Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. 7493-CO
STAFF APPRAISAL REPORT
COLOMBIA
FIFTH SMALL AND MEDIUM SCALE ENTERPVTSE PROJECT
FEBRUARY 9, 1989
Trade, Finance and Industry Division
DepartmenL III, Latin America and the Caribbean Region
This document has a restricted distribution and may be used by recipients only in the performance of
their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
CURRENCY EQUIVALENTS
(as of July 1, 1988)
Currency TUnit Colombian Peso (Col$)
US$ 1 Col$ 300.0
Col$ 1 US$ 0.0033
FISCAL YEAR OF THE GOVERNMENT OF COLOMBIA
January 1 - December 31
GLOSSARY OF ABBREVIATIONS
ACDPI SME Producers' Association
BR Central Bank of Colombia
CDT Term deposit certificate
CF Private development bank
CFP Public SME Development Bank
DANE National Agency for Statistics
DNP National Planning Department
DTF Average 90-day rate for term deposit certificates
issued by development and commercial banks.
FFI Industrial Finance Fund
FNGI National Deposit Insurance Fund
GDP Gross domestic product
ICOR Incremental capital-output ratio
IDF Industrial Development and Finance Division of the World
Bank
INCOMEX National Institute of External Commerce
IDB Inter-American Development Bank
LIBOR London Inter-Bank Offering Rate
MED Ministry of Economic Development
NGO Non-governmental organization
PFI Participating financial intermediary
PROEXPO Export Promotion Agency
SME Small and medium scale enterprise
SME 4 Fourth Small and Medium Scale Enterprise Project
SME 5 Fifth Small and Medium Scale Enterprise Project
SOE Statement of expenditures
WWB Women's World Banking
FOR OFFICIAL USE ONI
STAFF APPRAISAL REPORT
COLOMBIA
FIFTH SMALL AND MEDItUM SCALE ENTERPRISE PROJECT
TABLE OF CONTENTS
Page No.
LOAN AND PROJECT SUMMARY ......................................... i
1. THE INDUSTRIAL AND FINANCIAL SECTORS ......................... 1
Recent Industrial Sector Performance ....................... 1
SME Structure and Growth ................................... 2
SME Exports ............................................... 3
SMEs and Protection ........................................ 4
SME Employment and Wages ................................... 6
SME Efficiency and Factor Intensity ........................ 7
Financial Sector Institutions and Performance .............. 7
2. INCREASING THE DEVELOPMENT CONTRIBUTION OF SMEs .............. 9
National Objectives and SME Policy Agenda .................. 9
The SME Credit System ..................................... 9
Increasing SME Credit Volume and Access ................. 12
Directed Credit ..... ......... 13
Administrative Efficiency ............................... 15
Technical Cooperation ...................................... 16
Microenterprises ........................................... 17
Overall Policy Environment ................................. 18
3. THE PROJECT ..............-. . . . . 18
Relation to the Country Lending Strategy ................... 18
Lessons from Past Bank Assistance to Colombian SMEs ........ 18
Objectives, Strategy and Beneficiaries ..................... 19
Description ............................ 20
Credit Program .......................................... 20
Structure .............. ............................. 20
SME Financial Policies .............................. 21
Institutional Development ........................... 22
Technical Cooperation .................... 23
Cost and Financing ......................................... 23
Relending Terms and Conditions ............................. 23
Project Implementation ..................................... 24
Administration and Oversight ............................ 24
Procurement and Disbursement ............................ 25
Accounts, Auditing and Reporting ........................ 26
Benefits and Risks ......................................... 26
4. PROJECT AGREEMENTS ........................................... 27
This report is based on the findings of an appraisal mission which visited
Colombia in July 1988. The mission comprised Messrs./Mmes. J. Hanna
(Senior Financial Analyst and Mission Leader), K. Hallberg (Economist), and
H. Jackelen (Consultant).
This document has a restricted distribution and may be used "y recipients only in the performance
of their official duties. Its contents may not otherwise be disc^ised without World Bank authorization.
- ii -
SUPPORTING GRAPHS IN THE TEXT
Page No.
Graph 2.1 Total SME Credit by Banking Institutions, 1970-86 .... 10
Graph 2.2 Total SME Credit by Banking Institutions, 1980-86
Share of SME Credit Through CFP ................... 10
Graph 2.3 FFI Credit to SMEs, 1970-87 .......................... 11
Graph 2.4 FFI and World Bank Credit to SMEs, 1980-87 ........... 11
Graph 2.5 Use of FFI and World Bank Credit by CFP, 1980-87 ..... 15
SUPPORTING TABLES
Table 1.1 Industrial Sector Growth Rates, 1967-86 .29
Table 1.2 Industrial Sector Share of GDP, 1967-87 .30
Table 1.3 SMEs by 4-.Digit SITC Classification .31
Table 1.4 SME Exports by Subsector, 1980-86 .32
Table 1.5 Financial Indicators of All Commercial
Banks, 1980-87 .33
Table 1.6 Financial Indicators of Private Development
Banks (CFs), 1980-87 .34
Table 2.1 Composition of All Credit to SMEs, 1980-85 .35
Table 2.2 Volume and Compostion of Institutional Credit
to SMEs, 1980-87 .36
Table 3.1 SME 5 Detailed Financing Plan .37
Table 3.2 SME 5 Interest Rate Structure .38
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ANNEXES
1. Status of Bank Operations ..................... ................ 39
2. Experience Under Past Bank Lending for SMEs .................. 44
3. SMEs and the Environment ..................................... 48
4. Participating Financial Intermediaries ....................... 49
Corporaci6n Financiera Popular .......................... 50
Private Development Banks ........................... 52
Commercial Banks ........................................ 53
Recent Financial Indicators ............................. 55
5. Microenterprise Program .60......... ................ 60
6. Credit Terms and Conditions
a) The Fondo Financiera Industrial (FFI),
Existing and Proposed under SME 5 .................. 66
(b) FFI and the Proposed Bank Loan under SME 5 . . 69
(c) Past and Proposed Bank Loans to Colombia for SMEs ....... 72
?. Guidelines for the Restructuring Program . . . 75
8. Technical Cooperation Program . . . 79
9. Estimated St.hedule of Bank Loan Disbursements . . . 80
10. Key Indicators for Project Implenmentation . . 81
11. Documents Available in the Project File . . . 83
MAP IBRD 18370R
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STAFF APPRAISA9L REPORT
COLOMBIA
FIFTH SMALL AND MEDIUM SCALE ENTERPRISE PROJECT
Loan and Project Summary
Borrower: Banco de la Republica (BR)
Guarantor: Republic of Colombia
Beneficiaries: Small and medium scale enterprises (SMEs) in manufacturing,
mining and related service industries with total assets of
less than US$1.0 million equivalent.
Loan Aijount: US$80 million equivalent, to be repaid in 17 years,
including 5 years of grace, at the standard variable
interest rate.
Relending BR would relend the proceeds of the loan to participating
Terms: financial intermediaries (PFIs), pegged to the fully
variable average deposit rate of the Colombian banking
system (DTF). BR would relend in local currency and would
bear the foreign exchange risk since the free market DTF
rate has reflected over the long run expectations of
currency adjustment and thus contains an implicit foreign
exchange risk premium. Relending rates to SMEs by PFIs
would be determined by the PFI according to the maturity,
credit risk, operational cost and competition for each SME
loan. Guidelines would establish an allowable maximum of
DTF+4 percentage points in 1989 and DTF+5 percentage
points in 1990 for SME loans carrying the minim.um 4 year
maturity. Maximum inte.:est rates to SMEs and the margins
of PFIs would be progressively increased for loans with
longer maturities, up to an additional one percentage point
for maturities up to 10 years.
Project The proposed Project is intended to accelerate the growth
Description: rates of value added and employment creation of SMEs,
mainly by: (a) making modest changes in public policy and
institutional mechanisms influencing SME access to longer-
term credit; (b) engaging Colombia's commercial and
development banks as SME loan intermediaries and the
resources of these entities for this p rpose; (c)
simplifying Bank loan processing and increasing
technical cooperation to SMEs; and (d) preparing studies
and recommendations during project implementation on
policies influencing capital intensity, business
establis}ment and operations, to help promote a neutral
policy environment for SME development. Project resources
would be committed over about a two-year period during
CY1989-91.
Project Risks: The central project implementation risk lies in the ability
of commercial banks to adapt their appraisal and
supervision work to SME lending. To mitigate this risk,
PFIs would make clear organizational, staff and financial
resource commitments -a the Project with the support of
staff training prior to Project start-up.
Estimated Costs: Local Foreign Total
-------US$ millions-
Credit program 154.9 80.0 234.9
Technical cooperation 0.2 __0.2
Total 155.1 80.0 235.1
Financing Plan: %Total
Enterprises 54.1 54.1 23
Financial intermediaries 43.7 43.7 18
Industrial Finance Fund 44.1 44.1 19
Other Domestic Sources 13.2 13.2 6
World Bank _ 80.0 80.0 34
Total 155.1 80.0 235.1 100
Estimated
Disbursements: Based on average profile for SME Bank loans in Colombia
---------------- US$ millions ------------------
FY 89 90 91 92 93 94
Annual 0.3 9.7 20.7 27.7 15.8 5.8
Cumulative 0.3 10.0 30.7 58.4 74.2 80.0
Rate of SME loan approvals would require at least an 11 percent
Return financial rate of return
COLOMBIA
FIFTH SMALL AND MEDIUM SCALE ENTERPRISE PROJECT
1. The Industrial ard Financial Sectors
Recent Industrial Sector Performance
1.01 The 1967-74 period witnessed strong growth and diversification of
industrial production in Colombia, both as a result of import substitution
and export market penetration. The industrial sector showed its highest
growth since World War II, with manufacturing value added increasing at
8.6% per year in real terms, forming an increasing share of GDP (see
Tables 1.1 and 1.2). In addition, industry's contribution to employment
creation was high, labor produ-tivity exceeded the increase in real wages,
and capital-output ratios fell markedly.
1.02 An overvalued foreign exchange rate and other macroeconomic
management problems associated with a boom in world coffee prices were
substantially responsible for a fall over the 1974-80 period in the average
annual value added growth rate to 4.8%. Overtaken by growth in the service
sector, the share of manufacturing value added in GDP began a steady
decline that was to continue through the early 1980s. With the end of the
coffee boom in the early 1980s and other external shocks, combined with
domestic structural problems and a macroeconomic policy framework which was
generally unfavorable to industrial development, manufacturing value added
declined by an average of -0.1% per year during the 1980-83. This period
was characterized by stagnant domestic and foreign investment, low rates of
employment creation, low factor productivity and a serious deterioration in
the financial condition of enterprises.
1.03 A period of macroeconomic adjustment beginning in 1984 saw both
GDP and industrial output recovering more quickly in ColcAbia than in the
rest of Latin America, propelled by substantial real devaluation in 1985,
the coffee boom of 1986, and Colombia's relatively sound macroeconomic
management. During 1984-86, manufacturing value added rose by 4.9%
annually, compared to 3.0% in the rest of Latin America. Industrial value
added continued to grow in 1987 at 5.9%, with industrial exports (excluding
nickel) increasing by 35% in U.S. dollar terms.
1.04 A sense of confidence generated by the recent impressive
macroeconomic performance and industrial growth is tempered by several
Factors. First, the level of industrialization in Colombia, as measured by
the share of manufacturing value added in GDP, is at 21.6%, still below its
1974 peak of 23.5%. In addition, the 4mportance of the industrial sector
in Colombia has been and continues to be less than in other Latin American
countries. Second, much of the recent growth in manufactured exports may
be attributed to real exchange rate devaluation rather than to structural
change and improved efficiency in the industrial and financial sectors.
The authorities feel that, as the demand effects of the coffee boom fade,
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the industrial sector must increase its international competitiveness if
growth is to be sustained. The Administration has consequently focused
heavily on increasing industrial efficiency as a central theme in ita
1987-90 National Plan. Finally, recent industrial growth has been achieved
at considerable resource cost, reflected in increasing ICORs. Future rates
of growth ih industrial output and exports are likely to be lower than in
recent years ulnless policy reforms address the lack of competitive
pressure, both domestic and international, and barriers to real and
financial resource mobility. Alternatively, attempts to maintain
industrial growth rates at recent levels under the existing policy
framework would require increasingly high resource costs which would make
future adji:stment more difficult.
SME Structure and Growth
1.05 In 1985, small and medium scale enterprises (SMEs)l accounted for
93% of the 6406 formal sector firms with more than 10 employees in
Colombia. While SMEs produced about one-third of total industrial output
(13% by small scale enterprises, 25% medium scale) and value added (11%
small scale, 23% medium scale), they accounted for over half of industrial
employment (small scale enterprises accounted for 22% and medium-scale
enterprises another 30%). The importance of SMEs has remained fairly
constant during the past ten years in relation to some 450 large scale
Colombian industrial enterprises, following the heavy industrial import
substitution phase of the 1950s and 1960s in which large firms increased
their share of industrial activity.2
1.06 Small scale enterprises were particularly hard hit during the
recession of the early 1980s, possibly as a consequence of a relatively
stronger impact of the restrictive import regime of the period, lower
access to working capital to support operations during poor sales
performance, and more fragile marketing systems. Manufacturing value added
of small scale enterprises fell -40.4% and -17.5% in 1980 and 1981,
compared to -9.6% and -0.4% for the industrial sector as a whole. Medium
scale enterprises were able to maintain more stable value added growth
rates during the 1980-83 period. During the recovery phase initiated in
1984, however, small scale enterprises showed more dynamism than either
medium scale or large enterprises, with value added growing at an annual
average of 22.3% during 1984-85, compared to 4.6% for medium scale firms
and 7.4% for large enterprises.
1/ In this section, firm size is defined according to number of employees:
microenterprises (fewer than 10 employees); small scale enterprises (10
to 49 employees); medium scale enterprises (50 to 199 employees); and
large enterprises (200 or more employees). For purposes of the
project, however, "small and medium scale enterprises" are defined as
enterprises with total assets less than US$1.0 million equivalent.
2/ Pinto, Juan S, and Arango, Juan F. La Pequena y Mediana Industria en
Colombia. Situacion y Perspectivas. Universidad Externado de
Colombia, Bogota, 1968. Also, additional DANE date for 1984-85
provided by ACOPI.
1.17 In 1985, SMEs generated more than half the total value added in 27
of the 94 four-digit industrial subsectors (see Table 1.3). These include
apparel, shoes, leather products, wood products and furniture, metal
products and machinery. SMEs are also prominent in food, printing, rubber
and plastic products. The participation of SMEs is notably lower in su^h
concentrated industries as textiles (dominated by a few large firms but
under increasing competition by medium scale firms employing modern
technology), beverages and tobacco, clay and cement, glass products, basic
metals, and petroleum refining. About 69% of SMEs are located in
Colombia's four principal cities (Bogota 33%, Medellin 17%, Cali 12%, and
Barranquilla 7%) and the remainder mainly in smaller cities.
SME Exports
1.08 Industrial exports, responding to a favorable real exchange rate,
grew from US$624 million in 1934 to US$875 million in 1986, though still
falling short of the 1980 level of US$949 million (Table 1.4). Recent data
show continued strong growth: during the first four months of 1988,
registrations of industrial exports were 21% higher in dollar terms than
during the same period a year earlier. Growth in exports of ferronickel
(114%) was an important factor in this expansion; non-nickel industrial,
exports were 14% over their 1987 values.
1.09 The export orientation of small scale enterprises is generally
low, due primarily to lack of knowledge of external markets and export
procedures, other fixed costs involved in exporting, more restricted access
to credit to handle export risks, and inability to satisfy the quantity and
quality requirements of external markets. In all but five 4-digit
industries (in food products and leather goods), small firms export less
than 10% of their production.
1.10 Medium scale enterprises have a stronger external orientation than
do small firms, exporting more than 10% of their production in 14 of 94
4-digit industries. Large firms export more than 10% of production in
about the same number of industries, though the particular industries
differ. In many subsectors -- e.g., milling, cotton weaving, leather
goods, plastics, non-electric machinery -- medium scale enterprises export
a larger share of their production than do large firms. Mainly as a result
of exports by medium scale firms, direct exports by SMEs as a group
contributed fully 43% of total industrial exports in 1986 (Table 1.4). SME
exports in 1985 accounted for more than 50 percent of exports in four
branches -- food processing, furniture, paper products and non-ferrous
basic metals. In four others, SME exports constituted between 40-50
percent of total exports---other wood products, plastics, metal prod:cts
(excluding machinery and equipment) and "other" industries.
1.11 As in the case of production and value added, SME exports have
been more variable during the 1980s than exports from larger enterprises.
During 1981-84, SME exports declined more rapidly than those of larger
firms (-16.2% for SMEs versus -4.2% for large enterprises), while their
recovery rate was more rapid than that of large firms (29.3% for SMEs
versus 12.0% for large enterprises). Preliminary data indicate that
subsectors in which SMEs are concentrated have been the most responsive
segment of industry in Colombia's recen industrial export expansion.
However, by 1986 SMEs had not yet regained the share of total exports they
accounted for in 1980.
SMEs and Protection
1.12 The Colombian industrial sector is characterized by distortions in
product markets and factor markets, which are created or reinforced by
economic policies. The most significant policy-determined distortions stem
from the trade regime, financial policies (dealt with in the proposed
Project) and, to a lesser degree, from labor market tegulations (paras.
1.23-1.24). Factor markets providing labor and capital inputs to SMEs are
substantially free of distortioas, particularly relative to larger
enterprises. This is corroborated by evidence from Colombia as well as
other countries which suggests that differences in efficiency across
industrial firms are often correlated with firm size, as small and
(particularly) medium-scale enterprises frequently outpace larger
enterprises in various measures of efficiency.
1.13 The trade policy reforms made since 1984 and supported by two
World Bank loans (the Trade Policy and Export Diversification Loan of 1985
and the Trade and Agricultural Policy Loan of 1986) reduced the average
level and the dispersion of tariff rates, but did not significantly change
the protection granted to domestic production by quantitative restrictions.
Ave,age tariff rates were reduced by 31 percentage points and their
standard deviation was halved between 1984 and 1988. Currently the
unw' ghted average tariff rate is 27.4% for raw materials and intermediate
goods, 22.9% for capital goods, and 42.9% for consumer goods. Ir. addition,
a surcharge of 18% of the c.i.f. value applies to all imports, and some
imports are also subject to a sales tax. Tariff receipts are substantially
reduced by an extensive system of exemptions for both the public and
private sectors. A recent pzoposal for tariff reform would reduce the
number of rates to five and would reduce the dispersion of rates, but would
still leave a wide variation in the levels of effective protection and
would afford the greatest protection to those industries with low domestic
content.
1.14 Colombia's system of import licenses remains more important than
tariffs in determining the structure of protection, particularly during
periods of foreign exchange scarcity. Where INCOMEX believes zhere is
domestic production of sufficient quantity and quality, import licenses are
not granted. While the number of tariff positions subject to prior
licenses or prohibitions fell during the recent reform period, the
reduction did not completely reverse the import protection measures
introduced in the early 1980s. Currently, about three fifths of tariff
positions are restricted by licensing requirements, compared to less than a
third in 1980. In 1987, the foreign exchange budget available for prior
licenses was only about 54% of the value of applications for these
licenses.
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1.15 According to preliminary results of Bank sector work, coverage of
domestic manufacturing by licenses or prohibitions fell from 99.7% in 1984
to 82.1% in 1988, which remains high by international standards. For
example, in Venezuela, the coverage of domestic manufacturing by
quantitative import restrictions is 49%; in Mexico, the production coverage
by quantitative restructions fell from 100% to 20% during the first three
years of the reform program; Chile and Bolivia have no system of
quantitative restrictions on imports.
1.16 With respect to output markets, the available evidence suggescs
that industries (at the four-digit classification level) in which SMEs are
important receive about the same protection as industries in which larger
firms dominate. For example, there is no significant correlation between
output coverage by import restrictions, and either average firm size or the
output contr4bution of SMEs. Similarly, four-digit industry estimates of
nominal protection calculated using tariffs do not appear to be related to
average firm size in the industry.
1.17 On the input side, however, the distortionary effects of the
import regime are significantly lower for SMEs than for larger enterprises.
