Tool for the Financial Inclusion of Informal Retailers in Colombia

Introduction

In Colombia there is a big concern about how to achieve greater financial inclusion for low-income households and people employed in informal jobs, such as retailing. These agents face several limitations that stop them from conveniently and effectively gaining access to the resources of the formal financial system; these limitations include: the lack of previous banking history, low income, and high financial costs; and, from the point of view of the financial institutions, the risks incurred, especially when obtaining reliable information about the socioeconomic conditions of informal workers is difficult.

Some studies aimed at knowing how agents finance their economic activities in informal scenarios, point to the modality of informal credits. These are financial resources, to which no major restrictions are imposed, for example, regarding guarantees. Despite the high costs underlying this form of financing, the costs of informal credits are almost equal to, or higher than, the costs in the formal financial system. In Colombia, where the informality rate in the labor market is close to 50%, an estimate for the proportion of informal loans is close to half of that figure (DANE, 2019).

Among the population engaged in informal economic activities, there is a significant part working in informal trade in the public space of cities with relevant economic dynamics. In most cases, informal retailers act as intermediaries for the selling of industrial products, and, in other less significant cases, they sell goods manufactured by themselves, especially culinary products. Government policies and programs designed to promote financial inclusion in the country have focused essentially on productive activities involving the transformation of raw materials, which, to some extent, require the hiring of specialized workforce, thus the creation of formal jobs. Accordingly, informal retailers who are not engaged in activities dealing in industrial production, and work only as intermediaries in the retailing of goods, are excluded from these programmes.

Considering the rates of informality in developing economies, in which informal trade has a relative importance, we think that it is necessary, as a transitional strategy aimed at reducing poverty, and, simultaneously, as a way to create financial habits among this population, to take into account tools allowing the integration of the population engaged in informal commercial activities into the formal economy. In this way, a progressive improvement in the process of formalizing the economy could be achieved. Indeed, creating better financing practices, would allow these agents to engage in commercial and productive activities that generate profit, and, therefore, that could improve the quality of life of people and households.

Different alternatives that have been considered when defining and measuring labor informality and, based on technical criteria, employ the definitions related to the lack of lack of affiliation to social security schemes (healthcare and pensions) and that of DANE for measuring the intensity of informality in the twenty-three major Colombian cities. The results show that when defining informality as the lack of affiliation to social security, nearly six out of ten employees belong to the informal sector. Additionally, informal workers in Colombia are characterized by low educational and income levels, besides from working in smaller establishments, when compared to the formal workers (Galvis, 2012).

In this chapter, we propose to apply the Credit Scoring tool to the issue of integrating the informal retailers into the formal financial system. The application of this tool is based on a study on informal retailing from nearly one thousand surveys carried out in key sectors of the cities of Bogotá, Cúcuta, Ibagué Villavicencio, and Arauca. These five cities show informality rates, which, according to official figures, exceed the national average of 50%. In the aforementioned cities, information was obtained regarding the economic, social, and financial aspects of the people engaged in informal commercial activities in the public space. The study found that a significant proportion of the people interviewed feel excluded from the formal financial system due to its numerous restrictions. This is why informal retailers are forced into taking illegal informal loans known in Colombia as “drop by drop” (gota a gota) loans, that is, a form of onerous loans that exceed by far the conventional interest rates, and in which payments have to be made daily, and word assurances are constantly demanded, heightened sometimes by criminal intimidations.