Microfinance in Bogota, Colombia as a Development Strategy

Abstract

This paper aims to describe and analyze a financial strategy designed and implemented in Bogota, Colombia, in 2002, which considers microcredit as an important tool to provide poorer people credit services. Microcredit is just one of the different components of a broad concept, microfinance, which was developed as an answer to the lack of financial services for the poorer people from formal financial system.

Microfinance includes the provision of financial services, such as deposits, loans and insurance to poor families who do not have access to resources of the formal financial institutions. The loans are used to invest in micro-enterprises, as well as for investing in health and education, improve housing or deal with family emergencies. However, the strategy of microfinance is not limited to provide financial services only, but also provides training in management of money and strengthens aspects like leadership, confidence, self-esteem, education and micro-management.

Regarding the kind of enterprises that are the target of microfinance in Bogota, Colombia, it is important to mention that micro, small and medium sized enterprises (Mipymes thereafter) involve a big number of workers in the city. According to the Business Chamber of Bogota, there were 202,966 formally constituted enterprises in 2004, from which 201,146 were Mipymes (99%) and concentrated approximately 70% of total formal employment. Particularly regarding Mipymes, 86% were micro, 11% small and 3% medium sized businesses. Mipymes are engaged mainly in trading and the repair of all kinds of motor vehicles (35.4%), followed by real estate activities (13.2%), manufacturing (12.3%); transport, storage and communications (11.6%); and hotels and restaurants (11.3%).

Behavior of firms in Bogota evidences the importance of micro-enterprises and small enterprises in employment generation. However, these types of enterprises face various problems regarding their creation and their operation; among them, the main ones are associated with their financing and management. Faced with this situation, the Treasury Secretary of Bogota implemented a strategy of financial lines in April 2002 to help them, which is based on a scheme of credit throughout the financial system. The main objectives of the financial lines are: i) To facilitate access to credit to micro and small entrepreneurs, ii) to improve the levels of income and employment in the city, and iii) to improve the quality of life of the micro and small entrepreneurs in Bogotá.

The financial lines designed to help micro, small and medium-sized businesses managed by the Treasury Secretary of Bogota have meant a significant shift in attention to formal business of the city. This financing program for Mipymes was designed with the aim of solving the cyclical problem arisen by the banking crisis of 1999, which led financial institutions to be prepared to accept a lower risk and to raise the interest rates, which discriminated the Mipyme sector of bank financing in a recession and unemployment scenario.

Keywords: Bogota, financial lines, microcredit, microfinance, small businesses