SMEs use fewer directly imported inputs than do large enterprises. In
part, this is due to the administration of the licencing regime. During
times of greater foreign exchange scarcity (or anticipated future
scarcity), the priorities assigned by INCOMEX to prior license applications
sometimes favor large firms. In addition, INCOMEX will consider the
employment impact of denying import licenses, which also tends to favor
large firms employing more workers. More impor.antly, SMEs use fewer
directly imported inputs because of their lacic of information about
external markets and the fixed costs of direct importing, of which
bureaucratic obstacles are a major component. These costs involved in
direct importing cause SMEs to substitute locally produced inputs or
"indirect imports" bought off-the-shelf from direct importers.
1.18 Prices of indirect imports of raw materials, intermediates and
capital goods are often significantly higher than those of direct imports.
During times of foreign exchange scarcity, the premium paid for indirect
imports is of course even higher. In these times, INCOMEX also frequently
favors applications for direct imports by manufacturing enterprises over
those by commercial distributors, in effect severely restricting the supply
of indirecrt imports for SMEs. The oligopolistic structure of markets for
indirect imports may also be an important factor determining their high
prices, and this concentration of sellers is encouraged by the INCOMEX
practice of approving prior licenses based on historical import records of
the applicant.
1.19 Prices of alternatives, domestically produced inputs (when
reasonable substitutes are available), also exceed ths prices of directly
imported products. There are a number of examples of final goods produced
by SMEs in which the domestic markets for intermediate inputs are highly
concentrated (and substantially protected by the trade regime)-- e.g.,
garments (with concentration in textiles), plastics (with concentration in
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petrochemicals), furniture (with _oncentration in certain wood products),
alnd metal products (with concentration in basic metals). It should also be
noted that SMEs often pay higher prices for the same domestically produced
:Input than do large enterprises, simply because the scale of production of
thc latter allows greater access to quantity discounts.
1.20 In sum, due to economies of scale associated with direct importing
and the administration of the import licensing system, SMEs use a greater
proportion of indirect imports or locally produced goods, usually purchased
at higher cost, than do larger firms. As a result, effective protection of
SMEs is often lower than for large enterprises. With respect to exports,
similar conclusions apply: though the administration of incentives does
not appear to discriminate against SMEs, their use of them is 'Less
profitable at lower scales of production. In addition, with respect to
PROEXPO credit, collateral and counter-guarantee requirements of the
National Guarantee Fund impede SME access to this export incentive.
SME Employment and Wages
1.21 Open unemployment in Colombia has been and continues to be high.
The unemployment rate reached 14-15% in the mid-1980s, fell to nearly 10%
toward the end of 1987, and subsequently climbed to 11.9% in June 1988.
The growth rate of labor supply is likely to remain high into the 1990s,
particularly in urban areas, in view of high birth rates prior to the 1960s
and the more recent increase in women working in the formal marketplace.
These factors, combined with persistent socio-politlcal unrest, have led
the Government to assign a particularly high priority to employment
creation and socio-economic development among lower income segments of
Colombian society.
1.22 The creation of new SME firms accounted for about half of all
industrial employment growth during 1953-78. Such firms had rates of
employment creation (15% per year) which substantially exceeded the average
for all SMEs (about 5%) .5 During the recessionary period of the early
1980s, SMEs were relatively more stable employers than were large firms, as
they adjusted to declining output by lowering wages rather than the number
of workers. Full-time employment in the industrial sector fell by about
70,000 jobs (13.5% of the industrial labor force) in the early 1980s; of
this reduction, 83% was accounted for by large firms.
1.23 Remuneration per employee in SMEs averages only 40% of the that
paid to employees of large firms, though in a few four-digit subsectors,
e.g., some clothing, non-electrical machinery, and petroleum and coal
derivatives industries, labor in medium scale firms are paid more than
large firms. In most industries, both wages/salaries and non-wage benefits
are highest in large firms, followed by medium scale and small scale
enterprises. The higher labor remuneration in large firms is apparent for
skilled and unskilled worker categories. This is partly due to the fact
that workers and managers in SMEs are less specialized than their large-
enter'rise counterparts.
3/ Cortes, Berry, and Ishaq. Success in Small and Medium Scale
Enterprises: The Evidence from Colombia. The World Bank, 1987.
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1.24 SMEs tend to be less subject to distortions created by labor
market policies. Current labor legislation makes no distinction according
to size of firm regarding non-wage benefit requirements. However, large
enterprises tend to pay higher "extra-legal" benefits as a result of
agreements negotiated with unions, which are predominant in large firms,
and because of lower turnover rates in large firms. SMEs also tend to use
a greater proportion of workers from the "informal" labor market, at lower
labor costs and with greater flexibility in the allocation of workers to
different tasks within individual firms. On balance, then, SMEs are less
subject to distortions created by labor market policies.
SME Efficiency and Factor Intensity.
1.25 Capital-labor ratios in SMEs are lower than in larger enterprises:
in the industrial sector overall, the value of fixed assets per employee in
small scale enterprises is about one-third that of large firms, while it is
about one-half in the case of medium scale enterprises. Within most three-
digit subsectors, it is still the case that capital-labor ratios increase
with firm size. During 1975-83, capital-labor ratios in medium scale firms
increased relative to those in large firms, while the reverse was true in
small enterprises. The lower capital intensity of SMEs is also reflected
in lower levels of value added per employee, by about the same proportions,
and in higher output/capital ratios.
1.26 The study by Cortes, Berry and Ishaq cited above suggests that
technical efficiency, in addition to being associated with operating levels
in relation to the optimum scale of production, is predominantly correlated
w"-h the personal characteristics of the entrepreneur (skills, education
and previous job). EntreDreneurs whose skills are limited to production
tend do to rather poorly because they find it hard to organize other
aspects of the business. While nearly 90% of those surveyed go to fairs or
read trade catalogs and magazines, technical improvements reflect mainly an
entrepreneur's learning by doing in the firm, knowledge acquired in a
previous job, and technical cooperation. Empirical evidence from the study
shows that many SMEs have an impressive capacity for technical change, even
without help from outside. It found that smaller firms are able to adapt
technology according to the changes in its financial situations, market
access and factor prices which they face and that technical change tends to
be diffused from one firm to others with labor mobility and the movement of
workers from the factory to their own enterprises.
Financial Sector Institutions and Performance
1.27 Credit in the Colombian financial system is dispensed by some 96
intermediaries, ranging from commercial banks to savings banks, development
banks, savings and loan corporations and trade finance companies. The
Central Bank, Banco de la Republica (BR), also plays a significant role in
credit markets through its management of the directed credit system and
external credit lines. Commercial banks are the central players in the
financial system, accounting for more than one-third of the total
outstanding credit, and have by far the largest branch network (over 1,800
offices) across the country.
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1.28 The Colombian financial system has experienced substantial
difficulties in the 1980s. Financial intermediaries encountered an
increasing inability of a broad range of borrowers to repay as a result of
sharp changes in relative pri. es over 1976-82, high real interest rates in
combination with stagnation in aggregate demand, and relaxed credit
standards applied to their affiliates in the real sector. As a
consequence, net profit as a share of equity of the commercial banking
system fell progressively over 1980-85 from 10.1% to negative levels while
total arrears (under and over 1 year) as a share of equity rose from 7.0 to
20.4% and total assets in relation to equity increased from 10.1 to 39.6.
The financial performance of private developments banks (CFs) was far less
drastically affected overall, though reflected similar tendencies (Tables
1.5 and 1.6).
1.29 The Government has taken a number of steps to redress the
financial sector's weak conditions and underlying problems. In 1982, it
set restrictions on interlocking ownership of financial and industrial
entities and on the portfolio concentration of financial institutions.
Over 1983-85, it increased the yield on forced investments from 8 to 15%
created a racility to help recapitalize the system by financing the
purchase of equity and quasi-equity ir. financial and industrial enterprises
at subsidized rates, created a Deposit Insurance Fund (FNGI), nationalized
the banks in greatest trouble (Cr Grarncolombiana and Banco de Colombia) and
used the FNGI to lead workout exercises and to provide financing to other
banks.
1.30 More tecently, Colombia has moved ahead under the reform of the
Andean Pact Decision 24 to seek foreign investment in the financial sector
in order to increase capitalization and efficiency of intermediaries. It
has designed reforms in legislation for receivership ("concordato"), which
currently favors debtor firms over creditors in the workout process. In
addition, it has changed the interest rate structure for its industrial
directed credit lines by converting them from fixed to fully variable
rates. The average level of interest rates charged to enterprises was also
raised to about 2 percentage points above the average 90-day rate for term
deposit certificates (DTF). And at year-end 1987, the Government made
adjustments to reduce the low yields and illiquidity of forced investments
by reducing the share of institutions' assets subject to forced investment
(from 16.5 to 15.5%), increasing their effective yield (from 15.2 to 17.4%
though still remaining significantly below the 26% inflation rate), making
forced investment paper negotiable and permitting about half of reserve
requirements to be met by them.
1.31 The condition of the banking system, supported by strong aggregate
demand growth and relatively sound macroeconomic management over 1986-87,
has slowly improved since its 1985 lowpoint. After-tax profit reached 5.6%
of equity, arrears fell as a share of equity to 14.4% and total assets in
relation to equity dropped to 11.2, comparable to its 1980 level.
Nevertheless, steady progress needs to continue in order to bolster the
solvency, liquidity and efficiency of the system and to letter support
development of the real sector. In particular, the forced investment
system needs to be gradually phased out (see para. 2.10), incentives and
mechanisms strengthened to restructure non-performing portfolios (para.
3.11c and Annex 7), fiscal disincentives to write off bad debts removed,
and new financial instruments and services promoted, such as investment
banking, venture capital and medium-term bond markets. These issues are
currently under discussion with the Government in the context of Bank
sector work and preparation of other projects.
2. Increasing the Development Contribution of SMEs
National Objectives and SME Policy Agenda
2.01 Colombia's current development strategy, the 1987-90 National
Plan, views SMEs and microenterprises primarily as important instruments to
increase productive employment, income and output -- especially among lower
income groups. They have demonstrated their ability to provide employment
creation in a capital efficient fashion, and a large share of the country's
SME output---particularly in agroindustry, apparel, household goods,
construction materials and metal mechanical products---is oriented toward
low-income users' needs rather than large import-substitution industries,
which tend to produce primarily for higher income groups.
2.02 The Cortes, Berry and Ishaq study referred to in the previous
section suggests that larger firms among SMEs have higher average benefit-
cost ratios, explained statistically by their access to finance,
entrepeneurial skills, and type of technology rather than by size itself.
These findings are reinforced by a recent survey on the determinants of
investment by the private sector in Colombia, in which SMEs ranked the
availability of funds as clearly the most important factor determining the
investment decision. The public policy agenda, much of which is already
identified in the National Plan, should thus concentrate on three main
areas to accelerate SME development: (a) increased access to institutional
credit facilities tailored to SME needs; (b) increased access to vocational
training and technical cooperation, particularly that which supports
resolution of enterprise-specific problems in production, management and
marketing; and (c) a more neutral policy environment in order to expand the
potential scope of benefits from SME development.
The SME Credit System
2.03 Colembia's credit markets are characterized by a strong dualism in
which SMEs are served almost exclusively by the subsized directed credit
system eid the extra-banking market, while larger industry is associated
with the commercial banking network. Available data on investment and
credit flows to SMEs over 1980-85 suggests that formal banking institutions
intermediating SME directed credit - the Corporaci6n Financiera Popular
(CFP, the specialized public SME lender), Caja Agraria, CFs and commercial
banks - financed a steadily diminishing share of SME investment financing
(Table 2.1). Bank credit fell from 33 to 211 of total investment as firms
resorted increasingly to internal cash ger:eration (52 to 59Z) and
suppliers' credits (10 to 15Z); the extra-banking financial market
accounted for a relatively stable 3-62 of the total.
- 10 -
Graph 2.1
Total SME Credit by Banking Institution
1970-86
900
80 83 9. 0 838.7
8004 804.7 /
71.
700w 693
9 6 5.0
0
600
0
54.6 8 55-3
o 5~~~~~~~~~~~~~~~~~~~~~~~~6.6
500-
447.062 .1
60- .3 5.5
300 -
1970 1972 1974 1976 1978 1980 1982 1984 1986
Volume im Real Terms
Graph 2.2
Total SME Credit by Banking Institution
1980-86 65.7
66-
64 -
62 -
605.
54-
o 52-
w 49.5
so-
o 48
0
46-
44 -44
42~~~~~~~~~~~~~~~
40-
38-
36-
34
34
1980 1981 1982 1983 .1984 1985 1986
Shore of SME Credit Through CFW
- 11 -- Graph 2.3
Total FFI Credit to SMEs
1970-87
460 - )40.3
420-
39 9.4
400-
380 9
360 347.2
to ~~~~~~336.5
o 340 -
o 320 t
300
t 280 -7 1 15
'/olumc 260 Reoi Term
.0 260 24 .2 24 7 36.7
240 -232.2
c 200
180 16 .5
160 1 .
140 2
120-
1970 1972 1974 1976 1978 1980 1982 1984 1986
Volume in Reol Terms
Graph 2.4
FFI & Wo'rld Bank Credit to SMEs
1980-87
2802
261.2
260-
240 -367
220 215.2
200-
c
iso - ~~~~~~~~~~~~~~~~16.k5
o 160-
02
140-
O 120-
H
.0 100
80~~~~~~~~~~~~~~~~8.
60 -7.
1980 1981 1982 1983 1984 1985 1986 1987
Volume mn Real Terms
D World Bank + Total FFI
- 12 -
2.04 At the same time, the volume of SME credit provided by formal
banking institutions has fallen in real terms almost steadily since 1979
from about Col$850 million annually to under Col$350 million in 1986 (in
constant 1970 Col$) to a level lower than that ir 1970 (Table 2.2 and Graph
2.1). This decline is likely to have been a consequence of falling SME
investment levels during the early 1980s and a decline in their debt
service capacity, as well as changes in the financial system---increasing
real interest rates, decreasing use of directed credit by commercial banks
and CFs, and shifts to larger enterprises which were perceived (in
retrospect, probably incorrectly) to be better credit risks.
Notwithstanding the overall real decline in SME formal credit, CFP
increased the real value of its new lending over 1980-83 and maintained it
in an irregular fashion over the course of the preceding Bank-financed
project (SME 4, covering 1984-87). Consequently, CFP's lending as a share
of total formal banking credit to the SME market nearly doubled over
1980-86 from 34 to 66% and probably continued to grow in 1987 (Graph 2.2).
2.05 Among banking institutions, sources of longer-term funds for SME
lending have tended to emanate mainly from the Government's directed credit
line, the Industrial Finance Fund (FFI) a.'d the World Bank. The value of
FFI resources utilized by these institutions has fallen substantially over
1978-87, to the extent that it was lower in 1987 in real terms than when
the FFI was established in 1968 (Graph 2.3 and para. 2.10). Over a similar
period, the volume of Banik funds become of comparable importance for SMEs
(Graph 2.4). In fact, the maintenance in the real value of CFP's lending,
the major user of both sources of funds, was made possible exclusively by
the Bank's loan under SME 4. As a consequence, the Bank's share of total
CFP outstanding borrowings increased from 41 to 64%.
2.06 Increasing SME Credit Volume and Access. Use of institutional
credit from CFs and commercial banks by SMEs is very low, constituting
about 0.2% of their total 1987 estimated commitments. It is funded almost
entirely by the Government's FFI directed credit facility and is strongly
positively correlated with enterprise size. Credit supply to SMEs by these
institutions appears, according to interviews during prcject preparation,
to have been constrained mainly by (a) the scarcity of resources in the
system, (b) the absence of longer-term maturities of such resources, which
are critical to SME lending, (c) the opportunity cost incurred by not
lending to large, well-established clients, and (d) a general lack of an
active marketing and promotion strategy by most of these institutions. As a
consequence, SMEs frequently turn to the informal market or seek no credit
at all.
2.07 Nevertheless, CFs and commercial banking intermediaries have the
potential to offer the SME market wider access to credit, a broader range
of banking services, more efficient intermediation and greater
responsiveness to its changing needs. The Government's 1986 tax reform has
effectively led financial institutions to seek new market segments and
provide new services to sustain growth. By progressively reducing
corporate tax rates from 40 to 30% through 1990, and eliminating double
taxation on dividends and the deductability of the inflation portion of
- 13 -
interest costs, the reform provides incentives for traditional bank
borrowers to reduce the share of indebtedness in their capital structure
and increase internal cash generation for investment. Those institutions
interviewed consider SMEs to be the next natural market into which to move
and one in which enterprises are relatively creditworthy.
2.08 These institutions can help to promote the expansion of SME
capacity as well as increases in efficiency of existing capacity. A
significant number of SMEs require financial and physical restructuring
efforts to enhance efficiency and loan repayment capacity. Specific
restructuring exercises are needed to deal with an array of SME problems,
ranging from high levels of customer receivables which have diminished
working capital, to high debt service aris partially from informal money
market obligations and to more fundamental problems associated with
inadequate prior investments and technolo7ical obselesence.
2.09 The proposed Project would represent a promotional and
transitional step to stimulate increased SME credit volume and lending by
private CFs and commercial banks. To this end, the project would offer the
following incentives to such institutions: (a) a source of long-term funds
approximating short-term deposit rates with no liquidity (short-term
refunding) risk (para 3.18); (b) adequate profitability via flexibility in
pricing new SME loans according to cost, risk and competition (para 3.19);
(c) lower administrative cost via more streamlined administration in the
use of domestic directed and Bank credit lines (para 3.11 b) and (d)
flexibility in the definition of expeaditures eligible to finance workouts
of existing non-performing SME loans (para 3.11 c). The following
paragraphs of this section discuss the institutional and policy aspects of
these areas.
2.10 Directed Credit. The directed credit system in Colombia is funded
primarily by forced investments of financial intermediaries, which
represent about 15Z of commercial banks' loan portfolios and carry
substantially negative real interest rates despite the recent rate
increases by the Government. Forced investments have been established by
law to finance agricultural development, public debt and low-income
housing, and by the Monetary Board to finance industrial activities, other
housing and to recapitalize the financial sector.
2.11 The system not only promotes fragmentation of financial markets
but increases spreads and raises market interest rates, creates barriers to
the mobilization of financial resources and distorts factor markets. An
analysis of marginal interest rates paid by the industrial sector in 1982
showed that rates exceeded 25Z per year in real terms on 60Z of its
indebtedness while rates of -4 to 8Z prevailed for the 23Z of the debt
originating from the Government's directed credit system. Interest rate
differentials, while not as drastic today, persist with average effective
commercial lending rates in June 1988 approximating 13Z in real terms (43Z
nominal) alongside effective directed credit rates averaging about 7% (372
nominal).
- 14 -
2.12 Directed credit to SMEs is channelled primarily through the FFI,
created in 1968, to rediscount loans made to industrial enterprises with
total assets up to Col$140 million (US$467,000 equivalent) to cover fixed
asset and incremental working capital needs. While all CFs and commercial
banks are eligible intermediaries, in practice three public entities with a
central mandate to support SMEs (CFP, Banco Popular and Caja Agraria)
utilize the majority of the funds. The remaining FFI resources are
utilized Dy commercial banks and CFs, which so fund nearly all their SME
loans.
2.13 Commercial institutions have stated clearly that the FFI is not a
commercially attractive proposition because of lengthy procedures,
documentary requirements and rigid conditions for its use. These
necessitate specialized staff, make its profitability marginal at best and
thus lead CFs ar.d banks to limit themselves to other markets. One main
deterrent to the use of FFI under the present system is the establishment
of obligatory enterprise production and other investment-related targets.
FFI's focus on increasing output and immediate job creation largely
excludes those enterprises which seek funds to reduce production costs and
increase productivity without necessarily expanding employment in the
short-term. Insofar as increased efficiency is likely to lead to increased
product demand, enterprise expansion and employment creation, this narrow
focus does not best serve the FFI's own objectives.
2.14 Other aspects of the present FFI system stifle its use: (a) long
processing times for subloan applications, as FFI loans must be approved
both by the intermediary and BR (CFP reports an average of 107.5 days from
application to disbursement, of which 50 days for approval of BR); (b) high
administrative costs associated with SME loan processing and supervision,
especially for smaller loans; (c) high and costly rejection rates of SMEs'
second loan requests under FFI (89% in CFP), due to their ineligibility if
they have not met targets under a prior FFI loan; (d) inflexible loan
conditions, with maturities of less than 5 years for fixed asset and
construction financing, inadequate grace periods and the requirement that
firms capitalize within the maturity period an amount equivalent to the
loan; and (e) an inability to finance secondhand equipment already used in
Colombia.4 Some of these restrictions (particularly (d)) may place undue
financial pressure on SME borrowers and be substantially responsible for
the disproportionate share of non-performing assets associated with FFI
lending. For CFP, FFI non-performing assets were 41.6% of all CFP non-
performing assets, though the FFI portfolio represented only 21.0% of its
total portfolio. The figures for Bank-financed loans were 2.2 and 46.2%,
respectively.
