MICROFINANCE PAPER WRAP-UP: “Incentives for the Introduction of Agents in Colombia by Banca de las Oportunidades;” by Marulanda Consultores, published by CGAP (Consultative Group to Assist the Poor)

By Marulanda Consultores; published by CGAP (Consultative Group to Assist the Poor); February 2013; 32 pages; available at: http://www.cgap.org/sites/default/files/colombia_agent_subsidy_english.pdf

This report analyzes a set of incentives offered by Banca de las Oportunidades, a government organization in Colombia that aims to increase financial access, to expand networks of “non-banking correspondents” (NBCs) to reach unbanked areas. In Colombia, NBCs, or “agents,” are individuals contracted and trained by banks to provide financial services on their behalf in areas without bank branches.

The government issued regulations allowing certain banks to use agents in July and August 2006, at which point 309 out of 1100 municipalities in the country lacked banks and 755 were not served by nonprofit microfinance service providers. By June 2007, there were 1,500 agents in the country and 25 of the 309 unbanked municipalities had been reached. To increase the rate of expansion into underserved areas, Oportunidades designed an incentive program to subsidize the expansion of agent networks through three “invitations to tender” between 2007 and 2010. Through these invitations, subsidies were auctioned based on which banks requested the lowest number of guaranteed transactions per municipality.

For the first invitation to tender, Oportunidades chose to specify a three-year time period, a price of USD 0.50 per transaction and a maximum number of 1,400 guaranteed transactions that could be requested at auction. Transactions were subsidized only if sales did not reach the guaranteed level, in order to avoid financing operations that turned out to be profitable. Banks committed to keeping agents active for three years with transactions guaranteed to 100 percent of the set price the first year, 50 percent in the second year and not at all thereafter. 128 agents were established under the first incentive round in 128 municipalities, each with populations no higher than 50,000.

The second invitation to tender supported the establishment of agents in the 67 municipalities that remained unbanked by mid-2009. Because these locations were smaller and more isolated, the subsidy was extended by one year. The maximum number of guaranteed transactions was also increased from 1,400 to 2,200 per municipality. By December 2010, all but six municipalities had been successfully reached.

Rather than focus on financial access in rural municipalities, the third invitation to tender sought to expand financial services in underserved neighborhoods of five major cities. Rather than offer guarantees, Oportunidades co-financed operational and set-up costs for establishing new agents in these areas, with funding support decreasing 50 percent in the first year to 25 percent in the second and none in the third.

The obstacles Oportunidades encountered included establishing internet connectivity between banks and agents, banks’ lack of familiarity with the areas in which agents would be working, and the difficulty of managing large quantities of cash including transporting it between the agent and bank branches.

From December 2007 to June 2012, the number of agents nationwide increased from 3,500 to 20,865, and the volume of transactions performed by agents increased from approximately 300,000 to 5 million per month. As of December 2012, agents established under the tenders remained in all but six municipalities four of which had had agents established by other banks.

The paper concludes with lessons learned from the program including: (1) incentives alone cannot compensate for basic challenges such as cash management and the development of an appealing value proposition; (2) subsidies were not enough to encourage banks to tailor products to clients’ needs; (3) the structure of incentives should be adapted to the population demographics of each case, such as using cofinancing rather than guaranteed numbers of transactions to serve small populations; and (4) while a low-cost channel for financial access, the agent model developed in Colombia may not be the most efficient solution for very small communities due to the difficulty of managing cash in isolated areas.

By Nicole Boyd, Research Associate

Sources and Additional Resources

CGAP (Consultative Group to Assist the Poor). “Incentives for the Introduction of Agents in Colombia,” http://www.cgap.org/publications/incentives-introduction-agents-colombia

MicroCapital. April 15, 2013, “MICROCAPITAL BRIEF: CGAP, Grameen Foundation, Mobile Telecommunications Network (MTN) Uganda to Finance $1m Mobile Finance Product Research and Development Initiative,” https://www.microcapital.org/microcapital-brief-cgap-grameen-foundation-mobile-telecommunications-network-mtn-uganda-to-finance-1m-mobile-finance-product-research-and-development-initiative/

MicroCaptial. March 18, 2013, “MICROCAPITAL BRIEF: Boston University, CGAP Partner on Financial Inclusion Regulation Website, Request Submissions of Material from Microfinance Stakeholders,” https://www.microcapital.org/microcapital-brief-boston-university-cgap-partner-on-financial-inclusion-regulation-website-request-submissions-of-material-from-microfinance-stakeholders/

MicroCapital. February 8, 2011, “MICROCAPITAL BRIEF: Liberty Mutual Offers Low-Cost Health Insurance in Colombia, Includes Payment Through Gas Company,” https://www.microcapital.org/microcapital-brief-liberty-mutual-offers-low-cost-health-insurance-in-colombia-includes-payment-through-gas-company-2/

MicroCapital Universe Profile: CGAP http://microcapital.org/microfinanceuniverse/tiki-index.php?page=CGAP+%28Consultative+Group+to+Assist+the+Poor%29

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