Lending & Green Financing for small businesses in colombia
Nearly all of the estimated 1.6 million businesses in Colombia are micro, small, or medium-sized enterprises (MSMEs). Across the board, if you ask owners of these firms what the biggest challenge is to grow their businesses, the answer is almost unanimous: access to credit.
Growth of MSMEs is critical to the Colombian economy because they generate more than 80 percent of the country’s jobs and 40 percent of its goods and services. Yet, because financial institutions often face a shortage of long-term deposits to fund their lending, they tend to focus their operations on large, well-capitalized firms, which are perceived as carrying lower risk than small or medium-sized firms.
To address this problem, Colombia has been expanding lending through Bancoldex, a government-owned development bank that is using an onlending strategy to funnel credit to smaller firms. Drawing on $300 million in long-term loans provided by the IDB since 2008, Bancoldex has channeled financing through regulated financial institutions to fund investment projects, productive restructuring, and promote development of business and export activities among MSMEs.
According to data from two IDB impact evaluations, Bancoldex’s strategy is working. The studies found that companies accessing Bancoldex investment lines get loans that are bigger and that carry lower interest rates and longer maturities than loans obtained by non-beneficiary firms. Moreover, the studies show that beneficiary firms have experienced increases in output, employment, investments, and productivity.
In addition to providing financing to Bancoldex, the IDB has worked closely with the bank to develop a full-fledged environmental and social sustainability strategy that includes improving Bancoldex’s own operations and developing green financing lines. Bancoldex has created a special team to manage the sustainability strategy and has developed internal systems to promote the analysis of environmental and social opportunities and risks in its portfolio. The bank has also set aside about $90 million to finance green projects for MSMEs, including renewable energy, energy efficiency, sustainable transport, water and solid waste treatment, and local pollution control and recycling programs. 58% of the Bancoldex green lines in 2012 were dedicated to MSMEs projects.
Bancoldex has also been innovative in the design of financial green instruments. A good example is the energy efficiency credit line for Colombia’s service sector, developed in partnership with the IDB and the Clean Technology Fund, which offers a series of different instruments so financial institutions channeling resources from this line can better manage risk and demand for this type of financing. The instruments include a concessional financing line, energy savings insurance, standardized contracts for energy efficiency projects that clearly define the rights and obligations of investors and technical service providers; and third-party technical reviews, monitoring, reporting, and verification of all projects.
By boosting credit to MSMEs and creating innovative products to improve sustainability, Bancoldex is helping MSMEs boost productivity—and helping Colombia overcome one of the biggest obstacles to its economic development.