4/ SMEs less than 5 years old were found, according to Cortes, Berry and
Ishaq, to have nearly twice the share of used equipment as older ones.
Its cost, possibly one-quarter to one-third that of new, can
substantially influence capital requirements and the feasibility of
market entry.
- 15 -
2.15 The stagnation in the use of FFI resources reflects widespread
discontent by the banking system with these many conditions and
administrative requireL.ents. It has also resulted during SME 4 in Bank
resources substituting for rather than complementing the use of domestic
resources. Over 1984-86, FFI commitments fell on average 19.6Z in real
terms, commitments of Bank funds grew by 38.7Z (the loan was fully
committed by September 1987). This follows a pattern in which CFP's use of
FFI has been inversely proportional to the availability of Bank funds (see
below).
Graph 2.5
Use of FFI & World Bank Credit by CFP
1980-87
3.2
3
2.8-
2.6-
2.4-
2.2-
la 2
un 1.8
o 1.4
E 1.2
0.84
0.6
1980 1981 1982 1983 1984 1988 1986 1987
Loan Commitmn,tst
0 FF 4 World Bank
2.16 Some progress has recently been made toward reducing the
rigidities of FFI. BR has adopted automatic rediscounting for FFI credits
up to Col$2 million (about US$6,700), reducing the elapsed processing time
for some credits. However, the need to increase substantially access to SME
credit and to shift BR's role from ex ante project approval to ex post
supervision of the institutional performance of financial intermediaries
requires further change as outlined under the proposed Project (para.
3.11 b).
2.17 Administrative efficiency. The administration of SME lending by
financial intermediaries and the Bank is also of concern given the already
high operating costs of the banking system and the need for simplicity by
- 16 -
SMEs. A study was carried out in 1986 by the SME producers association,
ACOPI, of about 150 SME users through CFP and commercial banks around the
country.5 It concluded that an average of 7.5 months was required between
credit application and disbursement, undoubtedly influencing the ability of
many SMEs to invest, promoting the use of extra-banking market credit and
closing off access entirely to some SMEs.
2.18 From the SME perspective, institutional requirements for credit
applications themselves represent a serious development obstacle. The study
identified some 12 basic documents required for credit applications, which
in addition to basic financial data included the tax returns and personal
financial statements of principals, social security reports, registrations
and certificates related to the Chamber of Commerce, real estate and
equipment, banking and commercial references, property valuations, and
property and personal life insurance. Collection and presentation of this
information took on average about one-third of the elapsed time between
loan application and disbursement. Once gathered, processing is frequently
hampered by technical staff shortages, centralized decision-making and low
priorities accorded (by private commercial intermediaries) to SMEs.
2.19 Some changes to reduce administrative time and expense are
underway in these areas. The Superintendency of Notaries and Registration
has begun to decentralize and computerize its operations. Requests for
banking references have been reduced in favor of credit reference searches
through the Bankers' Association, and efforts have begun between
intermediaries and BR to seek more unified lending criteria. Further
efforts are required, however, as proposed under the Project to streamline
credit processing (see paras 3.21 and 3.25).
Technical Cooperation
2.20 More effective technical cooperation (TC) in support of SMEs is
needed to help them to increase competitiveness and to reduce credit risk
to lenders. The study by Cortes, Berry and Ishaq cited above suggests that
entrepreneurs whose skills are limited to production tend do to rather
poorly because they find it hard to organize other aspects of the business.
Firms with less than 20 workers do participate in general administration
and management training. It is freely available, mainly from CFP and the
national vocational training service in Colombia, SENA. Larger SME firms,
more frequently receive assistance on production issues from SENA, which
has a staff of about 60 persons involved in this program nationwide.
ACOPI, PROEXPO (the national export promotion agency), and several
universities also provide such services. They together provided help,
ma:nly in the form of courses and seminars, to some 2,300 SME participants
in 1987.
2.21 Despite this help, however, surveys of SMEs reflect a strong
interest in advisory services for individual enterprise problems,
particularly in the areas of quality control, bulk purchasing of production
5/ El Ejemplo Colombiano en la Agilizacion del Credito de Fomento a la
Pequena y Mediana Industria. ACOPI 1988.
- 17 -
inputs and product marketing. Individual support is at a premium (only a
total of 250 SME received such assistance in 1987), as priority is accorded
by SENA and others to their group outreach programs. CFP, in collaboration
with local SENA staff, helps to identify TC needs during appraisal and
supervision of its SME loans. To help increase the provision of assistance
in such areas, the proposed project would support through its financial
intermediaries the promotion of expanded distribution sers.ices which
provide bulk purchasing of production inputs and product marketing for
SMEs. It wculd also finance the cost of private sector consulting services
to expand TC for specific production, quality control, and other problems
confronting SMEs (para 3.06).
Microenterprises
2.22 A great deal of interest and activity has been generated in
Colombia by both public and private business sectors about those who are
largely self-employed by forming small informal production units, or
m3.croenterprises (entities with fewer than 20 workers). Informal
microenterprises probably directly employ about 450,000 people (1975), or
as many as the formal industrial sector itself. It is estimated that over
one-half are operated by women. Such operators tend to have very modest
formal education and lack extensive marketing, business organization or
financial management experience.
2.23 Colombia has become a laboratory for local initiatives in support
of microenterprises. Non-governmental organizations (NGOs) endowed by the
private sector provide a combination of credit, courses in business
management and on-site counselling. Among foundat!.ons led by the Carvajal
Group, training in business administration is a prerequisite for credit to
such enterprises. They have been supported since 1980 by credit from the
Inter-American Development Bank (IDB), which recently made a US$7 million
loan available for this purpose. During 1987, over 1,800 businesses
received loans averaging US$1,200 under this project. Results so far, in
terms of repayment of loans accorded to graduates of the training program,
have been very good.
2.24 The proposed project would seek to complement the IDB's support by
orienting assistance through CFP and the Caja Social de Ahorros (CSA), a
private bank experienced in lending to microenterprises, to (a) those who
have already acquired adequate education and professional experience to
establish an enterprise, and (b) those microenterprise groups supported by
other NGOs in Colombia. In the former category fall those leaving
manufacturing with experience to set up their own ventures and many with
post-secondary school training (the largest single category of those
currently unemployed in the country). In the latter category fall
enterprises backed by organizations such as Solidarity Group, a set of
eleven NGOs (including Women's World Banking in Colombia), which operate
successful programs providing credit and technical cooperation to
enterprises. The proposed program 'ould offer credit on formal market
terms to microenterprises benefitting from assistance of these NGOs and
would also finance the expansion of the advisory services of such NGOs (see
Annex 5).
- 18 -
Overall Policy Environment
2.25 Intervention to reduce capital market failure and to diffuse
specialized knowledge in support of SMEs is more productive with a more
neutral policy environment in which SMEs and large industries operate.
More equal access to economic inputs and to development incentives is also
likely to increase the labor-absorbing capacity and competitiveness of
industry overall.
2.26 Under Colombia's import regime, difficulties in obtaining raw
materials at reasonable prices and quality and in importing capital goods
have been frequently mentioned by SMEs in surveys as primary constraints to
operations. These increase uncertainty of supply and raise prices of
capital goods, production inputs and spare parts for SMEs above those for
larger firms (para. 1.17). Other drawbacks for SMEs are frequently found
in investment incentives which favor large firms, burdensome registration,
tax laws and other regulations which discourage setting up and legalizing
SMEs, and large volumes of subsidized and venture capital for heavy
industrial development. The proposed Project would support preparation of
studies which would analyze the above-mentioned areas and make
recommendations as warranted for changes in the policy and regulatory
en-ironment influencing the capital intensity of industry, business
establishment and operations to helr gain a more neutral business
environment for SME development (para 3.15).
3. The Prolect
Relation to the Country Lending Strategy
3.01 The Government's key medium-term development objectives are to
sustain economic growth at 4-4.5% per year while maintaining fiscal and
monetary discipline; increase export diversification and maintain
creditworthiness; and reduce poverty and unemployment. The Bank's country
strategy calls for emphasis on project loans with selective support from
policy-based operations to help achieve these aims. The Government's
1985-86 Reform Program, supported by two Bank trade-related loans, has led
to a relatively satisfactory macroeconomic policy framework in which to
pursue this strategy at the sector level. The proposed Project would be an
instrument mainly to help reduce policy, institutional, and credit
constraints associated with SME development (see Statement of Loans and
Credits to Colombia in Annex 1).
Lessons from past Bank Assistance to Colombian SMEs
3.02 Four Bank loans totalling $92.5 million have been made to SMEs in
Colombia over the past thirteen years. All have been intermediated by the
public development bank established especially to support such enterprises,
the Corporacion Financiera Popular (CFP). The fourth loan was fully
committed in September 1987 and 95% disbursed in October 1988. All of
these operations have principally focused upon generating employment and
- 19 -
the development of CFP as a financial intermediary. These project have been
successful in stimulating growth in employment and in increasing the
quality of CFP's development banking services. They have made very littli
progress, however, toward reducing the administrative cost of CFP's
operations and tackling policy issues influencing SME performance (ref.
PPAR No. 2645 for Ln. 1071-CO of 1979; PCR of April 1983 for Ln. 1451-CO;
PCR of April 1986 for Ln. 1834-CO, and Annex 2). The experience gained in
these projects has inspired more attention under the proposed Project to
changes in policy and institutional "actors, which are equally important
constraints to SME development as the lack of available credit. The
Project also places increasing emphasis on raising efficiency and incomes
of SMEs, which should also help generate increased employment over the
medium-term. In addition, it would focus increasingly on the provision of
technical advisory services to SMEs to resolve enterprise-specific
production, management and product marketing problems.
3.03 The proposed Project also aims to reverse the trends of declining
volume of institutional credit to SMEs and increasing concentration of
flows through CFP by expanding the level of SME lending, relying more on
private CFs and commercial banks, and introducing a specific component for
microenterprises. Continued emphasis would be placed on increasing the
capacity of CFP to efficiently intermediate SME credit by promoting a more
competitive environment for SME lending. At the same time, to reduce the
high share of Bank indebtedness in CFP's liability structure and to
stimulate increased domestic market resource mobiLization, the Project
would provide for limitations on the share of CFP commitments financed by
the Bank's loan.
Objectives, Strategy and Beneficiaries
3.04 The development objectives of the proposed Project would be to
increase SME value added and employment creation. This would be done
mainly by:
(a) making changes in public policies and institutional
mechanisms influencing SME access to long-term credit;
(b) expanding the number of financial intermediaries making SME
long-term loans and the volume of their own resources
mobilized for this purpose;
(c) simplifying loan processing and increasing technical
cooperation to SMEs; and
(d) preparing sector-wide industrial studies and recommendations
during Project implementation on policies influencing capital
intensity, business establishment and operations to help
promote a neutral policy environment for SME development.
- 20 -
3.05 The project would be expected to support over its two year
commitment period at least 2,500 existing and newly created SMEs and 2,000
microenterprises. Based upon past experience, direct job creation should
exceed 14,000 positions, most likely to the direct benefit of the
relatively young (about 77 percent of the unemployed in Colombia are 12-24
years of age). Productivity gains reflected in increased wage levels and
other improvements in existing enterprises would complement employment
creation, and be expected to help alleviate the poverty inberent in low
incomes, long working hours and poor health and safety conditions.
Description
Credit Program (total cost, US$ 234.9 million)
3.06 The credit program would support SMEs and microenterprises in
manufacturing and associated service sector businesses (e.g., repair shops
and spare parts dealers) with total assets of less than US$1.0 million
equivalent. The program would finance SME loans or equity investments for
the purchase of machinery and equipment, spare parts, construction and/or
purchase of industrial building facilities, and permanent working capital
needed to increase SME productivity and expand production capacity. It
would also finance technical cooperation to expand enterprise-specific
support services for SMEs, responding to the expression of many Sl4Es for
help in areas such as production, marketing techniques, organization and
management. Such services would also include assistance to identify and
adopt solutions to pollution and other environmental hazards being created
by SMEs (Annex 3). Such financing would be made available in connection
with a PFI's financing of pre-investment work, an SME investment, or in
support of the investment itself.
3.07 Structure. All development and cummercial banks legally
constituted in Colombia would, in principle, be eligible as participating
financial intermediaries (PFIs) of the proposed Project. Many are keenly
interested in expanding their markets beyond their current exposure to a
relatively small number of large clients, consumer finance and credit card
operations (para 2.07). Interested intermediaries irould be qualified as
PFIs upon satisfactory review by BR and the Bank of the following
eligibility criteria:
(a) certification by the Superintendency of Banks that the
intermediary is in good standing with respect to overall
operating policies and practices, financial condition and
reporting requirements. The standards of the Superintendency
are satisfactory to the Bank for the purposes of the proposed
Project;
(b) for CFs, that it meets the operating and financial standards
established by the CF Reform Act of 1987, which embrace
virtually the same standards as set under past Bank DFC
projects. It provides inter alia for a minimum share of
long-term loans in a CF's portfolio (50Z), a minimum level of
capitalization (US$2.1-2.3 million), and a maximum
debt/equity ratio (10:1) (Annex 4); and
- 21 -
(c) a satisfactory examination of its organization, staffing,
loan appraisal and supervision procedures for SME lending
under the Project.
3.08 Seven CFs and six commercial banks have expressed their desire to
participate in the credit program, meet the iligibility criteria, and would
constitute the initial PFIs: (CFs) Caldas, Del Norte, Nacional, Colombiana,
Santander, Suramericana, and Valle; (commercial banks) de Bogota, Cafetero.
de Colombia, Comercial Antioquefto, Popular, and Occidente. Their
participation, with their 1,300 branch offices throughout Colombia (versus
the 17 of CFP), would substantially increase the geographical and numerical
coverage of the SME market. They are likely to focus on larger enterprises
in the SME market, which tend to have stronger operating, management and
marketing skills. CFP would continue to be a principal intermediary under
the Project. It specializes in lending to SMEs with less than 20
employees, a market segment highly correlated with labor-intensive
industrial subsectors, lower investment costs per job created and SMEs
outside major urban areas (Annex 4).
3.09 Each PFI would conclude a Participation Agreement with BR,
renewable annually, to protect the rights of the borrower and the Bank and
to enable obligations to be carried out per the Loan Agreement. The
Participation Agreement would specify inter alia indicative SME loan
commitments under the Project, the need to maintain an adequate overall
financial condition, employ an adequate number of staff capable of managing
the portfolio of Project resources, and ensure proper control and
provisions for SME arrears. As a condition of loan effectiveness, BR would
conclude and duly execute Participation Agreements with at least three PFIs
whose aggregate indicative commitments exceed 40Z of the Bank's loan amount
and one Managing Institution for the microenterprise program (see para.
3.10). A financial rate of return calculation, market evaluation,
technical and management assessments would be prepared for SME loans in
excess of $100,000. A cash flow analysis would be undertaken for loans
below this threshold. SME loan approvals would require at least an 11
percent financial rate of return.
3.10 Lending to microenterprises under the rcredit program would be
implemented by two Managing Institutions, CFP and the Caja Social de
Ahorros (CSA). As second-tier banks, they would appraise the capacity of
NGOs, and approve and supervise credit lines to these organizations
(Annex 5).
3.11 SME Financial Policies. Under the proposed Project, changes in
regulations and management of financial resources destined to support SME
investments would be made in order to increase SME credit access and to
encourage more diversified participation by CFs and commercial banks as
PFIs. Simultaneously, this would support the on-going adjustment process in
the financial sector by helping to reduce distortions in resource
allocation, adjust the pricing of credit to reflect its cost and associated
risk, and upgrade portfolio quality and profitability of those few
financial intermediaries which are already significant SME lenders.
Agreement was obtained during negotiations on the following policy changes:
- 22 -
(a) Definition of SMEs: increase the enterprise total asset
ceiling which constitutes the definition of SMEs from the present
US$467,000 (Col$140 million) to US$1.0 million (Col$300 million) and
provide for annual corrections according to the full amount of inflation.
This step, which became law in December 1988, would just recover the real
value of the indicator at the outset of the SME 4 project (Col$100 million
in 1984);
(b) Adjustments in FFI Credit Regulations: revise FFI
regulations so as to (i) eliminate interest rate subsidies and expand
financial margins to PFIs, (ii) extend maturities and grace periods, (iii)
expand eligible expenditures to include imported used equipment, (iv) adopt
substantially higher automatic rediscount ceilings and simplify
documentation to reduce loan processing time and cost, (v) adopt repayment
performance as the key ex post monitoring criterion, (vi) relax
capitalization and production target requirements, and (vii) eliminate the
discretionary bases for cancellation of already approved rediscounts
(Annex 6). The implementation of these measures would be a condition of
loan effectiveness; and
(c) Restructuring Program: make a provision for a broader
definition of eligible expenditures under the credit program for
enterprises preparing well-defined restructuring plans aimed to reduce
output costs and increase productivity of existing assets of SMEs.
Expenditures to be financed via SME loans or equity would include goods and
services associated with such items as product research and development,
marketing and distribution network development, labor relocation and
retraining, and acquisitions where the utilization of capacity is
substantially below subsector averages. The Bank's loan would provide a
fresh injection of funds for such plans, generally in conjunction with
rescheduling, quasi-equity, debt/equity conversions and/or write-offs of
existing loans of PFIs (Annex 7).
3.12 Institutional Development. Like many commercial financial
institutions, CFP's financial condition suffered considerably during the
early years of SME 4 (1984-85) from rising non-performing assets, falling
financial margins and high administrative costs. Despite improving
performance over 1986-87, this cut into its capital base such that its 1987
debt/equity ratio was 16.7. With capital injections for 1988, it reached
7.5 by year-end. CFP's administrative cost as a share of average total
assets for 1988, 6.9Z, has not complied with the covenant under SME 4 of
6.0 (ref. Annex 2).
3.13 The proposed Project would establish a financial framework for CFP
and the Government, defining the following targets which they would need to
meet in order to maintain CFP's eligibility as a PFI: (a) attainment of the
6.02 administrative cost target in 1989 and 5.5X in 1990 under semi-annual
monitoring arrangements, (b) attainment of a net after-tax profit/total
average assets ratio of 1.02 in 1989 and 1.6? in 1990; and (c) a
debt/equity ratio not to exceed 7.5:1 from 1989. BR's rediscounts for CFP
using the Bank's loan, while having minimum access to US$25 million, would
also be limited to 352 of CFPs total commitments over 1989-90 in order to
reduce its high share of CFP's indebtedness (ref. Annex 4).
3.14 Most of the other core PFIs have a limited amount of SME lending
experience. Although they generally do not presently maintain separate
units within their organizations for such lending, a focal point exists for
management of directed credit lines and represents a reasonable starting
point upon which to build their Project participation. Each has agreed to
designate a specific entity responsible for its SME lending program,
allocate specific staff to it, and tailor its lending regulations and
procedures as required. Most of the core PFIs, with the exception of Banco
de Colombia, tend to rank above the banking system average with respect to
overall return on equity, portfolio quality, net capital and institutional
efficiency (ref. Annex 4). Given that lending of Project resources is not
expected to exceed 1 Z of total new loan commitments of these institutions
over the commitment period, no explicit conditionality on institutional
financial performance is warranted.
Technical Cooperation ($0.2 million)
3.15 Technical cooperation (TC) amounting to US$200,000 would be
included in the Project, to be prepared and financed by BR, to assist in
preparation of in-depth policy studies. These would be intended to improve
the basis for a dialogue with the Government on steps which might be
required to modify the regulations and policies influencing capital
intensity, business establishment and operations so as to help establish a
more neutral policy environment for SME development (Annex 8).
