Tool for the Financial Inclusion of Informal Retailers in Colombia

Tool for the Financial Inclusion of Informal Retailers in Colombia

Gustavo Adolfo Diaz (Universidad Santo Tomás, Colombia), Olga Marina García Norato (Universidad Santo Tomás, Colombia), Alvaro Andrés Vernazza Páez (Universidad Santo Tomás, Colombia) and Oscar A. Arcos Palma (Universidad Santo Tomás, Colombia)
Copyright: © 2020 |Pages: 21
DOI: 10.4018/978-1-7998-2440-4.ch010
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Abstract

One of the structural problems in Colombia is the informality of economic activities. Indeed, there is a high proportion of informal retailers in large cities of the country. This chapter propounds a tool, Credit Scoring, for the financial inclusion of this population. The tool is designed for obtaining resources at lower financial costs, and it aims at improving the commercial activities of these agents. In this way, informal financing, which increases poverty, is avoided. Also, in connection with this subject, surveys conducted among a thousand informal retailers in five Colombian cities—Bogotá, Cúcuta, Ibagué, Villavicencio and Arauca—were taken into account.
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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.

Key Terms in this Chapter

Informal Retailers: The category informal retailers refer in general to those people who are engaged in various activities, such as the supply of goods or services on streets, sidewalks and other public spaces, which make up the area in which they are and perform informal work. However, there are three different types of people dedicated to informal sales that may be affected by the measures, policies or programs aimed at recovering the public space occupied by them, namely: a) stationary informal retailers, which they are installed together with the goods, implements and merchandise that apply to their work in a fixed way in a certain segment of the public space, excluding the use and enjoyment of the same by other people permanently, so that the occupation of the space subsists even in the hours in which the seller is absent from the place; b) sellers or semi-stationary informal sellers, who do not permanently occupy a certain area of ??public space, but nonetheless, due to the characteristics of the goods they use in their work and the merchandise they sell, must necessarily occupy transitory form a certain segment of the public space, such as people who sell hot dogs and hamburgers, or who push fruit or grocery cars through the streets; and c) informal retailers, who, without occupying public space as such, carry with them - that is, physically carrying - the goods and merchandise that apply to their work, do not obstruct the transit of people and vehicles beyond their personal physical presence.

Informal Economy: This concept is relatively recent and is associated with alternative forms of production caused by lack of opportunities, deficiencies in education and the productive apparatus, excluding regulations in the financial and labor system in favor of certain population groups and economic sectors. This issue arises mainly in the urban sphere of many poor or developing countries, due to the appearance of spontaneous activities in response to problems associated with unemployment, precarious employment and lack of opportunities in the labor market. However, there has been a conceptual change from the informal sector to the informal economy as explained by the ILO to support the statistical measurement of informal sector activities ( http://www.ilo.org/wcmsp5/groups/public/---dgreports/---stat/documents/publication/wcms_501585.pdf ).

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