Carlos is not a typical bank employee. He spends most of his time on his motorbike, riding up winding dirt roads to visit farms perched high in the Colombian Andes. His clients are not typical either; they are small farmers, borrowing small sums, and they don’t go to the bank, the bank comes to them. “This is my office,” Carlos says, gesturing to the Palm Pilot he uses to log every detail of his visits.
He is a loan officer for Bancamia, a Colombian microfinance bank formed in 2008 out of two charities, with the aim of providing financial services to the country’s small businesses. “Wherever there is a small businessman unbanked and without access to credit, there will be a branch or an executive of Bancamia”, say its directors.
Microfinance has been a hot topic in the world of development for some time now, since Muhammad Yunus won the 2006 Nobel peace prize for his Grameen Bank in Bangladesh. The idea is to provide financial services, particularly loans, to those who are deprived of them – the poor. But microfinance is not just charity, its also good business. The theory is that small, poor entrepreneurs would make good debtors if only they’re given the chance. They work hard, and if you lend them a small amount of money they’ll know better than any aid agency how to invest it, and be able to pay it back – with interest. The thing that they lack is collateral.
This is the challenge for microfinance. Traditional banks don’t lend to underprivileged people in developing countries for a good reason; the poor lack collateral. How can you make sure that someone will repay a loan if that person doesn’t have title to the house he lives in or the land he farms?
This means that the poor are excluded from financial services. In Colombia only 35% of the population even have a bank account, much less a loan. The poor are often forced into the hands of loan sharks – illegal creditors who lend money at extortionate interest rates and enforce repayment with violence.
Microfinance banks try to overcome these problems by using personal relationships as a substitute for collateral. The Grameen bank uses the community to enforce the repayment of loans, putting each borrower in a five-person group which meets regularly, to encourage repayment. But in sparsely populated, mountainous Colombia, where the poorest are often displaced – people who have been forced from their homes by violence in the country’s long conflict – the community approach is less practical. Instead, Bancamia uses relationships between clients and their loan officers.
A day with Carlos
And that’s where Carlos comes in. His job, he explains, is to develop “as much knowledge as possible” about the region he covers for the bank, north of Colombia’s second city Medellin. His job is to assess new loan applications, manage the loans of existing clients, and find new customers. He looks after about 400 customers, and when somebody in his patch applies for a loan, Carlos gets on his bike and rides to see them. Colombia Reports followed him on a typical day’s work, which involves several hours of driving between far-flung farms.
Our first stop was a pig farm, at the top of a long, steep track two hours drive from Medellin. The farmer is one of Bancamia’s more well-off customers, with several dozen pigs housed in a series of brick buildings. Carlos is making a routine visit to see how the business is using the loan. He takes off his waterproof bike gear to reveal a smart suit, and produces a clipboard full of forms. He examines the livestock, and asks dozens of detailed questions. How much do the newly born piglets weigh? Where are they bought and sold? What is the average litter per sow? Carlos used to work as a farm manager and is an expert on agriculture and livestock. He loves his job because there’s always something different on each farm.
It is this emphasis on farming that makes Bancamia unique. Agriculture accounts for almost a quarter of employment in Colombia, and 11% of GDP, but much microfinance activity in the country has focused on urban areas. People in towns are easier to access, for one thing, and most banks lack the knowledge to properly value and administer loans to farmers, or perceive agriculture as too risky. Colombia has more small, low-tech farms than most other South American countries, and life is precarious for those running these small businesses, which may not be able to absorb the impact of a poor crop, or invest to generate an above-subsistence level of output. This problem has broader implications in Colombia, where farmers who can’t make a living out of legal crops often turn to growing coca, the raw material for cocaine.
There are 700 loan officers, like Carlos, who work directly with the customers. But all this hands-on care doesn’t come cheap; the distances that must be traveled on poorly-kept tertiary roads, the attention to each farmer and each peso loaned is a “very costly process,” Oscar, one of Bancamia’s seven vice presidents, tells me. This is why Bancamia charges 33% annually on its loans – a figure which sounds extortionate but which is about average for microfinance institutions.
Most new customers come through word of mouth, and that is how our next stop of the day, a quail farmer called Diego, contacted Bancamia. He runs a small farm which he wants to expand, and had already applied to the state-owned Banco Agrario for a loan but they asked for guarantees, which he doesn’t have. A friend told him about Bancamia, he called them, and within days Carlos is at the quail farm examining the accounts and peering into the egg incubator. There are more questions: how long has his business been running? What does his wife think about the loan? How many people live in his house? How many quails does he own? How many cages? And how many quails per cage? How many eggs do the quails lay every day? What is the nutritional value of a quail’s egg? They fill out the long, detailed forms while standing in a room whose walls are lines with cages of the softly cooing birds, being careful not to make too much noise because, Carlos tells me, quails are very sensitive animals. Once, when he was paying a visit to another quail farming client, someone inadvertently banged a steel door shut and several quails died of shock.
The purpose of all these questions is not just quantitative, to find out if the business is sound, but also qualitative, to assess the character of the would-be borrower. “The qualitative side is more important than the quantitative side, but harder to measure,” and this is why the loan officer’s job is so important, Oscar says; “Our workers are special.” Carlos will meet the man’s neighbors, ask for character references, find out everything he can to make sure it’s a good loan. The fact that the quail farmer has lived in the area a long time is good, as are the detailed accounts which he brings out to show the loan officer. “This is a business based on trust,” Oscar explains. How do they make sure that customers repay their loan on time? “Again, it’s based on trust.” The loan officer will visit a late payer, remind them of their obligation to the bank, try to persuade them to pay. If this doesn’t work they can press the customer further, using their property as leverage. There is a 4% default rate on Bancamia’s loans (significantly lower than the 6% default rate Goldman Sachs predicts for the U.S. in 2010).
“Microfinance in Colombia is still in its infancy,” says Alejandro Caminos, president of the International Public Finance Consulting Group (IFPC Group). But it’s moving in the right direction. Alejandro explains that there’s no lack of money in Colombia, just a lack of will and mechanisms to put it where its needed. It’s this will that Bancamia is providing, by channeling capital to the small and micro businesses that are the main pillar of the economy. IPFC Group is providing technical assistance to Bancamia on behalf of USAID, as part of its drive to bring financial services to regions of Colombia excluded from them. Bancamia now has 300,000 customers across the country, and is responsible for 16% of Colombia’s micro-loans. It is the country’s only bank dedicated to micro-loans, which make up 99% of its portfolio. The bank’s next step will be to provide a deposit service to help the country’s small businesses, and individuals, to save – pending approval, this will begin in October.
Bancamia recently had a piece of good news – the International Finance Corporation, part of the World Bank, announced plans to invest up to $10 million, owning 6% of the bank’s shares. Although Bancamia is a for-profit entity, which generates returns for investors, all shareholders put 80% of profit back into the bank, keeping only 20% for themselves.
There’s also good news for Diego the quail farmer – back at the bank’s headquarters in central Medellin, where Carlos presents his report on the day to another bank executive, they say that he’ll very likely get his loan. The money should be there by the end of the week.