Cost and Financing
3.16 The Project's total cost is estimated at US$235.1 million. This
takes into account projections of total SME credit demand for CY1989-91,
commitments in principle by PFIs, which are significantly higher than SME 4
particularly in view of the Project's broader network of financial
intermediation, the increased scope of enterprise eligibility, and
simplification of FFI and other administrative procedures. Of the total
cost, US$80 million or 34 Z represents direct and indirect foreign exchange
requirements. To finance the Project (Table 3.1), SMEs themselves would
cover an average of 23 Z (US$54.1 million) of total Project cost from
internal sources. The proposed Bank loan of US$80.0 million equivalent
would meet foreign exchange needs, while financial intermediaries would
mobilize an estimated 18Z (US$43.7 million), and FFI and other public
domestic sources utilized by CFP (mainly PROEXPO) would cover the remaining
25 Z (US$57.3 million).
Relending Terms and Conditions
3.17 The proposed Bank loan would be made to BR at the standard
variable rate with the guarantee of the Republic of Colombia. BR would
bear the explicit risks of interest rate and cross currency fluctuations
and pay the standard Bank commitment fee of 3/4 of one Z per annum. The
loan would be repaid in equal principal installments over 17 years,
including a five-year grace period. Any surplus of repayments from SME
loans made by the Project's PFIs to BR over amounts due to the Bank by BR
would be recycled to PFIs per the Project's legal agreements.
- 24 -
3.18 BR would relend the proceeds of the loan for the credit program.
BR would rediscount 80 Z of the total SME loan or equity investment amount
and charge an interest rate in 1989 equivalent to DTF minus 1 percentage
point to CFs and DTF for commercial banks; one percentage would be added to
each rate in 1990 and these rates maintained thereafter. The difference
between the rates to CFs and commercial banks reflects the lower average
cost of funds of the latter, which have substantially gr2ater access to
demand and time deposits than CFs. As the DTF rate has ov.r the long-term
reflected international interest rates plus expectations of the local
nominal devaluation rate, the interest rate risk would be implicitly borne
by the PFI and passed on to SME beneficiaries. Maturities of funds relent
to PFIs would match those set for SME clients.
3.19 The individual SME loan and cumulative financing limits for any
one SME would be US$0.5 million. Maturities of between 4-10 years with 1-3
years of grace would be established for financing of fixed assets,
restructuring plans and technical cooperation. Permanent working capital
would carry maturities up to a maximum of five years including up to one
year of grace. Flexible pricing by PFIs to client SMEs would be encouraged
for the credit program by setting interest rates according to the maturity,
credit risk, operational cost and competition for each SME loan. However,
guidelines would establish an allowable maximum of DTF + 4 percentage
points in 1989 and DTF + 5 percentage points from 1990 for SME loans
carrying the minimum 4 year maturity. Maximum interest rates to SMEs and
the margins of PFIs would be progressively increased for loans with longer
maturities, up to an additional one percentage point for maturities of 10
years (Table 3.2). Such rate limits would recognize the probable
oligopolistic tendencies in financial markets which drive up rates to
beneficiaries. This structure would place the maximum project lending rate
to SMEs above the "prime" rate (DTF + 3) to large-scale industrial
enterprises, though slightly below average commercial lending rates, and
4-6 percentage points above the effective interest rates of the SME 4
Project. The long-term maturities of the Bank's loan would permit PFIs to
compensate higher interest rates with longer maturities when necessary to
meet cash flow requirements.
Project Implementation.
3.20 Administration and Oversight. The proposed Project would be
administered by BR as the "second-tier" institution. To allow for maximum
financial and administrative autonomy of PFIs, its role would be kept to a
minimum consistent with accountability for the use of Bank funds.
Specifically, it would (a) qualify and supervise compliance with
eligibility criteria for PFIs, (b) review rediscount applications above the
free limit for PFIs, (c) provide ex post monitoring of SME loan appraisal,
supervision and portfolio quality, (d) disburse and account for Project
resources, (e) aggregate and analyze Project implementation indicators, and
(f) ensure compliance with the Project's Loan and PFI Participation
Agreements. BR has an adequate organizational and staff capacity to carry
out these responsibilities given in particular its experience in second-
tier operations with Bank-financed DFC projects.
- 25 -
3.21 Several steps would be taken to reduce administrative requirements
for the Bank's loan in order to reduce cost and elapsed time of SME loan
processing for PFIs and to simplify the process for SMEs. The Bank's free
limit for ex ante approvals by BR of SME loans would be set at US$400,000,
covering an estimated 25 Z of the Bank's loan amount. The ex ante free
limit set by BR would vary according to the experience of the PFI. BR has
established a limit of US$250,000 for CFP and most CFs, $120,000 for less
experienced CFs, and US$80,000 f`or commercial banks. All SME loans and
equity investments under the restructuring program would, however, require
ex ante approval of BR and the Bank. To monitor portfolio quality, a
provision would also be made for tracking by BR of SME loan repayment
obligations and performance, and for the right of automatic suspension by
BR of a PFI's access to the Project's rediscount facility if performance
during a quarter, in terms of recovery cf principal and interest due from
SME loans, fell below 90 Z. BR and Bank supervision of the Project would
also make individual reviews of SMt credits and the PFI's appraisal and
supervision work. Data required by the Bank and BR for SME loans would be
simplified to include only the essentials on an SME's financial performance
and condition, the proposed investment and financing plan, and procurement
of goo's and services.
3.22 Procurement and Disbursement. BR would be responsible for ensuring
the use of procedures under the Project for procurement of all goods and
services aimed to obtain competitive quality and price. Given the
relatively small average size of SME loans expected to be financed (about
$57,000) and the limit of US$0.5 million in cumulative loans to any single
SME, established commercial practices consistent with economy and
efficiency would be the standard for this purpose. PFIs would maintain
records enabling examination of the procurement procedures used, responses
and price quotations received and criteria for selection of suppliers.
3.23 The final date for submission of SME loan proposals to the Bank
would be June 30, 1991 and the closing date for loan disbursements would be
December 31, 1993 (Annex 9). This takes into account the average
disbursement profile for past SME loans to Colombia and the nearly two-year
rather than three-year commitment period, which is considered appropriate
given the expected increase in SME loan demand occasioned by the factors
ment4.oned in para. 3.16. In view of the present shortage of financial
resources, a provision has been made for retroactive financing of up to 10?
of the proposed loan '$8.0 million) for SME loan and equity investments
commitments incurred following completion of loan negotiations. The
provision would be available only following certification by BR and the
Bank that the PFI concerned has met the Project's eligibility criteria.
Bank funds would be disbursed on up to (a) 80 Z of expenditures under
qualifying SME loans or investments of PFIs, and (b) 100? under the
microenterprise program.
3.24 To facilitate rapid Project execution, a Special Account would be
established in BR with an initial deposit of $7 million, representing on
average about four months of disbursement requirements. BR would submit to
the Bank a monthly statement of transactions of the Special Account.
- 26 -
Withdrawals from the loan account would be made on the basis of statements
of expenditures (SOE), with detailed documentation for each SME loan and
equity investment maintained by the PFI for review by the Bank upon
request. As PFIs would be likely to experience a longer period between
expenditures by SMEs and disbursement by PFIs than is normal for non-IDF
projects, the Bank would disburse for expenditures incurred up to 180 days
prior to the receipt by BR of a disbursement rLquest.
3.25 Accounts, Auditing and Reporting. PFIs would maintain records
adequate to reflect their operations and financial situation, in accordance
with accounting principles consistently applied and in a form satisfactory
to the Bank. They would maintain separate Project records, including for
the Special Account, which would be audited annually by independent
auditors acceptable to the Bank. Project audit reports, along with copies
of financial statements and institutional audit information required by
Colombia's Superintendency of Banks, would be submitted within six months
after the end of the fiscal year of each PFI. They would include opinions
inter alia as to the reliability of SOE to support claims for disbursement
and to properly reflect the expenditures eligible for financing under the
Loan Agreement. PFIs submitting requests for automatic rediscounting would
submit to BR the SME loan agreement, repayment schedule and promissory
note. For requests above their free limits, PFIs would submit a
description of the SME and its financial performance, an appraisal of the
SME investment, goods and services to be financed, the financing plan and
terms and conditions of the loan. They would maintain for inspection
during supervision work essential information on the SME's investment,
financial performance, subloan and procurement characteristics. BR would
obtain, aggregate and analyze information on progress of the Project's
implementation (Annex 10).
Benefits and Risks
3.26 The proposed Project would help Colombia to realize its current
development strategy by accelerating value added, employment creation and
the supply of goods and services of SMEs. Previous Bank-financed projects
have clearly demonstrated their ability to have a substantial impact in
these areas. Under SME 3 (1834-CO), for example, an ex-post evaluation
based on a strvey 127 borrowers revealed average incremental growth in
sales of 26.5% per year, in employment of 13.3% per year, and in labor
productivity of 10.4% per year.. The Project would also substantially
expand access to scarce long-term investment resources to increase
productivity, expand installed capacity, and help to revive existing non-
performing loans in the banking system. It would make modest adjustments
in financial policies influencing SMEs' credit access and help private
development and commercial banks to expand their relationships with the SME
market.
3.27 The main implementation risk associated with the Project lies in
the ability of participating commercial banks to adapt their appraisal,
supervision and administrative processes to the requirements of SMEs. To
mitigate this risk, they, along with other PFIs, would make clear
organizational, staff and financial resource commitments to the Project and
participate in staff training courses under the aegis of Colombia's
Bankers' Association in order to ensure that their systems are well
prepared for SME lending.
- 27 -
4. Project Agreements
4.01 During negotiations, agreement was obtained on the following:
From BR
(a) Project objectives (para. 3.04) and the description of the
,.redit program (paras. 3.06-3.10) and technical cooperation
program (para. 3.15);
(b) SME financial policies (para. 3.11)
(c) Project costs, the loan amount and finan.Ring plan, and
relending terms and conditions to financial intermediaries
(paras 3.16-3.19);
(d) implementation arrangements for the Project's
administration and oversight (paras 3.20-3.21); and
(e) procurement, disbursement, accounts, auditing and reporting
arrangements (paras 3.22-3.25).
From PFIs
(a) CFP: (i) reach a target of 6.0 % of administrative cost as a
share of average total assets in 1989 and 5.5 % in 1990, (ii)
attain a target of 1.0% of net-after tax profits as a share
of average total assets in 1989 and 1.6% in 1990; (iii) not
exceed a debt/equity ratio of 7.5:1 from 1989; and (iv) limit
BR rediscounts using the Bank's loan to 35% of total annual
CFP commitments over 1989-90 (para 3.13); and
(b) All PFIs: a draft Participation Agreement between BR and
PFIs which would specify inter alia relending terms from BR
to PFIs and SMEs, appraisal guidelines, documentation
requirements, minimum SME loan commitment volume, the need to
maintain an adequate overall financial condition, employ an
adequate number of staff capable of managing the portfolio of
project resources, and ensure proper control over and
provisions for SME arrears (para. 3.09).
From the Government
ensure that capital contributions to CFP are adequate to keep
its debt/equity ratio within the 7.5 target from 1989 (para.
3.13).
4.02 As special conditions of loan effectiveness, (a) the Government
would put into effect the financial policies and institutional changes
outlined in para. 3.11, and (b) BR would conclude and duly execute
Participation Agreements with at least three PFIs whose aggregate
indicative commitments exceed at least 40% of the loan amount and with one
Managing Institution for the microenterprise program (para 3.09).
- 28 -
4.03 The proposed Project constitutes a suitable basis for a Bank loan
of $80 million equivalent on the terms and conditions set out in Chapters
1-3 of this Report.
- 29 -
Table 1 .1
COLOMBIA
FIFTH SMALL AND MEDIUM SCALE ENTERPRISE PROJECT
INDUSTRIAL SECTOR GROWTH RATES, 1967-86
1967-74 1975-79 1981-68 1984-86
Total (excluding procoeosd coffe.) 8.60 3.92 -0.13 4.87
Non-durable Consumer Goodc 6.13 3.96 -0.34 3.68
Food 7.4U 6.51 2.0e 3.160
Procosefd coffe. 2.35 13.14 -1.82 6.9w
othor food products 7.84 6.23 2.45 3.79
beverages 7.91 6.39 1.76 2.16
tobacco 6.90 -3.96 1.19 7.46
Textiloe, clothing A leother 9.29 . 2.36 -6.02 4.19
Durablo Consumer A Interediste Goods 8.21 3.48 0.64 2.95
Wood industrios A furniture 4.83 1.63 -0.89 4.91
Paper producet A printing 13.70 6.20 0.81 6.88
Chemicals A rubber products 7.67 4.72 0.10 -2.79
Potroloum refining products 8.63 -2.14 6.92 9.74
Non-metal min-rnl products 6.20 6.43 1.51 5.33
Basic motals 7.74 2.58 -2.38 3.71
Capital Goods 17.10 6.67 -3.47 5.93
Machinory a equipment 11.84 7.16 -2.90 6.08
Transport equipment 27.40 6.14 -4.15 6.28
Other industries 5.40 3.30 3.99 6.72
Light Manufacturing 1/ 8.47 4.04 -0.11 4.10
Hoavy Manufacturing 2/ 8.82 * 3.77 -0:16 2.64
1/ includes food, textiles, clothes, leather, wood A other
2/ include paper, chemicals, non-metal minerals, basic metal. o capital goods
- 30 -
Table 1. 2
COLOMBIA
FIFTH SMALL AND mEDIUM SCALE ENTERPRISE PROJECT
INMUSTRIAL SECTOR SHARE OF GOP, 1967-67
1967-74 1975-79 191-68 1984-66
PRIMARY
Agriculture, Fishing 9 Foroetry 25.2 23.4 22.6 21.S
SECONARY (INDUSTRY) 26.7 23.6 27.3 29.9
Mining 2.6 1.4 1.8 2.5
Manufacturing 21.7 23.9 21.8 21.3
coffee 3.4 2.8 2.9 3.0
other 18.4 20.1 18.4 18.3
Electricity, Gas a Water 0.8 0.9 1.0 1.0
Construction -3.0 3.s3 3.6 4.2
TERTIARY (SERVICES) 43.3 45.5 46.6 46.2
Co mercC 11.4 13.2 12.6 12.1
Transport, Storage A Comounication 7.7 8.9 9.6 9.4
Financial Establishoments 14.9 13.8 14.7 14.3
Comunal Services, social A person 12.8 12.3 12.9. 13.1
minus Imputed Bank Servicos -2.6 -2.6 -8.2 -2.7
VALUE ADDED 97.2 97.6 96.5 97J1
indirect taxes 2.8 2.5 3.5 2 9
GROSS DOMESTIC PRODUCT, W 1. 1.0 19.9 199 0
SOURCE: DANE, Cuentas nacional
COLOMBIA
FIFTH SMALL AND MEDIUM SCALE ENTERPRISE PROJECT
SMEs BY 4-DIGIT SITC CLASSIFICATION 1/
SITC Description X total *ub- X total SITC Description X total *ub- totnl
sector output SUE output *ector output SUE output
SIE Output Exceeding U0S of Total for Subsctor SHE Output Amounting to 20-49X of Total for Subsector
3113 Canned Fruit - V-gtables 64.2 0.6 3111 Slaughter A meat prepsration 33.2 2.0
3182 Wine 89.8 0.6 8112 Dairy products 83.5 4.8
Sub-total 1.1 8116 Grain milling products *C.0 18.9
8117 Bakery product. 38.4 5.4
8212 Made-up toatil- goods 57.9 9.3 8121 Food products, n.e.c. 22.7 2.5
8214 Carpeto A rugs 62.5 0.4 8122 Animal eeods 22.4 8.O
8216 Cordage, rope & twine 9S.9 0.2 8184 Soft drinks 28.4 2.3
8229 Apparel except shoes 66.3 9.1 Sub-total 51.6
8221 Apparel except shoes, other 82.4 0.6
8283 Leather products 10n.0 0.9 8211 Spun A woven textiles 27.8 2.0
8240 Footwear U .8 2.2 8213 Knitting mills 46.0 2.8
Sub-total 13.7 8282 Skin dressing and dyeing 28.2 *.1
Sub-tot l 4.9
3312 Wooden containers 139.0 a
8319 Wood products. n.e.c. 97.7 0.3 3811 Sawmills 42.9 1.1
8320 Wooden furniture 75.6 1.4
Sub-total 1.7
3419 Paper products, n.e.c. 22.6 0.7
8691 Structural elay product. 69.1 1.1 8420 Printing A publishing 28.9 8.6
Sub-tot l 4.2
8728 Pecio;us metal rf t)nlng 139.0 9.1
3611 Fertilzers A pesticides 28.6 2.1 w
8812 Metallic furniture A fixtures 76.5 1.0 8628 M)icellaneous cbheical products 46.1 0.8
8614 Metallic plumbing A heating 66.8 0.4 3529 Chemical products. n.e.c. 40.4 1.4
8522 Agricultural mchinery 100.0 8.4 8659 Rubber product., n.e.c. B4.0 *.8
M823 Metal & woodworking machinery 1".0 0.2 860# Plnstic products, n.e.c. U4.8 6.8
8824 Other specialty ind. machinery 100.6 0.6 Sub-total 9.9
8826 Office & computing machinery 139.0 9.2
3826 Other non-classifi d machinery 96.3 9.8 3621 Other glass products 28.4 0.1
U2 2 scuhinry, n.o.ec. 62.4 0.7 8699 Mon-metollic mineral prod., n.e.c. 26.7 1.3
8849 Transport materials, n.e.c. 67.9 0.1 Sub-total 1.9
3862 Photo A optical goods 76.6 0.1
Sub-total 4.9 8722 Tin I nickel refining 32.6 *.1
3902 Musical instruments 100.0 0
3903 Sporting goods 100.0 * 3813 Structural _etal products 29.5 1.2
8904 MIscollaneous ind. products 53.e 1.6 3819 Fabricated metal products, n.-.c. 27.5 2.4
Sub-total 8627 Non-electrical mach A *quip, n.e.c. 26.5 1.5
3831 Electrical industrial machinery 29.8 1.1
3842 Railway equipment 23.0 6.6
8844 Motorcycles A bicycles 83.2 *.4
3851 Prof A scientific equipment. n.-.c. 83.1 9.7
Sub-total 7.1
3909 Other miscellandeous ind. products 38.8 0.3
U Total SUE Output 23.2 X Total SUE Output 61.1 m
Average SME Output in Industry 19.0 w
l/ Using 185 DANE daLa and defining SUEs as those enterprises with total assets of l-e nhan Coll 118 million, or an estimated ColS ae million in 19g9.
- 32 -
COLOMBIA
FIFTH SMALL AND MEDIUM SCALE ENTERPRISE PROJECT Table 1.4
SME EXPORTS, 1986-86
(oillion$ of i,St)
1980 tool 1982 I9n 1954 1985 1986
Food Products 225.4 151.6 101.4 134.8 109.6 116.3 1560.5
Clothing 113.8 114.0 180.7 69.2 89.8 49.6 77.0
Leather 28.6 26.6 32.8 26.1 22.5 38.7 51.9
Shoes 18.3 16.2 19.5 8.0 7.3 11.0 20.8
Wood Products 11.7 13.9 16.9 9.5 6.0 12.7 15.1
Furniture 3.2 4.6 3.9 1.6 1.7 8.8 7.9
Petroleum and Coal Derivatives 6.5 5.9 4.8 2.6 4.4 4.6 10.0
Plastic Products 11.2 11.7 9.2 12.6 11.3 10.3 11.2
Metal Products 46.1 62.7 66.2 26.5 22.1 22.8 28.6
Other 14.4 19.8 19.0 7.0 3.0 6.6 7.9
Total SUE Exports 489.1 417.3 398.9 289.1 227.2 274.8 378.4
Large Scale Industrial Exports 479.4 486.6 424.2 867.0 396.6 427.7 496.5
Total Industrial Exports 948.6 992.8 816.1 656.1 628.7 762.0 874.9
Annual Growth Rates (X)
Total SUE Exports -11.0 -5.6 -26.6 -21.4 20.7 38.0
Largo Scale Industrial Exports 1.8 -12.6 -13.6 8.0 7.9 16.1
Total Industrial Exports -4.8 -9.4 -19.3 -4.9 12.6 24.8
Share of Total Industrial Exports
Total SME Exports 49.6 46.2 46.1 44.1 36.4 89.1 43.3
Large Scale Industrial Exports 56.6 63.8 61.9 66.9 63.6 69.9 58.7
Total Industrial Exports 100.0 100.0 100.0 190.0 196.0 190.0 100.0
Source: Banco do Is Republics. Evolution Recionte do Los Exportaclonsa manutactureras, May 1987.
