs will continue to expand their companies with other financing forms that will be less expensive.
> The new forms of financing that microfinance can provide will encourage companies to formalize to expand without having to attend to the high costs of the banks.
Primary SDGs addressed
9.3.2 Proportion of small-scale industries with a loan or line of credit
9.5.1 Research and development expenditure as a proportion of GDP
> 62% of Colombian SMEs have no access to financing. On average, 50% of SMEs do not survive the first year, and only 20% survive the third year (31).
> Colombia, as of 2018, invested in I&D 0.24% of its GDP.
> Latin America has the largest CAGR for factoring in the world (11%), and the total insurance market in Colombia is expected to grow 11.7% (19). The government has not yet published its specific goals on the inclusion of SMEs.
> As for 2030, Colombia expects to invest 0.84%.
Secondary SDGs addressed
Directly impacted stakeholders
People
Gender inequality and/or marginalization
Corporates
Public sector
Indirectly impacted stakeholders
People
Gender inequality and/or marginalization
Corporates
Outcome Risks
> Reduces perceived demand from banks.
> Displacement of local structures that finance SMEs.
Impact Risks
Execution risk: > Digital literacy from both entrepreneurs and credit FinTech's to trust new information sources and give out loans that hadn't otherwise been given out.
Stakeholder participation risk: > Lack of a comprehensive regulation covering financial transactions originated from companies that are not regulated by financial superintendence.
External risk: > Due to the new modalities, new regulations may be included that may alter some services' operation. The preceding could either limit or facilitate specific financing modalities. > Limited access to the internet in different parts of Colombia for smooth alternative data capture.
Gender inequality and/or marginalization risk: > Companies previously relegated by the financial system may have difficulties in their credit history.
Impact Classification
What
Positive and important outcome due to the possibility of different financing possibilities.
Who
Various stakeholders in SMEs, currently looking for working capital.
Risk
Limited penetration due to lack of knowledge and technology adoption.
Impact Thesis
This initiative intends to support credit scoring and financial education to expand SMEs' access to credit.
Enabling Environment
Policy Environment
(National Development Plan (2018-2020)): Seeks to strengthen access to financing for SMEs to promote entrepreneurship and reduce informality by strengthening Banca de Oportunidades supporting cheaper corporate microcredit by Bancoldex and creating a comprehensive market for electronic invoice trading (22).
(The CIIF and MinTic): Defines a roadmap for taking advantage of new technologies and innovations to achieve gains in efficiency and competition in the financial services industry, promoting access for individuals and companies (23).
(The regulatory LatAm 'Sandbox'): Seeks to promote financial innovation by expanding service offering and facilitating access to financial products (24).
Financial Environment
Financial incentives: > Sempli, Finaktiva, and other VC backed alternative finance platforms give out credits from USD$ 7M and USD$ 100M to SMEs that did not have access to finance before (22). > Pomona Impact has invested in ePesos, a Mexican microfinance company, which provides services to the population most excluded by the banking system. They offer payroll advances, taking care of the financial lives of employees of large Mexican companies (10).
Regulatory Environment
(Decree 2443 of 2018): Regulatory adjustment that allows financial entities supervised by the Financial Superintendence to invest in the capital of financial innovation companies (23)
(Decree 1154 of 2020): MinHacienda and MinComercio issued rules for the circulation of the electronic sales invoice as a security in the national territory. This will make it possible to boost local businesses as it will move capital faster to SMEs (28).
(Decree 1357 of 2018): Regulated the collaborative financing activity (Crowdfunding) in Colombia that did not exist before. With the above, small and medium-sized companies could access natural persons' debt or capital resources in issues of less than COP$ 1.7B (~USD$ 482M)(29).
(Decree 1235 of 2020): Establishes the special conditions for the issuance of securities in the secondary market by affected companies within the State of Economic, Social and Ecological Emergency framework. Also, it regulates the issuance of debt securities in the stock market by SAS (30).
(Article 171 National Development Plan): FinTech may obtain a certificate to operate temporarily, with minimum capital requirements (38).
Marketplace Participants
Private Sector
703 fintech start-ups in LatAm, over 50% of which were launched between 2014 and 2016, received over USD$ 186M in VC funding last year, and one-third of that went to start-ups (25). Companies such as Lisim anticipate current and potential clients' behavior to reduce the risk and uncertainty involved in the client (non-payment, fraud, desertion, among others).
