Banco de Bogota’s “mobile branch” bus travels to small towns in Colombia, allowing rural communities to open bank accounts and speak with financial advisors.

How does the development community incentivize the financial sector to include rural, marginalized clients that it may consider too risky and too costly to reach?

In a large city, it probably would take you less than five minutes to find an ATM. In a small town, however, finding an ATM can be much more challenging. Imagine that you live in a small town torn by decades of armed conflict, and like many others, you don’t even have a bank account because the closest bank is three hours away by bus. Who can give up a full day’s worth of work to open an account? Or risk taking public transportation carrying large sums of cash to deposit or after a withdrawal?

Financial inclusion — already a challenge in times of peace and stability — deteriorates in fragile environments. Decades of armed conflict often result in geographically isolated communities with low financial literacy, few assets, and a lack of trust in the government or private sector. Development implementers need to make a business case to engage financial institutions and serve marginalized clients, even in conflict-affected areas. The way to do this is by lowering risk and costs for the bank and client alike while building trust between the two so that both can turn a profit.

Lowering Costs

Financial institutions face high operating costs because it is expensive to reach geographically dispersed populations, especially in post-conflict areas with ongoing security concerns. To solve this challenge, the USAID Colombia Rural Finance Initiative (RFI) is working with financial institutions in Colombia to leverage digital technology to bridge geographic distances and increase access to financial services. In rural Colombia, residents may just receive a visit from Banco de Bogota’s “mobile branch,” a bus equipped with financial advisors and digital tools that travels to remote towns, allowing people to open a savings account or apply for a loan using a digital application. Financial institutions in Colombia are investing in building digital ecosystems — including digital wallets, microloans, and digital savings — to reduce costly cash-based transactions and make financing accessible and safer for clients in remote locations, where cash can leave some people vulnerable to assault. Experience in Colombia and elsewhere tells us that low-income households are able and willing to pay market interest rates when the bank dramatically reduces transaction costs. Now, many community members in rural Colombia don’t have to miss a day’s work just to make a microloan payment.

Lowering Risk

Serving post-conflict markets can be risky business. Banks perceive potential clients as having low financial literacy, few assets for collateral, and no credit history, all of which indicate high risk of default. The development community can help financial institutions lower their risk by investing in financial literacy to help future borrowers gain core financial competencies and records to be eligible for credit — and help banks gain new customers. In Colombia, Banco de Bogota’s mobile branches offered workshops on financial education so that Cauca residents can open digital savings accounts at local mobile offices. Financial institutions can also use development financing tools such as USAID Development Credit Authority (DCA) loan guarantees to lower risk. In Colombia, implementers have used DCA loan guarantees to incentivize financial institutions to lend to clients who do not meet traditional requirements but show reasonable promise of return. In 2018, for instance, Banco de Bogota, one of Colombia’s largest banks, issued 6,690 DCA-backed loans. The development community can offer other assistance mechanisms, like grants, as engine starters for banks’ initiatives in post-conflict areas. RFI is using a $7 million grant fund to support financial institutions’ expansion efforts and pilot innovative digital finance solutions such as Microempresas de Colombia’s first digital loan, which disburses up to $3,000 instantly into eligible clients’ savings accounts.

Building Trust Between Institutions and Clients

In post-conflict environments, trust is a scarce commodity. In Colombia, banks didn’t know or understand their potential clients in rural, post-conflict areas, and those communities didn’t trust the banks. How do you rebuild trust in this environment? First, financial institutions needed to understand the business case of expanding to rural post-conflict communities. Since cost and risk factors inhibit the bank’s willingness to penetrate those communities, RFI’s financial specialists provided technical assistance to bank representatives — from salesmen to executives — to demonstrate how restructuring their business models and using new tools such as progressive lending, mobile branches, and digital products could lower risk and cost factors to make lending to post-conflict communities an attractive and profitable business venture.

On the flip side, post-conflict communities who live in remote areas and have had little to no experience with formal financial institutions are often weary of trusting them. Putting money under the mattress, so to speak, feels safer than having it disappear into an account. To build the trust necessary for penetrating previously unbanked areas, RFI helped Colombian financial institutions engage the local community. Bancompartir’s Soy Líder (I’m a Leader) program, implemented with RFI support, works with trusted community leaders to promote the bank’s products and services within their community networks. As of July 2019, the Soy Líder program had 40 community leaders who referred 353 clients for 315 loans valued at $434,928.

Identifying and mitigating cost and risk factors, while simultaneously building trust, increases the financial sector’s penetration into post-conflict communities, helping the bank and smallholders alike turn a profit in their new ventures. By employing these practices, the development community and the local financial institution partners can better serve individuals in remote areas, providing better access to financial services that can help rural residents weather external shocks, increase their productivity, and improve their quality of life.

Learning at #SEEP2019

At the 2019 SEEP Annual Conference, we invite you to join the Peer Learning Session, The Business Case for Financial Services in Conflict and Post-Conflict Areas, chaired by Chemonics on October 23, 2019. Join Asdrubal Negrete from Chemonics, Lina Guzman from Opportunity International Colombia, Richard Shumann representing The Vitas Group and Caroline Averch at FHI 360 for lively discussion on how development, non-profit, and for-profit financial sector practitioners have been providing and encouraging formal financial services to some of the most vulnerable and remote business from Colombia to the West Bank - and how you can too.

Estefania McPhaul is a manager for Chemonics’ economic growth and trade practice team. Previously, Estefania was a project manager for the USAID Colombia Rural Finance Initiative.”

Asdrubal Negrete has over 25 years of experience in the financial sector, including microfinance, credit risk analysis, and financial inclusion. As chief of party of the USAID Colombia Rural Finance Initiative, Mr. Negrete works with banks and other partners to design and scale innovative products and channels in rural markets. Previously, Mr. Negrete spearheaded business operations and portfolio development in the financial sector. Mr. Negrete holds a degree in Engineering Systems from the Universidad Piloto de Colombia.