COLOMBIA
FIFlH SOALL AND MEDIUM SCALE ENTERPRISE PROJECT
FDNANCIAL INDICATORS OF ALL COMAERCIAL BANKS. 1986-87
lioi 1981 1982 1963 1984 1986 1986 1987
1. SOLVENY
Total Assets / Equity 10.1 10.3 9.6 19.8 12.7 39.6 10.8 11.2
(Equity * NPA Provisions - WA) / Equity 1.0 9 9 8 0.8 066 -0.9 1.3 098
2. PROFITABILITY
Not Profit / Equity 10.1 14.1 6.9 5.7 4.6 -206.8 -3. 6 6.6
Gross Financial Margin / Productive Assots 12.6 11.4 11.7 10.1 8.4 7.2 9.2 9.7
Net Financial Margin / ProductIvo Assets 12.2 11.1 109. 8.7 7.6 -9.3 8.3 08.
3. RISK MANAGEMENT
(Arrears * NPA) / Equity 7?. 7.6 11.4 12.4 19.4 20.4 18.2 14.4
(Arrars * WPA - WA Provisions) / Equity 39.4 38.7 63.7 62.2 116.0 237.7 �1.9 41.5
4. OPERATING EFFICIENCY
Operational Expenditurew / Total Assets 4.6 4.a 4.7 4.4 4.5 4.6 4.6 4.
Operational Profit / Productive Assets 6.9 4.6 3.6 2.6 -4.2 -7.8 6.9 2.6
Sourco: Banco de la Republics
COLOMBIA
FIFTH SMALL AND MEDIUM SCALE ENTERPRISE PROJECT
FINANCIAL INDICATORS OF PRIVATE DEVELOPMENT BANKS (CF*), 1960-87
Participants in Bank-financed DFC ProJoct. (9) and Others (16)
1980 1981 1982 lOw 1964 1985 1966 198r
1. SOLVENCY
Capital + Legal Reserves / Total Assets
Bank-financed CFs 8.7 8.2 8.7 8.2 7.7 6.90 6.0 6.6
Other CF. 27.8 26.7 18.6 11.7 11.8 8.1 13.0 18.9
Total 11.2 11.P 9.8 9.1 8.7 8.1 7.6 7.7
2. PROFITABILITY
Not Profit / Capital plus Reorve
Bank-financed CF. 88.8 18.6 11.6 10.9 16.3 17.6 86.5
Other CF. 18.9 1.9 -0.4 -49.4 -81.8 -2.2 7.9
Total 29.9 18.3 7.8 -9 4. -94 109. 27.9
8. RISK MANAGEMENT
Non-performing Assete / Total Portfolio
Bank-financed CF. 0.4 0.9 2.9 2.6 4.8 4.4 8.7 8.1
Other CFs O.7 1.6 1.7 5.6 16.2 16.4 13.9 10.1
Total 6. 1.0 2.8 8.1 8.2 8.8 6.3 4.5
- ---------------- - - - ----- ------- -----p
4. OPERATING EFFICIENCY
Operational Expenditures / Total Assets
Bank-financed CF. 3.2 1.6 1.5 1.6 1.5 1.3
Othbr CFs 3.9 1.8 1.9 2.1 1.7 1.8
Total 3.6 1.6 1.6 1.7 1.6 1.4
Source: Banco de a Republica
- 35 -
Table 2. 1
COLOMBIA
FIFTH SMALL AND MEDIUM SCALE ENTERPRISE (SUEs) PROJECT
COMPOSITION OF ALL CREDIT TO SMEs, 1980-8C
2- 19S2 1981 1952 193U 1984 1996
SOURCES CF FINANCING
CP.rcant of Tot& I)
Internal Resource. 51.9 49.7 50.9 62.9 61.0 68.9
Supp eI'e Credits 9.5 8.2 8.8 17.2 15.6 15.2
Banking Institutions 33.9 34.2 30.9 23.0 16.7 20.6
of which:
Public Dovelop ent Bank (CfP) 12.6 i2.6 14.0 9.5 4.7 8.6
Privat* Development Banks (CF.) 4.9 8.6 2.8 1.9 1.6 2.8
Coenercial Banks 15.6 17.5 14.6 11.6 16.5 19.2
Informal Money Market 6.0 8.1 6.9 4.4 4.3 3.1 If
Other *.6 .4.8 3.4 2.5 2.5 2.0 It
TOTAL 110.6 109.9 1W. 109.9 100.9 190.0
1/ Estimated
- 36 -
Table 2.2
COLDOIEA
FIFTH SMALL AND MEDIUM SCALE ENTERPRISE PROJECT
VOJU1E AND COMPOSITION OF INSTITUTIONAL CREDIT TO SME, 1909-67
los tool 19 2 w is" 1oss low tool
BY SOURCE Of FUNDS
(millions of 19t0 ColS)
Fond. Financeirs Induostral (FFt) 272.5 210.7 261.2 286 7 215.2 144. 122.9 160.6
The World lank 36.9 S7.4 64.9 706. 06.2 69w 1961.8 60
Total 310.6 276.1 826.1 397.8 801.4 225.1 231.2 288.8
(X share of total)
Fondo Flnanclera Industrial CFFI) 87.6 79.2 69.1 77.0 71.6 64.1 58.2 t
The World Bank 12.2 209. 19.9 23.0 23.4 3a.. 46.3 2 1:
Total 10. 19.0 199.9 1091. 1090. 1n.* 19e.9 196.0
BY INSTITUTION
(X sokre of total funds)
Fondo Financiera Industrial (FFI)
CFP 25.1 26.8 81.2 81.7 41.4 82.5 24.9 28.6
Caj Arer! 10.4 11.2 19.7 7.8 6.2 9.7 1s.7 NA
Corporac ones Finnncicroc (Cf 16.6 21.3 18.4 12.7 2.3 18.2 28.9 MA
Co Bmrcial anks 1/ 47.7 40.7 48.7 46.8 60.1 44.6 42.3 NA
Total In-6 100.0 10. 9 199.0 10099 1n.6 1i9.6 1n.0
Tho World Bank
CFP 109.9 199.9 199.9 19.9 199.0 19.91 199.9 1".0
Sourcet Bonco de la Republics and CFP
1/ Mainly Banco Popular and Banco do Colombia
- 37 -
COLOIBIA Table 3.1
FIFTH SMALL AN MEDILU SCALE ENTERPRISE PROJECT
DETAILED FINANCING PLAN
1989 1990 Total 89-91 1989 1990 Total 89-90 1 Total S Total
(in mullions of Coll) * (in milliona of USW) * SME Institutional
I. Summary a a Investment Loans
---------- a~~~~~~~~~~~~*
Total Financing 36326 54648 90974 * 107.2 128.0 235.1 * 100
* a
SME anterprisO 835S 12519 20924 * 24.6 29.4 54.1 * 23
Institutional credit 27971 42079 70050 82.5 98.5 181.1 77 100
of which:
FFI 7300 9650 16950 a 21.5 22.6 44.1 a 19 24
world Bank 10980 20349 31329 a 32.4 47.7 80.0 * 34 45
Financ;al Intermedieries 7456 9260 16716 * 22.0 21.7 43.7 * 18 24
Other domestic sources via CFP 2235 2820 S055 * 6.6 6.6 13.2 a 6 7
1989 1990 Total 89-90 1989 1990 Total 89-90 S Total
(in millions of Coll) a (in millions of USS) a
II. Institutional Credit (A * 8) 27971 42079 70050 82.5 98.5 :81.1 a
-------------------------------a a
A. Corporacion Financiera Popular 13835 18320 32155 a 40.8 42.9 83.7 a 100.0
financed by: a a
FFI 2300 3600 5900 a 6.8 8.4 15.2 a 18.3
World Bank - SME Component 3700 5900 9600 a 10.9 13.8 24.7 * 29.9
Capital and local CC;' market 5100 5300 10400 a 15.0 12.4 27.5 a 32.3
PROEXPO credit via CFP 1785 2250 4035 a 5.3 5.3 10.5 a 12.5
Mlicroenterprise Program - 108 450 570 1020 * 1.3 1.3 2.7 a 3.2
Microenterprise Program - W8 50 700 1200 a 1.5 1.6 3.1 a 3.7
S. Other Intermediaries' Commitments 14136 23759 37895 * 41.7 55.6 97.3 a 100.0
financed by: a a
FFr 5000 6050 11050 14.7 14.2 28.9 29.7
World Bank - SME Component 6780 13749 20529 a 20.0 32.2 52.2 a 53.6
Subtotal 11780 19799 31579 a 34.7 46.4 81.1 a 83.3
a a
Intermediaries own resourcee 2356 3960 6316 a 6.9 9 3 16.2 a 16.7
* a
_~~~~~ a
Indicative Coimitments by Intermediarie e
Total 11526 18788 30314 34.0 44.0 78.0
of which: a a
Banks
Banco Cafetero 509 641 1149 a 1.5 1.5 - 3.0 a
Banco Popular 848 1068 1915 * 2.5 2.5 5.0 a
Banco de Colombia 848 1068 1915 a 2.5 2.5 5.0 a
Banco de Occident 848 1068 1915 a 2.5 2.5 5.0 e
Banco Commercial Antioqueno (to confirm) 848 1068 1915 * 2.5 2.5 5.0 a
Banco de Bogota (to confirm) 848 1068 1915 a 2.5 2.5 5.0 a
Subtotal 4746 5979 10724 * 14.0 14.0 28.0 a
Private Financial Corporations
CF del Valle e a
CF National a a
CF Suramaricans ,
CF Colombions e a
CF del Norte a a
CF Santander C a
CF Calds a d
a a
Subtotal 6780 12810 19590 * 20.0 30.0 50.0 e
- 38 -
Table 3.2
Page 1 of 1
COLOMBIA
FIFTH SMALL AND MEDIUM SCALE ENTERPRISE PROJECT
TNTEREST RATE STRUCTURE FOR SME 5
Credit Line: World Bank FFI (Directed Credit)
Min. Max. Min. Max.
Subloan Maturity 4 Years 10 Years 4 Years 10 Years
Financial IntermediarS CB 1/ DB 2/ CB DB CB DB CB DB
Intermediary
Rate to SME
1989 DTF+4 DTF+4 DTF+5 DTF+5 DTF+4 DTF+4 DTF+5 DTF+5
1990 DTF+5 DTF+5 DTF+6 DTF+6 DTF+4 DTF+4 DTF+5 DTF+5
Central Bank Rate to
Intermediary
1989 DTF DTF-1 DTF DTF-1 DTF DTF-1 DTF DTF-1
1990 DTF+1 DTF DTF+1 DTF DTF DTF-1 DTF DTF-1
Intermediary's Margin
(Percentage Points)
1989 4 5 5 6 4 5 5 6
1990 4 5 5 6 4 5 5 6
1/ Commercial Bank
2/ Development Bank
- 39-
Alnnex 1
Page 1 of 5
STATUS OF BANK OPERATIONS
A. STATEMENT OF BANK LOANS AND IDA CREDITS IN COLOMBIA (as of September 30, 1988)
(US$million)
Loan Amount (less Cancellation)
Number Year Borrower Purpose Bank IDA Undisbursed
89 fully dis'.ursed loans and one IDA credit 2,536.1 23.5 1/ --
1593 1978 Zona Franca Industrial y Industrial
Comercial de Cartagena Export 14.7 0.1
1725 1979 Interconexion Electrica, S.A. Power 72.0 2.1
1857 1980 Banco de la Republica Industrial Cr. 142.0 3.3
1868 1980 Empresas Publicas de Medellin Power 124.5 9.4
1953 1981 Empresas Publicau de Medellin Power 85.0 41.8
1996 1981 Instituto Colombiano de
Hidrologia Irrigation 34.3 1.4
1999 1981 Corporacion Electrica de la
Costa Atlantica Power 34.2 6.3
2008 1981 Empresa de Energia Electrica
de Bogota Power 359.0 10.4
2090 1982 Ferrocarriles Nacionales de
Colombia Railways 30.0 0.4
2121 1982 Fondo Vial Nacional Highways 149.6 6.9
2174 1982 Republic of Colombia Rural Develop-
ment 53.0 28.5
1/ Includes exchange adjustment of US$4.0 million.
- 40 -
Annex 1
Page 2 of 5
A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of September 30, 1988)
Number Year Borrower Purpose Bank IDA Undisbursed
2192 1982 Fondo del Ministerio de
Educacion Rural Education 14.0 2.5
2303 1983 Instituto Colombiano Agricultural
Agropecuario Research 63.4 24.0
2349 1983 Carbones de Colombia, S.A. Coal
Exploration 9.5 5.7
2379 1984 Republic of Colombia Earthquake Re-
construction 40.0 1.3
2449 1984 Empresas Publicas de Medellin Multipurpose
power & water
supply 164.5 125.6
2453 1984 Federacion Nacional de Agricultural
Cafeteros de Colombiano diversifi-
cation 50.0 15.2
2464 1984 Banco de la Republica Industrial Cr. 40.0 2.0
2470 1984 Empresas Municipales
de Cucuta Water Supply 18.5 11.4
2476 1984 Empresa Colombiana de Petrol Petroleum 130.0 23.1
2477 1984 Banco de la Republica Development
Banking 90.0 33.2
2512 1985 Empresa Acueducto
Alcantarillo de Bogota Water Supply 129.0 101.0
2551 1985 Republic of Colombia Trade Policy
Export Diver-
sification 300.0 0.5
2611 1985 Republic of Colombia Health Services
Integration 36.5 30.4
2634' 1985 Empresas de Energia
Electrica de Bogota Power 171.0 163.0
2635 1985 Empresas Puertos de Colombia Port Rehabili-
tation 42.8 29.9
2637 1985 Empresas Publicas Municipales Water Supply 24.0 13.1
2667 1986 Instituto Colombiano de
Hidrologia Irrigation 114.0 101.0
- 41 -
Annex 1
Page 3 of 5
A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of September 30, 1988)
2668 1986 Fondo Nacional de Caminos
Vecinales Rural Trans-
port 62.0 34.3
2677 1986 Republic of Colombia Trade and
Agriculture
Policy 250.0 2.0
2829 1987 Fondo Vial Nacional 2nd Highway 180.3 168.9
2889 1988 Republic of Colombia Power Sector 300.0 150.0
2909 1988 Caja de Credito Agrario Caja Agraria 15.0 15.0
2961 1988 Water Supply & Sewerage Water Supply 150.0 150.0
TOTAL 6,028.7 23.5
Of whichi has been repaid 1,680.6 7.2
Amount sold 51.0 -
Of which has been repaid 51.0
Total now outstanding 4,297.1 16.3
(Exchange Adjustment B-Loans) .4
Total now held by Bank and IDA 4,296.7 16.3
-
Total undisbursed 1,313.7
_ 42 -
Annex 1
Page 4 of 5
B. STATEMENT OF IFC INVESTMENTS (as of September 30, 1988)
Fiscal Type of Amount in USS Million
Year Obligor Business Loan Equity Total
1959 Laminas del Caribe, S.A. Fiber-board .50 .50
1960-1965 Industrias Alimenticias
Noel, S.A. Food products 1.98 .08 2.06
1961 Envases Colombianos, S.A. Metal cans .70 - .70
1961-1968 Morfeo-Productos para el
Hogar, S.A. Home furniture .08 .09 .17
1961 Electromanufacturas, S.A. "Iectrical equ pment .50 - .50
1962-85 Corporacion Financiera Development
Colombiana financing 6.00 2.02 8.02
1962-1963-85 Corporacion Financiera Development
Nacional financing 6.00 2.04 8.04
1963-1967 Compania Colombiana de Textiles 1.98 .15 2.13
1968-1969 Tejidos, S.A.
1964-1970 Corporacion Financiera de DevelopmelLt
Caldas financing - .81 .81
1964-1968 Forjas de Colombia, S.A. Steel forging - 1.27 1.27
1966 Almacenes Generales de Warehousing 1.00 - 1.00
Deposito Santa Fe, S.A.
1966 Industria Ganadera Livestock 1.00 .58 1.58
Colombiana, S.A.
1967-70-74 ENKA de Colombia, S.A. Textiles 18.31 2.61 20.92
85-86-87
1969 Compania de Desarrollo de Tourism - .01 .01
Hoteles y Turismo, Ltda.
(HOTURISMO)
1969-1973 Corporacion Financiera del Development
Norte financing - .45 .45
1969-85 Corporacion Financiera del Development
Valle financing 6.00 .43 6. 43
1970 Promotora de Hoteles de Tourism .23 .11 .34
Turismo Medellin, S.A.
1970-1977 Pro-Hoteles, S.A. Tourism .80 .24 1.04
1973-1975 Corporacion Colombiana de Housing - .46 .46
Ahorro y Vivienda
1974 Cementos Boyaca, S.A. Cement 1.50 - 1.50
1974 Cementos del Caribe, S.A. Cement 3.60 - 3.60
1976 Las Brisas Mining 6.00 - 6.00
1977 Promotora de la Intercone:ion
de los Gasoductos *e la
Costa Atlantica S.A. Utilities 13.00 2.00 15.00
1977-80 Compania Colombiana de Clinker, Cement and
S.A. Construction
Material 0.49 2.24 2.73
- 43
Annex 1
Page 5 of 5
B. STATEMENT OF IFC INVESTMENTS (as of September 30, 1988)
Fiscal Type of Amount in US$ Million
Year Obligor Business Loan Equity Total
1981-85-87 Leasing Bolivar Leasing 14.00 .20 14.20
1981-1982 Petroleos Colombianos LTd. Chemicals and
Petrochemicals 12.15 3.86 16.01
1983 1rigorificos Colombianos S.A. Food Processing 1.0 0.54 1.54
1984 * Cementos Rioclaro S.A. Cement and
Construction
Material 22.47 5.00 27.47
1984-87 Carbones del Caribe S.A. Mining 14.7E. -- 14.78
1986 SF/Chucuri Chemicals and
Petrochemicals 5.00 5.00
1987 Prodesal Chemicals and
Petrocl'emicals 6.00 1.18 7.18
1987 Promotora Gasoducto Centra Chem & Petrochem .04 .04
1988 Corp. Fin. del Valle S.A. Dev. Finance 5.00 4.78 9.78
Total Gross Commitments 145.08 36.19 ;81.27
Less cancellations, termina-
tions, repayments and sales 106.38 14.15 1.20.53
Total cRmmitments now held by IFC 38.70 22.04 60.74
Total undisbursed (including 14.10 7.23 21.33
participants)
- 44 -
Annex 2
Page 1 of 4
Colombia
Fifth Small and Medium Scale Enterprise Project
Experience Under Past Bank Lending
Introduction
1. Four Bank loans totalling $92.5 million have been made to small
and medium scale enterprises (SMEs) in Colombia over the past thirteen
years. The first loan of US$5.5 million (1071-CO) was approved in 1975 and
represented the Bank's first operation in Latin America for this purpose.
Subsequent operations were approved for $15 million in 1977 (1451-CO), $32
million in 1980 (1834-CO) and $40 million in 1984 (2464-CO). The last was
fully committed in September 1987 and 95 percent of its funds had been
disbursed by September 1988. All of these operations have been principally
focused upon generating employment, providing technical assistance to
smaller enterprises and upon the institutional development of CFP.
2. All of the Bank's loans have been made to SMEs through the public
development bank established especially to support such enterprises, the
Corporacion Financiera Popular (CFP). CFP was founded in 1967 to
contribute to SME development through the provision of financial and
technical assistance. CFP is primarily publically capitalized, with only 2
percent held by the private sector, and its Board of Directors is chaired
by the Minister of Economic Development. The organization currently has
376 staff members, of which some 162 are professionals who are well
qualified to carry out the CFP's day-to-day operations. The fclloving
sections review who has benefitted from these loans and draw some
conclusions Rbout their institutional setting from experience with the CFP.
Steps under SME 5 to increase the availability of credit and the efficiency
in financial intermediation, particularly by CFP, are outlined in Annex 4.
Credit Program
3. CFP has developed a strong capacity to reach and support small-
scale Colombian industrialists. The Bank's most recent loan of US$ 40
million under SME 4 was fully committed in September 1987, several months
ahead of the December 31, 1987 Commitment Closing Date. This represented a
real increase of financial support by CFP to the small business market of
about 129 percent over the SME 3 project (1981-83 commitment period) and an
expansion in the number of enterprises supported from 1,270 to 2,162.
