Strategies for Financial Service Providers to Access Colombia's Untapped MSME Market

Author: Laura Trueba, Musa Kacheche
Client: Argidius Foundation
Year 2024 - Present

The Current State of MSME Banking

Micro, small, and medium-sized enterprises (MSMEs) are crucial to the economic fabric of Latin America and the Caribbean. In Colombia, they account for 99% of companies, 80% of private employment, and 35% of GDP. Despite their significance, MSMEs in Colombia remain underserved. They receive only 14% of total commercial loans, facing a financing gap estimated at $56.2 billion—19% of the 2017 GDP—for formal MSMEs alone. Informal companies face an additional financing gap of 10% of GDP, while women-owned MSMEs experience a shortfall of $6.1 billion.

Addressing this gap requires continued efforts by the government and financial institutions to develop innovative solutions that meet the unique needs of MSMEs in the Colombian market. With funding from the Argidius Foundation, ConsumerCentriX conducted a market feasibility study to identify barriers to access finance for MSMEs in Colombia. The study involved customer research engaging business owners in Bogota and Medellin and a market analysis involving interviews with key industry stakeholders, such as financial service providers (FSPs), government institutions and other MSME ecosystem partners.

Understanding Customer Perspectives
Despite a dynamic MSME sector with over 5.7 million enterprises, Colombia's 1.4 million registered micro-enterprises face a vast gap in accessing financial services. These businesses often rely on retail banking solutions rather than tailored business products. For instance, they often opt for personal loans over business loans due to stricter requirements, lengthy approval processes, and high fees associated with the latter. While personal loans are more accessible, they often come with higher interest rates and rigid repayment terms, which do not align with the financial needs of the businesses. Additionally, most entrepreneurs are unaware of the offerings from the largest banks, and those familiar with them find the products unsuitable. Colombia's registered microenterprises tend to be "multi-banked," meaning they use financial services from different institutions, seeking the most favorable options. For example, they may take out personal loans, open deposit accounts, or access business credit from various banks. As a result, these businesses do not depend on comprehensive solutions from a single FSP but diversify their services across multiple providers.

Moreover, MSMEs in Colombia value having a dedicated point of contact at their bank, such as a relationship manager who understands their business and can offer personalized advice. The availability of knowledgeable financial advisors or loan officers helps MSMEs make complex financial decisions and grow their businesses. Furthermore, MSME owners expressed a need for non-financial services, such as business training and access to networks, to support their growth. Many business owners whose educational backgrounds may not prepare them for a growing business seek opportunities to develop essential skills and knowledge. Colombia has a diverse ecosystem of MSME support institutions, but the fragmented landscape makes it difficult for business owners to know where to access these resources.

Understanding the Competitor Landscape

Market analysis reveals intense competition in the small and medium enterprises (SME) banking sector, where major banks offer tailored and holistic market solutions. A similar level of competition exists among microfinance institutions serving the unregistered micro-enterprises. However, a significant opportunity exists within the registered micro-enterprises segment, which remains largely underserved by financial service providers.

Despite the evident need for financing among registered micro-enterprises, banks remain cautious due to perceived credit risks. Most financial institutions prefer lending to well-organized SMEs, focusing on legal entities and secured loans backed by government programs like the National Guarantee Fund (FNG), mortgages, or leasing programs. For microfinance institutions, the challenge is adapting their models—both in terms of human resources and product portfolios—to meet the needs of formal businesses. Offering lower-cost financing and overcoming the challenge of building brand recognition are additional obstacles in this space.

To differentiate themselves, FSPs should offer financing solutions that help registered micro-businesses achieve short- and long-term goals, such as purchasing machinery, expanding locations, acquiring raw materials, or maintaining cash flow with suppliers. These businesses expect low interest rates, simple requirements, fast approval, and transparent information. They also desire flexible repayment options and personal guidance from advisors who can explain the products and recommend the best options.

In conclusion, Colombia's financial service sector holds significant potential for serving the registered micro-enterprise segment. By partnering with business development service providers and other key ecosystem players to bridge the skills gap, FSPs can position themselves as critical enablers of the growth and development of this segment in Colombia.