Government
The Financial Superintendence is the entity in charge of supervising the financial and stock exchange systems and promoting the solvency and discipline of the Financial System.
Multilaterals
Bancoldex is a state-owned bank that operates as Colombia's entrepreneurial development and export-import bank, providing financing and specialized financial products.
Target Locations
References
- (1) ElEspectador (2019) - El 62% de las PYMES colombianas no tiene acceso a financiamiento. Accessed June 10th 2020
- (2) Asobancaria (2018) - Supervivencia de las MiPyme: un problema por resolver. Accessed June 15th
- (3) Asobancaria (2016) – Regulación y gestión de riesgos financieros. Accessed June 10th 2020
- (4) DNP (2005) – Censo económico. Accessed June 11th 2020
- (5) Bancoldex (2020) – Portafolio líneas de crédito para enfrentar el Covid-19. Accessed August 21st 2020
- (6) Giang et al (2019) - The Causal Effect of Access to Finance on Productivity of Small and Medium Enterprises in Vietnam. Accessed August 21st 2020
- (7) Digital Holding: https://holding.digital/.Accessed February 8th
- (8) Konfio: https://konfio.mx/.Accessed February 8th
- (9) First Circle: https://www.firstcircle.ph/about/our-story.Accessed February 8th
- (10) Pomona Impact's Portfolio: ePesos - https://www.epesos.com/acerca-de.Accessed February 8th.
- (11) La República (2020) - El índice de inclusión financiera de Colombia se ubicó en 85,9% a finales de junio de 2020
- (12) Banca de las Oportunidades (n.d) Who are we?
- (13) Colombia Fintech (2018) - Invertir en Fintech, una oportunidad en Colombia
- (14) Colombia Fintech (2016) Fintech Companies in Colombia: an investment opportunity with potential growth
- (15) Rodriguez (2015) - Las barreras para acceder al crédito formal dificultan la subsistencia de los microempresarios
- (16) Cano et. Al (2014) - Inclusión financiera en Colombia
- (17) MinComercio (2019) - Sistema Nacional de Apoyo a las micro, pequeñas y medianas empresas. Plan de Acción 2019
- (18) FCI (2020) Annual Review 2020
- (19) EMIS (2019) Colombia insurance sector 2020/2021
- (20) El Mundo (2014) – Colombia es tercero en el mercado de factoring. Accessed May 22nd 2020
- (21) Mesfix (2019) – Crowdfactoring: qué es y cómo funciona. Accessed May 21st 2020
- (22) Plan Nacional de Desarrollo (2018 – 2020)
- (23) Colombiafintech (2019) - Fintech en el Plan Nacional de Desarrollo de Colombia. Accessed May 22nd 2020
- (24) Legis (2019) - Esta es la propuesta de reglamentación del 'sandbox' regulatorio. Accessed May 22nd 2020
- (25) Colombiafintech (2019) - Overview of Fintech in Latin America: Startups, Funding and Opportunities. Aceesed May 21st 2020
- (26) Forbes (2019) - Auge de constitución en el país de empresas ‘fintech’. Accessed May 20th 2020
- (27) National Planning Department (2019) - 2030 Agenda in Colombia
- (28) ColombiaFintech (2020) Government regulates circulation of the electronic sales invoice as a security in Colombia
- (29) LatamFintech (2020) The new rules for Crowdfunding in Colombia
- (30) Legis (2020) Government regulates the issuance of debt securities in the stock market by SAS
- (31) Colombia Fintech (2020) 62% of Colombian SMEs have no access to financing
- (32) MisionPYME (n.d) The regions speak
- (33) DNP (2005) – Censo económico. Accessed June 11th 2020
- (34) La República (2019) - Mipymes representan 96% del tejido empresarial y aportan 40% al PIB
- (35) La Republica (2019) - Al menos 10,7 millones de colombianos ganan el mínimo o menos actualmente
- (36) Franco-Ángel et al. (2019) Caracterización de las pymes colombianas y de sus fundadores: un análisis desde dos regiones del país Estudios Gerenciales vol. 35, N° 150, pg. 81-91
- (37) Portafolio (2019) - En el país, seis de cada 10 empresas son informales
- (38) Colombia Fintech (2020) - Congreso de Colombia aprueba fast-track de licencias para Fintechs