4. All of the Bank's loans through CFP have tended to cover a similar
segment of the SME market. Under SME 4, about 86 percent of the Bank's
loan went to enterprises in the "small' category (under 50 employees);
nearly two-thirds to enterprises with less than 20 employees and a
remarkable 40 percent to enterprises with less than 10 employees. Over
- 45 -
Annex 2
Page 2 of 4
half of loan commitments were to industrial subsectors with moderate to
high average labor intensity - apparel, footwear and leather (14.2
percent); wood and furniture products (10.8 percent); metallic products
(6.8 percent); food and beverages (20.7 percent). About 26 percent of the
loan volume assisted new enterprises, nearly 98 percent produced for the
domestic market and slightly more than half of the enterprises were located
outside of Colombia's four principal industrial districts of Bogota,
Antioquia, Valle and Atlantico. Survey data suggest that investments
supported by the SME 4 loan generated about 6,500 new ,obs directly at an
average cost of some COL$1.3 million (USS 6,500).
5. The median SME loan amount was about COL-$ 6 million (US$ 30,000),
with about 25 percent of the loan volume below loans of Col$ 2.5 million
(US$ 12,500). Bank funds continued to be used primarily to finance the
purchase of machinery and equipment (67 percent), some construction (15
percent) and working capital (18 percent). Subloan terms have effectively
softened since SME 3 given a rise in inflation and an extension of average
maturities. Real effective anticipated interest rates under SME 4 for
fixed asset financing averaged 3.7-5.7 percent per annum (spread depends
upon business location), a declire from 7.7 percent under SSI 3.
Significant progress was made, however, toward the end of the project with
the Government's 1987 reform of interest rates for directed credit.
Project rates were pegged to the 90-day bank deposit rate (the DTF) and set
at DTF + 1 percentage point, a rise of about 4 percentage points over the
SME 3 rate. Meanwhile, maturities of subloans were extended, apparently in
response to the effects on SMEs finances of the recessionary years and to
the rising level of payment arrears. More than 90 percent of the subloan
commitment volume under SME 4 provided repayment of 4 or more years (65
percent under SME 3), and about one-third exceeded 6 years (11 percent
under SME 3).
6. These projects have had a measurable effect on the availability of
credit for SMEs and on growth in value added, employment creation and the
supply of goods and services derived from their investments. An ex-post
evaluation of SME 3, based on a survey of 127 borrowers, revealed average
incremental growth in sales of 26.5 percent p.a., in employment of 13.3
percent and in labor productivity of 10.4 percent. Less successful,
however, has been the effort to develop an autonomous, financially self-
sustaining institutional mechanism to serve SMEs.
Technical Cooperation
7. CFP has developed under previous Banks-financed projects a capacity
to meet many basic technical cooperation requirements of SMEs. CFP's
personnel support the preparation of financial feasibility studies and the
provision of basic information for subloans approval. They also provide
technical advisory services in different managerial and operating fields
for small business. Under SME 4, such services were provided to nearly
1,600 firms and about 530 seminars ;,ave been organized by CFP in which some
6,330 industrialists participated.
4 46 _
Annex 2
Page 3 of 4
8. At the same time, these programs have tended not to provide
sufficient direct advisory services tailored to individual enterprises,
particularly with respect to training in product planning and production
techniques, quality control and marketing. Under the proposed Project,
thererore, CFP would seek to develop information, mobilize and finance
consulting services in such areas for SMEs to draw upon. CFP would also
develop a modest feedback and evaluation system to try to better judge the
utility and cost effectiveness of technical cooperation programs.
CFP's Operatin2 Capacity
9. CFP has tried under Bank-financed project to improve the
efficiency and quality of its operations. Under its 1984-87 Action Plan,
for example, CFP revised its operating framework and stepped up staff
trainiDg in an effort to decentralize its operations t, CiP's regional
offices. A progressive shift in staff away from headquarters has proceeded
slowly, falling from 41 to 37 percent of total staff over the Plan period.
There is evidence that subloan processing time over the past two years has
been reduced by some 30-40 percent in most cases, and that appraisals and
supervision activities have improved in quality as a zesult. A substantial
increase in supervision visits by CFP has also taken place, growing from
1773 to 3056 per year over 1983-87. Information systems appear to have
improved significantly with the installation of Bank financed computers and
training. Six of 14 regional offices utilize this equipment both for
administrative as well as project appraisal purposes. Information systems
for accounting records, financial analysis, risk management and the socio-
economic statistics generated by subprojects are sound, auditing procedures
have been found satisfactory and audit reports have contained unqualified
opinions.
10. However, the benefits of these steps have yet to be clearly
realized in financial terms. Total CFP administrative costs in terms of
average total assets were no lower in 1987 than comparable figures for
1983. Operating cost per project approved and per peso lent were also
comparable. By year-end 1987, such costs remained at a high 7.0 percent of
average total assets, in violation of the loan covenant under SME 4
requiring CFP to reach a 6.0 percent figure. Such costs are, in fact, in
substantially the same range as those under previous projects. The
proposed Project, while including further explicit measures to lower CFP
administrative costs and increase profitability, thus places the emphasis
on developing a more competitive environment in which CFP must operate as
the main motivating force for increased efficiency.
CFP's Financial Performance
11. Although CFP's financial performance compares favorably with many
Colombian financial institutions, it has been characterized over the long
run by low profitability, periodic needs for the Government to replenish
its capital base, and hc,vy reliance on forced investment and external
credit lines. During SME 4, CFP's new loan commitments permitted it to
maintain the real value of its loan portfolio, though the trend was uneven.
It experienced a significant fall in the overall portfolio over 1984-85, at
4 47 _
Annex 2
Page 4 of 4
an average rate of 6.6 percent per year, and a like rebound over 1986-87,
both in step with macroeconomic trends. Over this period, CFP sustained net
operating losses in each year excepting 1984, which averaged -3.3 percent
of total assets. Three factors explain its faltering finances: (a)
financial margins fell over the period from 7.4 to 5.4 percent of assets;
(b) significant provisions for losses were made in 1986 to recognize the
rising trend since 1982 in loan payment arrears; and (c) high
administrative costs per peso lent.
12. Margins. The margins between CFP's interest income and its cost of
funds has steadily narrowed from 50.3 percent of financial income in 1980
to 27.6 percent in 1987. It had dipped even further in 1986 (24.4
percent), but has rebounded with a fall in the proportion on non-performing
assets and the implementation last ycar of fully variable interest rates to
CFP's clients pegged to the DTF rate. The basic trend appears to reflect
the rising share of non-performing assets in CFP's portfolio, and to a
lesser extent the decline in spread on FFI and on the Bank's loan between
SME 3 and SME 4 from 5.0 to 4.5 percent.
13. Arrears. After total arrears had risen steadily over 1980-84 from
8.4 to 16.8 percent of CFP's total portfolio, the proportion receded to
13.9 percent by the end of 1987. By comparison, this indicator for private
development banks (CFs) participating in tha DFC 9 project, which
essentially serves large industrial enterprises, showed sharper improvement
over June 1985-June 1987 from an average of 9.1 to 4.8 percent of total
loan portfolio. CFP's non-performing assets (arrears over 360 days) fell
noticeably over 1984-87 from 9.3 to 7.7 percent (from 4.6 to 2.1 for CFs).
14. As part of its risk management, CFP has implemented
recommendations contained in a detailed evaluation by Peat Marwick in 1986
of the probable realizable value of its real property guarantees. It had
by end-1987 made provisions to cover the likely shrinkage between their
stated and market value amounting to about 41 percent of arrears exceeding
one year. The uncovered share of such arrears represented about 75 percent
of CFP's net worth at year-end 1987 and will amount to about 28 percent by
year-end 1988 with the additional capital injection.
15. Capitalization. CFP's high administrative costs, narrowing
financial margins and provisions for high levels of arrears have made deep
cuts into CFP's net worth during SME 4. CFP embarked upon SME 4
underpinned by a debt/equity ratio of 4.6, well within the 6.0 target
covenanted in the Bank's loan, but fell to 16.7 by year-end 1987. CFP's
growth and the maintenance in the real value of its new loans since 1984
was financed almost exclusively by Bank funds, its indebtedness (through
Banco de la Republica) jumped from 41.7 to 58.3 percent of its total
indebtedness. Its mobilization of domestic term deposits (CDTs) during
this period represented only a small fraction of total borrowings (4-52).
16. The proposed Project would promote better financial performance by
increasing financial margins on Project funds, introducing a restructuring
program to deal more effectively with non-performing loans, and introducing
new semi-annual performance indicators which would need to be met in order
for CFP to maintain its access to Project funds (see Annex 4).
ANNEX 3
Colombia
Staff Appraisal Report
Fifth Small and Medium Scale Enterprise Project
SMEs and the Environment
1. Within the industrial sector, a significant segment of SMEs
utilize materials which have the potential to pollute and otherwise create
hazards for the environment. These are found, in particular, in the canned
and preserved fruits and vegetables industry, leather tanning and
finishing, and metal finishing where SME production constitutes the
majority of value added within these subsectors. It is also relevant where
SMEs produce a smaller share of subsector value added (about one-third of
the total), in livestock feed, dairy and meat products, grain milling,
textile products, fertilizers and plastics.
2. Legislation establishing environmental regulations for- industry
was first issued as Law 9a of 1979 the "C6digo Sanitario Nacional". This
and later laws (particularly decree 1;94 of 1984) regulate t1ie use of
water, waste discharges and atmospheric emissions; set standards for
drinking water, occupational hazards and industrial safety, food quality
control, and also sanitary standards for buildings. The main executing
agencies for these laws are EMAR and the Ministry of Health, either
directly or through its departmental secretariats and regional health
units. However, some regional corporations have the authority to set wAter
standards in their regions. The effectiveness of pollution regulations in
Colombia seems to vary according to the type of pollution, the Length of
time of the legislation and the efficiency of the agency administering the
regulations. However, even where enforcement is effective, the penalties
for polluting crn be well below the costs of installing pollution control
equipment. Since the overall legislative and enforcement process does not
provide sufficient environmental guidelines for SMEs in Colombia,
provisions have been made under the Project for special assistance in
enviromental matters to the SME borrowers.
3. Under the proposed Project, technical cooperation would be
financed by the Bank's loan inter alia for the purposes of identifying and
proposing solutions to environmental hazards created by SMEs. Ihis would
include examination of the production process with respect to (a) the
storage, use and disposal of any toxic, explosive or reactive chemicals
used as raw materials; (b) haza:dous by-products and wastes generated;
(c) monitoring arrangements for and compliance with environmental. laws and
occupational health and safety regulations. INDERENA, Colombia's agency
which promotes environmental protection, would facilitate such assistance
via the interpretation of the existing environmental legislation in
Colombia and references to expertise to carry out these tasks.
- 49 -
Annex 4
Page 1 of 6
Staff Appraisal Report
Colombia
Fifth Small and Medium Scale Enterprise Project
ParticipatinR Financial Intermediaries
Introduction
1. The public development bank for smaller-scale industrial sector
lending in Colombia, the Corporacion Financiera Popular (CFP), has been the
sole financial intermediary for the past four SME projects supported by the
Bank. As one of the principal objectives of the proposed Project is to
increase the access of SMEs to capital via the diversification of sources
of credit, CFP is expected in the coming round to utilize about 45 percent
of the Bank's loan, or about US$ 28 million equivalent. In contrast with
the US$ 40 million Bank loan which CFP intermediated under SME 4, this will
represent a substantial reduction in its reliance on external capital and a
step increase in the mobilization of domestic capital to finance the growth
in its portfolio.
2. At the same time, the number of participating financial
intermediaries (PFIs) will be significantly expanded. Seven private sector
development banks, or corporaciones financieras (CFs), are committed to
join the project and are expected to intermediate about 40 percent
(US$25 million) of the Bank's loan. They are qualified to do so and are
well known to the Bank, having participated for many years in the Bank's
DFC icans for large-scale industry in Colombia. In addition, six
commercial banks have expressed their desire to enter the SME credit market
as PFIs for the project and are prepared to commit at least the remaining
US$ 10 million equivalent.
3. All PFIs are subject to the regulatory framework of the
Superintendency of Banks in Colombia. The Superintendency is responsible
inter alia for monitoring the procedures, practices, solvency and liquidity
of all institutions in the financial system. It exercises this
responsibility mainly via (a) its authority to approve the creation,
restructuring and liquidation of such institutions, (b) setting regulations
and technical nouns to meet standards of operation and accountability, and
(c) its authority to suspend operations of an institutiori found to be in
violation of its statutes, financial or operational requirements.
Facilities are available through the Central Bank to maintain liquidity
requirements and, where an institution's financial and operating condition
is endangered, the Superintendency has wide latitude to intervene to
protect the interests of creditors and maintain its viability.
4. The Superintendency monitors in particular the following financial
indicators: (a) reserve requirements, (b) debt/equity ceilings, (c) minimum
net worth requirements (defined as at least 50 percent of paid-in capital),
(dj delinquent payments (up to one year) and non-performing assets (over
- 50 -
Annex 4
Page 2 of 6
one year), (e) provision requirements for non-performing assets (100
percent of the debt when backed by personal guarantees), (f) the
distribution of profits (which require its prior authorization), and (g)
the financial accounts reviewed by the fiscal examiners of each
institution. It also places limitations on an institution's total loans
outstanding, in particular of up to of 10 percent of paid-in capital and
reserves in most cases for any single borrower. It further obliges
institutions making loans in excess of Col$ 5 million each (US$ 15,000) to
consult the central credit reference system in Colombia maintained by the
Colombian Bankers' Association before lending to a prospective borrower.
5. PFIs will be required to operate in conformity with the
requirements of the Superintendency, as well as to ensure satisfactory
organization, staffing, loan appraisal and supervision procedures for the
Project in order to maintain their access to Project funds. The following
sections highlight any additional eligibility requirements for their
participation.
Corporacion Financiera Popular
6. Medium-term Obiectives. In the face cf the shortcomings in CFP's
long run financial performance (see Annex 2), the Government, CFP and the
Bank agree that CFP can best serve the smaller business community by
adopting a major commitment to become a more efficient and financial
autonomous organization which is able to compete with private sector
intermediaries in serving the SME market. Under the proposed SME 5
Project, therefore, it is prepared to to give primary emphasis to quality
improvements in CFP, mainly via modest loan portfolio growth rates,
increased attention to workouts in the existing portfolio, and more
administrative streamlining.
7. Since the Bank's appraisal mission for SME 5, CFP is complying
with semi-annual targets which aim to compress administrative costs,
further accelerate loan recoveries, and increase capitalization. By August
1988, it had recorded a net profit of Col$ 27.6 million against a budgeted
loss of Col$ 19.9 million, reduced non-performing assets to 6.6 percent of
total assets versus 7.7 percent at the end of 1987, and augmented its
capital so as to bring its debt-to-equity ratio to 7.9:1.
8. 1989-90 Program. In the coming two years, CFP aims to (a) expand
its new commitments at a pace of 5-7Z per year in real terms and diversify
the financial services it offers to SMEs, (b) further reduce non-performing
loans and assets held in payment for arrears, (c) keep administrative costs
under the annual na,ional inflation level, particularly by continuing to
reduce the present staffing levels, and (d) increase provisions from
profits for non-performing assets. CFP envisions that its lending will
continue to be oriented toward small firms, frequently producing goods for
lower income consumers, such as in agro-industry, apparel, household goods
and construction materials, and metal mechanical products. The following
describe conditions, in addition to maintaining its good standing with the
Superintendency of Banks, which the CFP must meet in order to maintain its
eligibility as a PFI in the proposed Project (see Table 4.1).
- 51. -
Annex 4
Page 3 of 6
9. Capitalization. Capital injections provided and budgeted in 1988
will restore CFP's debt-to-equity ratio to a projected 6.9 at the end of
1988. An additional amount (about Col$ 360 million) is required to ensure
that CFP meets the present 6.0 ratio covenanted under SME 4. This will
nevertheless be inadequate for the future given the likelihood that no
significant profitability can be anticipated from CFP in the short run.
The Bank will thus seek during negotiations, as a condition of first
disbursement to CFP, confirmation that capital contributions to CFP have
been made such that CFP complied with a 6:1 debt/equity ratio. It would
also seek to ensure that capital contributions to CFP are adequate to keep
its debt/equity ratio within the 6.0 target at December 31 over 1989-90.
This is projected to require a total additional contribution of Col$ 2,100
million (US$ 5.5 million) for 1989-90.
10. Borrowing Program. CFP has prepared a medium-term borrowing
program which reverses the increasing reliance of CFP upon Bank loans, and
increases reliance upon internal resources and the local capital market
without increased reliance on the forced investment resources of the FFI.
CFP's funding strategy for 1989-90 calls for a decrease in i.ts reliance oni
external credit lines (34 percent, mainly from the Bank) and the use of FFI
(18 percent), a significant increase in the use of its "own' resources
(prim&rily CDTs, equity contributions and loan recoveries, to 32 percent),
and maintenance of the level of PROEXPO funds (13 percent). To help ensure
implementation of this strategic shift, a ceiling would be placed on the
commitment by CFP of the Bank's loan for SME 5 of up to 35 percent of total
annual CFP commitments. This would apply within a total allocation to CFP
from the Bank's loan of US$ 25 mIllion for SMEs and US$ 3 million for
microenterprises.
11. Interest Rates. Interest rates to SME clients for Bank funds
under the proposed project would rise by 5 percentage points above the SME
4 Project to DTF + 6, approximating commercial market levels (see
Table 4.2). Funds would be provided to CFP by BR at DTF + 1, providing a
0.5 percent increase in spread over SME 4 to help increase CFP's gross
financial margins, its profitability and its ability to attract domestic
market capital.
12. Administrative Costs. CFP's administrative costs are higher than
many other financial institutions given the small firm and SME loan sizes
involved. However, there remains scope for cost reductions and increased
operating efficiency, particularly through further streamlining of its
regional office network, further reductions in overall staff, and a shift
in the costly provision of technical cooperation from its own
administrative budget to its inclusion as part of SME loans. CFP therefore
intends to (i) continue its decentralization program to regional offices
while undertaking a review of the financial viability of those offices with
low SME loan volumes, (ii) maintain the growth in total staff remuneration
within the national inflation rate in the coming two years, and (iii)
consider the establishment of a preinvestment financing facility (similar
to the Bank's PPF). During loan negotiations, the Bank will seek CFP's
agreement to budget for and attain in 1989 the 6.0 percent administrative
cost to total average portfolio and to reach 5.5 percent in 1990.
- 52 -
Annex 4
Page 4 of 6
13. SME Loan Restructuring. CFP has organized a team in its
headquarters which joins with regional office staff to evaluate
specifically the prospects for SME loans in substantial arrears and to
recommend liquidation or restructuring. A more explicit and substantial
effort is required, however. Thus, under the Restructuring Program of SI.V
5, CFP will systematically increase staff resources devoted to workouts for
subloans in substantial arrears in collaboration with the preparation by
clients, with technical cooperation as required, of restructurirng plans
which can be supported by the Program. Overall, CFP undertakes to reduce
its non-performing assets as a share of total porfolio from a projected 5.9
percent at the end of 1988 to 3.8 percent by end-1990.
Private Development Banks (CFs)
14. Colombia's 24 development banks (corporaciones financieras, or
CFs) were established between 1959 and 1975 to provide medium and long term
debt and equity financing to private productive enterprises, principally in
the industrial sector. They are predominantly Colombian-owned and their
shares are relatively widely held among banks, insurance companies and
industrial enterprises. Nine of these CFs, accounting for more than half
of the system's total net worth, have been beneficiaries of Bank Group
financing. Bank DFC lending to Colombia via Banco de la Republic began in
1966 and, to date, nine loans totalling US$ 582.5 million have been
intermediated by nine these CFs. They are characterized, in particular, by
their specialized focus on the industrial sector and sound loan appraisal
and supervision capacity.
15. Recent Financial Performance. These nine CFs are currently
performing reasonably well, after consistent efforts since 1985 toward
financial recovery in the wake of the international recession of the early
1980s. They have a sound overall capital structures, with an average d6bt-
to-equity ratio in December 1987 of 7.6:1 (see Table 4.3). They have taken
advantage, in particular, of financial reform measures to promote increased
net worth by expanding equity holdings and the use of convertible bonds.
Operational efficiency of the members of this group has been high,
particularly in relation to the rest of Colombia's financial system,
averaging 1.2 percent of total assets over 1985-87.
