Reducing Payment Defaults with Microfinance Institutions in Colombia

The Colombian Association of Microfinance Institutions, Asomicrofinanzas, is a microfinance network created in 2009 with the objective of representing the industry and promoting financial inclusion. Asomicrofinanzas comprises of approximately 40 institutions that serve 90% of the country’s microfinance sector. It provides services and products to organizations that contribute to overcoming poverty in Colombia, actively participates in the definition of relevant public policies and carries out other activities that seek to contribute to the institutional strengthening of its associates and to consolidate the association as the leader of microcredit in the country.

They are currently working to improve how microfinance institutions serve small and midsize farmers and agricultural enterprises. Therefore, they requested a remote and a local F2F volunteer to help them define how to reduce payment defaults and better detect if a client will be able to pay. The remote volunteer chosen for this assignment was Jim Dougherty, who holds an MA in Administration and International Development. He is a high-performing corporate banker and for more than 20 years has worked in banking business development and risk mitigation, including of agricultural lending. The local volunteer chosen was Jaime del Valle, a financial engineer with over 17 years of international experience in the financial sector, including extensive involvement in risk management.

Between September 2020 and January 2021, Jim and Jaime regularly met with Asomicrofinanzas to work on this assignment. They also interviewed seven microfinance institutions from different regions in Colombia, to ask them about their services and processes. Both volunteers analyzed exactly what information these organizations collected, how they chose their clients, what collateral they required and how they approved their loans. Based on this information they created a manual of good practices that can be used by all the institutions under Asomicrofinanzas to better analyze their client data and in this way prevent clients from defaulting.

The manual will allow them to identify opportunities for improvement in their credit granting processes and, in this way, ensure they are administering their portfolio effectively. It is expected that once they implement these good practices when giving loans, these entities will have lower levels of defaults and lower costs associated with credit recovery which will permit them to provide better microfinance services. Additionally, all of this will ensure that their clients are assigned terms and credit amounts according to their conditions and capabilities, mitigating the risk of them over-borrowing and going into excessive debt.

At the end of his assignment, Jim commented: “I want to thank all of those at Asomicrofinanzas and the Farmer-to-Farmer program who facilitated and patiently worked with me to allow me to be involved with this volunteer experience. I want to communicate my gratitude for the absolute graciousness, politeness, and kind reassurance of the value of my involvement through the supportive comments of the team that facilitated this experience. I think the topic we investigated is a topic that can have a positive impact on the development of lending services in Colombia and other countries.

Whatever frustrations existed with this effort, it was the most challenging intellectual exercise I have had in many years, and it was a pleasure to interact with all involved. It is my “grass on the other side of the fence” to be back in international development and be able to work with small lending groups seeking to raise the boats of those that may be the least among us. This gave me the opportunity to do so.”