16. These CFs have also cleaned up their portfolios, with non-
performing assets (arrears over one year) consequently falling over 1985-87
in absolute terms and in relation to total portfolio from 4.4 to 2.1
percent. Nevertheless, CF Colombiana continues to have a significant share
of non-performing assets (7.0 percent in December 1987), associated mainly
with the cement industry (Samper and Cementos Diamante). However, it has
consistently generated profits approximating the modest average for the
nine CFs (1.0-1.7 percent of total assets), and is well protected by
collateral and bad debt provisions. Non-performing assets less provisions
as a share of networth were 33.1 percent in December 1987. Total arrears of
CF Occidente also persist at significant levels (5.9 percent of total
portfolio in December 1987), though it is more vulnerable than CF
Colombiana given lower coverage by provisions. Increased capitalization
and more determined workout efforts are underway with the close scrutiny of
- 53 - Annex 4
Page 5 of 6
17. CF Reform Program. While CFs were intended as primarily long-term
lenders and principal users of of BR rediscounts, the inflationary
environment and high liquidity preferences of savers has made mobilization
of medium and long term domestic resources extremely difficult. In 1975,
CFs were given authority to issue short term term deposits (CDTs) to
finance the working capital needs of productive enterprises. In practice,
this provided an incentive to turn toward the short term end of the market
in the absence of longer term instruments, competition from BR's subsidized
credit and the higher profitability of CDTs than the spreads offered on
rediscount facilities. CFs qualifying for the use of Bank funds have
maintained a balance of short and long term loans in their portfolios
according to guidelines (at least 50 percent of loans with maturities in
excess of one year), though most other CFs have turned almost entirely to
short-term credit operations. This has created a duality within the CF
system which is clearly manifested in portfolio composition and quality,
and in profitability (see Table 1.6).
18. In October 1987, the Government adopted a Reform Program
consistent with earlier recommendations by the Bank aimed to reassert the
original role of CFs as longer-term financiers and equity investors and to
eliminate the duality in the system. It is designed, in particular, to
increase CF profitability via the diversificatiorn in its markets and
financial services. The Reform authorizes CFs to finance marketing
cooperatives associated with SMEs, leasing companies, and to develop such
services as factoring, underwriting, and enterprise restructuring advisory
services. It also stipulates minimums requirements to help strengthen the
capital structure of all CFs and an increase in the share of longer-term
lending in their portfolios.
19. CF Eligibility Criteria. The Reform established the following
three standards which all CFs must meet according to a phase-in schedule
over 1988-90:
(a) specialization ratio - at least 50 percent of a CF's
operations involving its own and BR rediscount funds rmust
carry maturities in excess of one year;
(b) minimum capitalization of existing CFs of Col$ 700 million
(US$ 2.1 million) by 1989 and ColS 1,000 nillion (US$2.3
million) in 1990, and for new CFs Col$ 1,000 million; and
(c) a maximum debt to equity ratio of 10:1 instead of 15:1
previously.
These would be adopted as the minimum financial criteria for CFs to be
eligible as PFIs under the SME 5 Project. The nine CFs currently
participating in the DFC IX Project meet these standards and are among the
initial financial intermediaries for the SME 5 Project. Other CFs which
desire to participate will be subject to the same criteria.
Commercial Banks
20. The 28 commercial banks in Colombia accounted for 45 percent of
the total assets of the banking system. They have a large network of
nearly 2,000 branch offices which facilitate access to low cost demand,
- 54 -
Annex 4
Page 6 of 6
savings and time deposits. As these represent about 80 percent (June 1988)
of their sources of funds, about 70 percent of their loans also carry
maturities of less than one year. These institutions have suffered from a
variety of distortions in the financial sector - in particular, the forced
investment and directed credit system, differntial interest rate policies -
which have negatively influenced efficiency, profitability and capital
structure.
21. These underlying problems were clearly exposed by the recession of
the early 1S80s, when banks had to confront (a) the major repayment
problems incurred by their borrowers in the early 1980s, which were hit by
the combination of high real interest rates and stagnating demand for their
products, (b) the high debt-to-equity positions of many firms in the
private sector, and (c) a high portfolio concentration of a limited number
of firms and the consequences of relaxed credit standards which had been in
use. The resulting financial crisis led to a prolonged deterioration in
the system which was not reversed until 1985, and in the meantime led the
Government to intervene in several major banks (Colombiana, Estado,
Commercio, Tequendama and Trabajadores) in an effort to protect depositors
and stem a banking crisis.
22. The profitability as a share of paid capital and legal reserves
fell steadily from 30.4 percent in 1980 to negative levels in 1985, while
non-performing assets in relation to paid capital and legal reserves rose
from 28.5 percent to 189.9 percent. Net capital (paid capital plus legal
reserves less non performing assets net of provisions/ paid capital and
reserves) fell over this period from 82.5 to -35.2 percent.
23. Since then, net capital and total arrears as a share of total
portfolio have returned to their 1982 level (56.8 percent and 13.9 percent,
respectively, in June 1988). Debt-to-equity ratios average about 13:1.
Eighteen of the 24 banks registered profits in the first half of 1988 and,
overall, profitability is slowly returning to positive levels (8.0 percent
as a share of paid capital and legal reserves in June 1988), though it
remains low due to a continued significant share of non-performing assets
(both arrears and forced investments) and high operating costs. Total
administrative expenses as a share of total assets averaged 4.8 percent in
June 1988 (on an annualized basis). Although non-performing assets have
also fallen to an average of 6.6 percent of total assets over the first
half of 1988, their level remains of concern and will require substantial
further provisions from profits. Capitalization, while it has been a
shared effort by the private sector and public programs, is expected to be
shouldered in the future mainly by private capital and retained earnings.
24. Six of the banks which make up the initial PFIs rank substantially
above the banking average with regard to profitability, net capital, and
non-performing assets as a share of total assets (Table 4.4). The
financial position of Banco de Colombia is substantially weaker, though it
is actively working with the Government within a rehabilitation program and
it is considered to be a sound PFI for the Project.
COLOMBIA
FIFTH SMALL AND MEDIUM SCALE ENTERPRISE PROJECT
FINANCIAL INDICATORS OF THE CORPORACION FItANCI5tA PGPtRAR (CF.)
Actual or Estimated 1980-88 and Target. for 1989-90
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
Estimted * Targets
1. SOLVENCY AND CAPITAL STRUCTURE --
6-30 12-31 6-30 12-31
Debt / Equity 3.8 4.2 5.0 4.8 4.6 6.2 13.5 16.7 7.5 a 7.5 7.5 7.5 7.5
Foreign Borrowing. / Total Borrowings 46.2 48.6 51.4 51.4 46.6 55.1 64.4 69.7
World Bank Borrowings / Total Borrowings 33.2 37.5 44.1 45.0 40.9 51.0 60.2 64.4 35.0 35.0 35.0 35.0
Dometic Credit (COT.) Total Borrowings 4.4 6.7 5.3 a
2. ANNAL REAL QIT RATES 1/ a
Loan portfolio 5.5 17.7 19.8 2.4 -11.6 -1.6 3.9 9.4 4.2 a 6.3 6.7
Total a*sts 15.4 10.3 24.8 0.2 -10.3 -1.9 -3.6 4.6 2 a 6.3 6.7
Equity -19.9 0.8 4.5 4.8 -6.8 -11.0 -65.0 -19.8 199.0 a 6.3 6.7 V
3. PROITAILM a
Nat Profit J Equity 7.1 7.3 3.0 2.7 3.3 -9.2 -51.9 -14.5 1.1 * 4.8 9.6
Nat Profit J Total Aset- 1.7 1.5 0.5 0.5 0.6 -1.3 -4.8 -0.9 0.2 1.0 1.6
Oro_ Financial Margin / Productive Assets 9.8 8.0 7.5 7.4 6.2 6.5 5.2 5.4 8.8
4. RISK I_T)4EMff
Arrears / Total Portfolio 8.4 9.7 9.2 14.4 16.8 15.5 16.1 13.9 a 10.0 8.3
of which: a
les than 360 days 4.1 5.7 4.9 7.2 7.5 6.3 6.3 6.2 * 5.2 4.5
more than 360 days 4.3 4.0 4.3 7.2 9.3 9.2 9.8 7.7 5.9 a 4.8 3.8
5. 0PRATIM EFFZCZENCY a
Operational EApenditures / Avg Total Assets 6.7 7.1 6.7 6.5 7.1 7.6 8.3 7.2 6.9 6.5 6.0 5.7 5.5 a'
1/ Adjusted by the national accounts deflator for fixed capital formation. xD X
- 5b -
COL IA 42
FIF7h SMAL AND HEDIU SCAUE SEIPRISE IOJECT Tablo 4.2
DfItEST RATE SUTCr5 FOR SE 4 NO SE 5 Paeo 1 of 2
Actual for 195-611 and Projected for 1969-90
Nor eS Mar U Mar Sr Nar 66 June Aug 1989 1990
---- Actual ------------------------ Projected
Inflatior 22.6 22.7 20.4 26.3 30.8 29.6 * 24.0 24.0
(12-ao Yr CPI)
Nominal Deposit Rats 1/
(90-day CDTa) 28.6 28.4 28.7 29.2 29.9 26.9 * 26.0 26.0
(90-dsr 0TF) 28.9 2S.8 26.1 28.6 29 P 26.9 a 26.0 26.0
Effective Depoait Rate 1/ a
(90-day CDT*) 34.5 30.1 30.4 85.3 36.5 32.0 a 80.8 80.8
(90-day DTF) 38.0 30.8 31.0 34.5 39.5 82.0 9 30.8 J0.6
Foreign Interot Rato 45.1 5S.2 34.4 28.1 81.O 83.1 3 82.1 82.1
(IORD ir CoIl equiw) a
Effective Prisa Lending 39.0 34.3 34.7 39.7 41.0 36.8 a 35.9 9S.9
Rate (DTP * 8) 5
Average Nn Loan Rate 44.0 9.7 41.0 42.5 48.0 43.1 a 42.0 42.0
hy Commercial Banks 2/
Real Effctive Intntreet Rate
Depoeit Rate 12.2 7.9 10.6 8.2 6.2 2.4 a 6.6 6.6
Prime Lending Rate 16.2 11.6 14.3 18.4 10.7 6.7 a 11.9 11.9
Average Lending Rate 21.2 17.0 20.6 10.2 12.7 13.5 a 18.0 16.0
Effective Margin
Prim Rate - DTP 4.0 3.7 3.7 5.2 4.8 4.8 e 5.1 5.1
Average Rate - OTF 9.0 9.1 10.0 6.0 6.5 11.1 a 11.2 11.2
.
1/ OTF rate was consolidated with more broadly bae CDT rate in June 1958.
2/ Estimted
COLmOZA
FIFTH SKALL AND MMI" SCALE EtT R�ISE PROJEY
IHTEREST RATE STUCRE FR SE 4 AND Se 8
Actual for 19885- and Projected for 1989-90
Mar 65 mar 6S Mar 67 Mar of June Aug 1989 1990
A. O-ledingRot tSg -------- Actual�a------------ Projected
~~~~~~~~~~~.___- .... -- .Aeul---------------- --------* ejeJ
A. On-landing Rate.- to SE 9f
SME 4 3/
World Bank
Avaera Effective Ret- to 9/87 32.0 81.3 01.4 87.4 38.4 88.0 e
(0TF * 2 afterward)
FFI
E4fectiva Rate to 9/67 S0.6 90. 30.6 87.4 98.4 9S.0 a
(DTF * 2 afterward) 3
SE S (For loa r lwth a 4-year maturity) _ a
World Bank (from 1990)
Effective Rate - Mao OTP * S S 8.1 38.1
FFR
Effective Rnte. - Ma. DTF . 4 * 36.6 36.6
.
Rate for SE 4 SHE S World Bank line (man) Relative To: a
Inflatinn 9.2 8.6 11.0 11.1 6.1 5.4 * 14.1 14.1
DiF -3.0 0.7 0.4 2.9 1.9 8.0 * 7.3 7.3
Prim Rate -7.0 -3.0 -3.3 -2.8 -2.6 -1.3 a 2.2 2.2
Average Commercial Rate -8.4 -9.6 -8.1 -4.6 -8.1 a -8.9 -8.9
8/ Aepliee to loans for major mtroolitan areas
- 57 -
COLOH81A
FIFTH SMALL AtN HEDIUH SCMLE CdTELRIAE PRoJECT roab . 4. 2
INTe'ESt RATE STRUCTURF FOR SHE 4 AN SHE o Page 2 of 2
ActuaI for 1985-88 and Project d *or 1989-0
Her 85 Har 88 Mar 87 Nor 88 June Aug 1989 1980
------- Actual ------------------- Projected
S. Interest Ratas from 8R to Inter.odisry
SHE 4
World Bank (SHE rate - 4.51)
Effect;in Rat, to CFP 25.8 28.2 25.2 30.9 31.9 28.6
FFI (OTF - 2.5 after 10/87)
Effecti v Rates 28.1 26.1 26.1 30.9 81.9 28.6
SHE 5 (For loans with & 4-year maturity)
World Bank (frca 1990) C
Efftcti. Rate to CFs (OTF) * S0.8 S0.8
Eff*ctica Rat, to Banks (DTF * l) 32.2 32.2
FFI 9
Effective Rate to CF. (DTF-1) 29.5 2985
Effective Rate to Banks (OTF) 3 0.6 30.8
C. Interest Rate, fros World Bank to BR for SM1E 4 & S1E 5 loan a
------- __ ---------- - - - - - - - - - - -- - - - - - - - - - - -
-ORD R.te in Coll Terms 48.5 58.4 40.6 34.8 a 30.8 30.8
COLOMBIA
FIFTH SMALL AND MEDIUM SCALE ENTERPRISE PROJECT
INTEREST RATE STRLCTIRE FOR SHE 4 AND SHE 5
Actual for 1985-88 and Projected for 1989-90
Mar 85 Mar 86 Mar 87 Mar 88 June Aug 1989 1990
------------------ Actual -a---------------------- 0 Projected
0. Effective Margins for Financial Intarnadiaris a
SHE 4
World Bank a
M*rgin for CFP 6.2 .1 6.2 6.5
FFI
Margin 4.7 4.7 4.7 6.5 o
SHE 5 (For loan with a 4-year maturity)
World Bank (from 1990)
Miaimum Margin for CF a 7.3 7.3
Masimu- Margin for Banks 5.9 5.9
FFI
Maa.aUa margin for CFa a 7.1 7.1
Maxiauat Maroin for Banks 5.8 5.8
E. Effective Margins for 8R a
SME 4
Margin on World Bank Loan -20.7 -33.2 -15.6 -3.9 a
SIE 5 (For ooni with a 4-year eatUr;ty)
World Bank (ffo- 1990)
Margin for CFs 0.0 0.0
Margin for Banks e14 1.4
FFI
Msiaua MargiH n for CF4 a -1.3 -1.3
Ma.imun Margin for Banks �00 0.0
COLOMBIA
FIFTH SMALL AND MEDIUM SCALE ENTERPRISE PROJ&CT
RECENT FINUNCIAL INDICATORS OF DEVELOPMENT BANKS (CFo) PARTICIPATING IN SNE 6, 19U-87
1986 1ow 1987 19t6 1980 1967
1. SOLVENCY 2. OPERATIONAL EFFICIENCY
Development Bonk - Debt-to-Equlty Ratio Operational Eup dituro. / Total Asset.
Cold*s 7.6 6.56 .0 1.6 1.4 1.7
Colombians 6.7 8.7 7.4 1.8 1.8 :.6
Nacional 6.a 6.1 7.8 1.1 6.9 1.6
Notte 16.7 9.1 *.5 1.4 1.2 1.8
OccIdeate 11.6 9.2 16.4 1.a 1.4 1.5
Progreso 4.9 8.5 e.i 8.0 2.6 1.7
Sataoder 7.0 7.0 6.4 1.6 1.t 1.C
Surseericans 7.4 7.5 9.2 1.6 1.4 1.2
V. I* 7.7 6.2 7.6 1.6 6.0 6.9
WeIghted Average of 9 CFo 1/ 8.4 6.9 7.7 1. 1.2 1.2
8. PIOfZTABILITY
Net Profit I Total Assets Net Profit / Equity
Caldes 0.4 -0.2 0;. 2.8 -16.9 8.5
Colombiaa 6.7 1.2 1.7 O.0 16.4 12.6
Nacionel 1.6 1.0 2.7 9.5 14.2 22.6
Nortt 0.4 0.8 0.6 4.2 2.9 7.1
Occideete 8.2 -2.2 -2.5 2.2 -21.6 -26.6
Progreso 8.4 *.4 6.6 2.4 1.9 6.2
Santander 2.4 1.0 1.2 10.8 7.9 16.6
Siramei.cea 2.6 2.4 2.2 16.2 19.8 22.6
Valle 1.7 2.0 5.2 18.8 10.7 28.6
Weighted Average o 9 Cfs 1.1 1.1 1.7 9.1 6.1 13.4
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
4. RISK MANAGEMENT
(NPA - WA Provisions) / Equity WA I Total Portfolio
Celdee 09.1 86.6 26.2 6.6 6.8 2.1
Colombian* 64.0 41.7 88.1 7.1 7.9 7.6
Nacional 26.7 21.2 7.0 8.0 2.7 *.9
Norte 84.4 18.8 17.6 2.0 1.5 *.9
OccIdenate o 92.7 55.6 4.8 4.5 8.6
rtogrero 66.9 16.8 6.5 1.6 1.4 6.8 '-3
Srotgoie 33.3 34.1 21.6 8.5 4.6 2.4 cr n
Suramricans 47.3 16.1 6.7 6.9 1.1 1.6 I x
Valle 12.7 8.7 4.0 1.9 1.4 8.7 x
Weighted Average of 9 CF. 40.6 20.6 17.3 4.2 3.4 2.1
Soureo: Colombian Bankers Association WA = Non-Perforuing Asset (arrears over 866 days)
1/ Weighted by total assets of each institution at December 31, 1967
COL.OMBIA
RECEN7 FI.CIAL INDICATORS OF COIERCIAL BA14S PARTICIPATING IN SME S. 19UO-
1989 1961 1962 18 s 1964 19" -1066 -1967- 19U8
1. SOLVENCY (Ju-.)
Net Capital (Paid Capital * Legal Resrves - WA * WA Provhaiens)/(P&id Capital * Legal Reerve) (S)
Banco de Bogota 96.6 91.3 76.9 47.6 9.4 -6.3 -55.7 -45.4 17.1
lanco Cafetero 69.6 64.2 85.0 -185.8 -5.0 -14.3 21.4 42.5 40.2
lanco de Colombia 76.1 59.6 84.9 26.3 -U3.1 -1790.9 8.0 64.2 78.2
lance Comercial Antloqueo 99.0 96.6 61.' 72.1 25.A 40.7 47.6 62.9 8.7
lbaco Occideat. 99.9 99.1 98.7 91.5 779.2 01.6 90.1 96.0 97.4
laco Popular 72.2 72.6 39.1 -23.7 -116.7 -141.9 -84.4 -3U.1 11.6
Coja Social de Aherrea 97.8 92.1 96.6 96.6 97.6 95.6 96.8 90.5 96.5
lUight.d Average of 7 lanka 1/ 79.4 78.6 53.4 -8.5 -478.2 -487.7 -3.1 29.6 96.O
Weighted Average of 7 Blnok (cauc Colobia) U.7 77.6 90. -17.J 74.9 -19.6 -5.1 19.6 48.9
2. PROFITABILITY
Net Profit / Paid Capital * Legal iRrve ()
Bance de Bogota 27.2 29.0 29.1 84.6 16.5 -25.5 47.6 16.9 S6.J
leaco Cafetare 2S. . 32.9 12.2 1.8 -10.8 -16.9 18.7 10.6 2.6
Bance da Celoebio 2.8 9l.1 *8.9 25.8 -96.1 -12777.0 -72.6 -26.7 -64.9
Banco Comercial Antlequane 26.6 22.1 29.2 41.7 52.6 66.4 112.0 *2.A 69.2
Banco Occident. 62.6 ".8 98.6 29.2 U.4 66.5 54.7 28.7 U6.2
lanco Popular 22.8 20.9 17.7 11.2 6.6 12.4 26.2 28.4 16.5
Coja Social de Ahorroe 94.9 79.6 5.S 00.6 ".6 48.2 119.1 84.8 62.5
Weightd Average of 7 ankak 32.7 81.1 25.8 21.7 -19.0 _367.5 16.7 6.6 16.1
Weighted Average of I aske (CocI Colombia) 88.7 11.4 28.5 29.4 18.7 19.6 48.6 29.1 U.2
7. RISlt MAMACElET
Non-Parforming Assets / Paid Capital snd Iba-rtt (U)
Banco de Bogota 16.8 19.1 41.9 64.4 145.6 228.7 366.2 295.5 157.2
Banco Canet-ro 60.4 67.1 66.0 278.6 164.1 178.2 121.6 112.4 96.0
Banco de Colombia 31.2 46.2 77.6 94.6 8700.7 18432.4 477.6 610.9 553.4
Banco Comercial Antioqueno 2.6 6.9 26.2 44.2 164.2 14.9 184.9 1U4.0 76.9 rs
Banco Occident. 4.7 4.3 11.3 17.4 2.9 22.9 12.1 14.1 6 0 .
Banceo Popular 46.1 47.2 93.6 181.6 317.6 866.6 372.2 286.9 268.6 m *
Cnjo Social de Ahorroo 6.0 16.6 6.4 11.6 9.9 14.0 16.8 16.6 21.9 X
Weighted Average of 7 Banks 29.2 30.7 63.8 135.9 999.4 3316.6 286.7 264.7 220.6 4C
Weighted Average of 7 Banks (excl Colombia) 20.6 33.1 69.7 146.? 162.2 189.9 219.6 175.2 117.6
Sourc-: Colomiabn Bankers Association NA = Non-Performing Assets (arroars ovor 360 days)
1/ Weightod by total assets of oach institution at Decamber 31. 198?
- 60 -
ANNEX 5
Page 1 of 6
Staff Appraisal Report
Colombia
Fifth Small and Medium Scale Enterprise Project
Microenterprise Program
Introduction
1. Microenterprises are estimated to involve about 40 percent (4.6
million people) of the economically active population in Colombia, in
particular those who are in the lowest income segments in society. Some
500,000 urban and 500,000 rural microenterprises operate across the
country, which are basically small income-generating units owned and
managed by entrepreneurs, frequently employing other family members, and
usually include no more than a total of 20 workers. About 40 percent of
such enterprises carry out production-oriented activities, which are
heavily domestic resource-oriented, while another 40 percent are commercial
entities and the remainder are service-oriented.
2. Private sector support for microenterprises is readily
identifcable since the late 1970s, while the Colombian Government has
focused explicitly on them in its development policy-making since the mid-
1980s. The Government's basic aim is to increase the net income of
microenterprises and the overall socio-economic well-being of families
depending upon these units. In the current second National Microenterprise
Development Plan (1988-90), coordinated by the National Planning Department
(DNP), the strategy has shifted from promoting employment creation to
increasing productivity of existing enterprises by (a) expanding channels
for financial and technical assistance and aiming to progressively set the
stage for relationships with formal credit market, (b) focusing on
particular constraints, such as materials supply, product marketing, and
the acquisition of appropriate technologies, and (c) mobilizing an
increased levels of savings. Consideration is also being given to whether
the legal and regulatory framework should be modified to promote a more
neutral business environment.
NGO Support for Microenterprises
3. Advantages. One of the main steps distinguishing the Government's
second Plan for microenterprises from the first is its aim to expand the
number of non-governmental organizations (NGOs) affiliated from 14 to 37.
Specialized NGOs are better adapted to supporting microenterprises than
most formal banks. They entail a lower level of complexity, bureaucracy and
transaction costs, thus reaching microenterprises with modest budgets and
overheads appropriate to the small scale of loans to microenterprises.
- 61 -
ANNEX 5
Page 2 of 6
They maintain direct contact with such enterprises, often have unparalleled
knowledge about their needs, and can develop solid relationships with them.
They are in general also better equipped to promote lo'al participation, to
spur the use of low-cost technologies, and can induce savings through their
programs.
4. Models of NGO Support in Colombia. Two main models of NGO support
for microenterprises have emerged in Colombia. The traditional Carva,al
model, buoyed by a network of private foundations in 24 cities around the
country, has been the central approach to microenterprise development
during the first half of the 1980s. It focuses on those microenterprises
in business for at least two years, on substantial training (particularly
in business administration) as a prerequisite for credit, and on continuous
follow-up technical assistance. This approach has tended to support those
microenterprises which have already attained some strength and size in
production-oriented activities, and the more successful microentrepeneurs
with modest levels of education and an ability to pay for the training.
Credit is subsidized (232 per annum vs commercial rates exceeding 402) and
collateralized generally by a personal guarantee or mortgage. Default rates
oe the credit programs are as low as three percent.
5. An alternative, achieving growing recognition in recent years and
highlighted in the Government's second Plan, is that of the Solidarity
Group in Colombia (Asociacion Grmpos Solidarios de Colombia). It tends to
focus on microenterprises in lower income strata than the Carvajal model
and to stress easy, timely credit in small amounts without high transaction
costs or substantial training as a prerequisite. Since 1983, this program
has been supported by Accion International/AITEC. Accion maintairLs an
agreement with Solidarity for 1987-90 to provide financial support of about
US$480,000 for local staff, design and production of training materials,
and for training workshops.
6. The core of Solidarity's programs is the provision of credit at
rates approximating market interest rates (about 36?). This covers the
operational costs of the NGO and is backed by group guarantees. The
average default rate of such programs is 0.8Z, lower than those with
subsidized credit. Training programs are, however, provided free of cost.
They vary from two mandatory introductory sessions on credit and accounting
to more emcompassing issues of basic business management. The success of
the program is derived largely from careful screezling of microenterprises
and from monitoring and evaluation. Progress workshops serve, among other
things, as means of regular personal contacts between staff and
microentrepreneurs and as early warning mechanisws to detect problems.
Microenterprise Program under SHE S
7. Obiectives. The basic objective of the Program is to increase
microenterprise income, improve record keeping, workshop productivity and
- 62 -
ANNEX 5
Page 3 of 6
product diversification. The Colombian foundations using the Carvajal model
have been and are currently receiving considerable assistance from the
Inter-American Development Bank (IDB) in this field. The SME 5 Project
seeks to complement this effort by providing support for those NGOs who are
not participating in the IDr program but have proven to be successful
without the use of credit subsidies and mandatory training services. The
Program's design, as described below, would basically aim to minimize
administrative costs to microenterprises and provide adequate protection to
lenders.
8. Second-tier Banking Institutions. Responsibility for managing the
Program on behalf of the borrower for the project, Banco de la Republica
(BR), would be the Corporacion Financiera Popular (see Annex 2 of the SAR
for a description) and Caja Social de Ahorros (CSA). CSA has the
motivation, organization and experience to carry out this work. It has a
large branch network which appears to operate efficiently in this field.
CSA has worked out an effective relationship with microenterprise
borrowers and is able to do so with low administrative costs. The CSA's
record in debt collection is excellent.
9. Management of the Program by the two institutions would basically
entail (a) qualification of NGOs, (b) setting guidelines agreed with the
NGO for microenterprise selection, approval and supervision, (c) quarterly
reviews of proposed lending programs, (d) quarterly tranche disbursements,
and (e) repayment monitoring. They would not duplicate the accounting
systems, approval process for each loan and the large number of
transactions of participating NGOs. Safeguards against ;089 to these
institutions would be maintained by establishing a specific recovery rate
(902 of interest and principal obligations due), below which they would
have the right to susperd all lending activity to the NGO, and the
collective guarantees of participating microenterprises. These would be
supported by an information system to track NGO portfol'o performance and
by two introductory credit and bookkeeping orientation sessions for
microenterprises in which there was an absence of a basic accounting system
in place. Second-tier institutions would supervise on a sample basis the
performance of NGO loans to microenterprises.
10. Participating NGOs. Under the Program, NGOs would basically act as
(a) financial intermediaries, (b) suppliers of technical knowledge to local
beneficiaries, and (c) cofinanciers of microenterprise projects. NGOs would
do all the selection, appraisal, approval, monitoring and supervision work
for such loans, which would be supported financially by their own fees to
clients. The following types of NGOs would be eligible under the Program:
(a) associations, partnerships, cooperatives with more than ten
members in the same subsector, and ot'her entities registered
with the second National Microenterprise Development Program
with objectives to promote microenterprise development
through credit, training and technical assistance; and
- 63 -
ANNEX 5
Page 4 of 6
(b) trading companies operating solely for the provision of
inputs for and product marketing of microenterprises, and
which are also associated with the second National
Microenterprise Development Program. Such companies may
also provide technical assistance for product design,
quality control, packaging and related issues.
Those qualifying under the current IDB project, insofar as its credit
remains available for commitment, would not be eligible under this Program.
11. Subject to the conclusions of an evaluation currently underway,
NGOs belonging to the Solidarity Group are expected to be the main
participants in the Program. Its members have progressively increased from
five (Corporacion Accion por Antioquia, Cooperativea Multiactiva de
Dessarrollo Soci&l, Fundacion Familiar, Fundacion Banco Mundial de la
Mujer, and Corporacion Fondo de Apoyo de Empresas Asociativas) to eleven.
The microenterprise programs of Solidarity currently reach about 15,000
direct beneficiaries, of which about 60Z are women, and about 40,000
indirect beneficiaries. About 40 percent are enterprises with a few
individuals which accumulate small amounts of capital, mainly in
manufacturing operations producing clothing, food products, leatherworks,
handicrafts and repair activities. Another 20 percent of its enterprises
are larger manufacturing operations with up to 10 employees. Loans for
fixed assets range from US$400-1,000 for up to 2 years and for working
capital average US$100 for 1-6 months. Savings by clients of 0.5-1.02 of
the loan amount per month is compulsory, and forms a pool for a guarantee
fund for loans and for emergency loans. The savings of about 5,000 active
microenterprises totaled US$107,500 in May 1988 ($21 per person versus an
average loan of $95), and total savings of the Solidarity Group amounted to
US$245,000.
12. The Women's World Banking (WWB) program in Colombia, as one
example of the NGOs affiliated with Solidarity Group, began in 1982 based
upon analyses that credit, training and consultancy services were the most
pressing needs of women as well as men microentrepreneurs. It has three
affiliates in Colombia and is supported by the headquartera of WWB in New
York. While its operations are directed primarily at women working in
microenterprises, 272 of its ben( 'ciaries were men as of June 1988. Its
main aims are to facilitate access of such enterprises to credit, create
employment and incorporate Colombian women and their families into the
formal national economy. Through the Solidarity Group progr-im, it has to
date reached 650 women and 324 men in 277 active groups with working
capital credits from US$ 17-670 each with interest rates of 3Z per month
for 2-6 montis. Loans are collateralized by the guarantee of a group of a
minimum of three potential beneficiaries. WWB also has other activities,
such as the credit card program and several individual credit programs for
fixed assets (up to US$ 1600 for 12 months), women starting new
microenterprises and domestic calamities. These are supported by training
and close contact with borrowers.
- 64 -
ANNEX 5
Page 5 of 6
13. NGO Evaluation Criteria. Other NGOs can become eligible to
participate as financial intermediaries during the implementation of the
Program, subject to confirmation by the World Bank, if they meet the
following criteria:
(a) socio-economic objectives consistent with the overall
objectives of the SME 5 Project and an absence of
conflicting political, religious or other aims;
(b) regional or national scale of support for microenterprise
development, as shown in the trends in the numbers, coverage
and success with microenterprises served;
(c) a demonstrated ability to design activities which can be
subsequently sustained by beneficiary communities;
(d) managerial and technical capacity adequate to satisfactorily
intermediate the Bank's resources under the Microenterprise
Program, particularly with respect to its organization and
field staff used to identify, select, appraise and sapervise
microenterprise borrowers;
(e) a sound repayment record of credits offered to date, and
adequate accounting and information infrastructure to
provide early warning of non-payment;- and
(f) adequate fee income, spreads and financial reserves in
relation to administrative costs and credit risk; and.
(g) a significant level of funding of microenterprise
investments by enterprise owners, the NGO itself and
possibly local private banking sources, and an absence of
heavy dependence on official sources.
14. Financial Terms and Conditions. The Program would be fini:nced by
the World Bank's loan for the SME 5 Project up to US$ 3 rmillion.
Microenterprise loans would reflect the full cost associated with the
provisions of these funds: (a) the cost of World Bank funds channel:.ed from
BR to the second-tier intermediary at DTF-IZ point in 1989 and DTF from
1990, (b) the administrative cost and risk to the second-tier
intermediaries, and (c) the intermediation cost of the NGO. They would
carry maturities of up to 36 months, with up to 3 months of g::ace and
quarterly amortization. Participating NGOs would bear the credit risk of
microenterprise loans. The Bank's loan would be limited to 40Z of the
total prior year's lending program of qualifying NGOs in order t3 ensure
the mobilization of other (particularly local private) sources of support.
15. The following expenditures would be eligible for 10OZ reliscount
by the Program:
- 65 -
ANNEX 5
Page 6 of 6
(a) fixed assets, working capital and technical assistance
requirements of microenterprises financed by the NGO loan;
and
(b) technical assistance to strengthen the capacity of NGOs to
provide credit and technical assistance, in such areas as
staff training, data managment systems, monitoring and
evaluation of development programs.
16. Second-tier banks would carry out supervision visits as deemed
necessary and NGOs would be required to provide quarterly reports on the
condition of the Program's portfolio, semi-annual statements of overall
financial condition, and annual audited financial statements.
17. Procurement of fixed asset requirements would be by local shopping
or direct contracting as appropriate. Statements of Expenditures prepared
and certified by the NGO would constitute acceptable documentation for
disbursement purposes. Separate accounts would be kept by the second-tier
institution and NGO for the Program and audited by independent auditors
acceptable to the Bank.
- A6 -
Annex 6
Page 1 of 9
Staff Appraisal Report
Colombia
Fifth Small and Medium Scale Enterprise Project
A. Terms and Conditions of Colombia's SME Directed Credit Line
The Fondo Financiera Industrial (FFI)
(mm = millions)
Existing FFI Proposed FFI
1. Enterprise Eligibility
(a) Maximum total assets Col$140 mm (US$467,000) Col$300 mm (US$1 mm)
(b) Minimum investment 202 of total (existing) Identical
by sME 30Z of total (new) Identical
(c) Minimum equity 30% of total assets Identical
2. Maximum SME Loan Col$70 mm (US$0.23 mm) Col$ 150 mm (US$0.5 mm)
3. Explicit Exch.Risk to SME No No
4. Eligible Expenditures New Imported Fixed Identical
Assets (F.A) Used Imp FA
New Local FA Identical
Increm & Free-standing WC Identical
5. Terms BR to PF. DTF-2.5Z (3 main cities) DTF-1 (CFs)
DTF (Banks)
DTF-4.5Z (other areas) DTF-1 (CFs)
DTF (Banks)
Maturity & grace same Identical
as SME loan
85-90% rediscount 80Z rediscount
Remaining 20Z of
SME loan amount from
PFI with min 4-yr
maturity
- 67 -
Annex 6
Page 2 of 9
Terms and Conditions of Colombia's SME Directed Credit Line
The Fondo Financiera Industrial (FFI)
(mm - millions)
Existing FFI Proposed FFI
World Bank FFI
6. Terms PFI to SME DTF+2.0 (3 main cities) DTF+4.0 max
for 4 yr. loan, up
DTF+5.0 max. for
10 yr. loan
DTF+0.5 (other areas) Same as above
Fixed assets up to 5 Fixed Assets -
years maturity & grace 4-10 yrs maturity &
set case-by-case 1-3 yrs grace
Perm & free-standing WC Maximum 3 yrs. and up
max 3 yrs & up to 6 to 1 yr of grace
months grace
7. Administration BR to PFIs
(a) Automatic rediscount All: By class:
Col$2 mm (US$6,700) 1 CFs & CFP
Col$83 mm (US$250,000)
2 CFs Col$41 mm (US$120,000)
3 CFs & Bks
Col$ 27 mm (US$80,000)
(b) Ex Ante Auto Redisc't Detailed credit applica- 1-page credit
Info requirements cation form Standard rediscount request
Promissory note
(c) Financial Analysis Cash flow max US$0.25 mm Cash flow max.
employed US$0.1 mm
IRR over US$0.25 mm IRR over US$0.1 mm
(d) Ex Post .4onitoring Production targets SME repayment of at
least 90? due
Semi-annual BR
supervision visits
- 68 -
Annex 6
Page 3 of 9
8. Capitalization Required Above 70/30 debt/equity, Above 50/50 debt/equity,
1OOZ of SME loan amount 100? of SME loan amount
within maturity of loan within maturity of loan
9. Production Targets All loans subject to BR If working capital
investigation & disqua- component in excees
lification of 2nd loan of 20? of SME loan,
requests if production production below targets
triggers investigation by BR.
10. Cancellation of approved At discretion of BR According to 5 basic
rediscount criteria only
(i) SME in excess of total
asset ceiling and outside
sector definition;
(ii) minimum equity less
than 30? of total assets
at time of SME loan approval;
(iii) less than 20-302 of
investment financed by SME;
(iv) SME loan proceeds not
used for proposed investment;
(v) inaccurate
information supplied in
loan documentation.
- 69 -
Annex 6
Page 4 of 9
Comparative Terms and Conditions for
B. Proposed World Bank and Fondo Financiera Industrial Credit
(mm = millions)
World Bank FFI
1. Enterprise Eligibility
(a) Maximum total assets Col$300 mm (US$937,000) Identical
(b) Minimum investment 20% of total (existing) Identical
by SME 30% of total (new) Identical
(c) Minimum equity 30% of total assets Identical
2. Maximum SME Loan US$0.5 mm Identical
3. Explicit Exch.Risk to SME No No
4. Eligible Expenditures Imp. FA, dir/indir & new Identical
or used
New Local FA Identical
Perm WC Identical
Free Standing WC
Technical Cooperation
Restructuring Plans
Microenterprises
5. Terms BR to PFI 1989 DTF-lZ (CFs) Identical
(for minimum SME loan DTF (Banks) Identical
maturity of 4 yrs.) 1990 DTF (CFs) DTF-1 (CFs)
DTF+1 (Banks) DTF (Banks)
Maturity & grace Identical
same as SME loan
80% rediscount Identical
Additional 20% of Identical
SME loan amount
from PFIs with maturity
same as rediscount amount.
- 70 -
Annex 6
Page 5 of 9
Comparative Terms and Conditions for
Proposed World Bank and Fondo Financiera Industrial Credit
(mm = millions)
World Lank FFI
6. Terms PFI to SME 1989 DTF+4.0 max (CFs) Identical
(for minimum SME loan DTF+4.0 max (Banks) Identical
maturity of 4 yrs. 1990 DTF+5 max. (CFs) DTF+4 max (CFs)
DTF+5 max (banks) DTF+4 max (Banks)
Fixed assets & rest. Identical
4-10 yrs maturity &
1-3 yrs grace
Perm & free-standing
Permanent W.C. working capital
max 5 yrs maturity max 3 yr. maturity
max 1 yr grace max 1 yr. grace
7. Administration
(a) Automatic Rediscount
WB to BR Max US$0.40 mm
BR to PFIs By class:
1 CFs/CFP US$0.25 mm Identical
2 CFs US$0.12 mm Identical
3 CfslBks US$0.08 mm Identical
(b) Ex Ante Rediscount 1-page credit info Identical
Information Required Standard redis't apl
Promissory note
(c) Financial Analysis Cash flow max US$0.1 mm Identical
IRR over US$0.1 mm Identical
(d) Ex Post Monitoring SME repayment of at Identical
least 90Z due
Semi-annual BR Identical
supervision visits
8. Capitalization Required None Above 50/50 debt/equity,
10OZ of SME loan amount
within maturity of loan
- 71-.
Annex 6
Page 6 of 9
9. Production Targets None Working capital component
in excess of 20% of SME
loan, actual production
below targets triggers
investigation by BR loan
proceeds
10. Cancellation of Approved 5 basic criteria only Identical
rediscounts
- 72 -
Annex 8
Page 7 of 9
STAFF APPRAISAL REPORT
COLOMBIA
FIFTH SMALL AND MEDIUM SCALE ENTERPRISE PROJECT
COMPARISON OF FEATURES OF THE PAST AND PROPOSED BANK LOANS TO COLOMBIA FOR SUEs
Category Loan 1071-CO Loan 1451-CO Loan 1834-CO Loan 2464-CO Proposed Fifth
Loan
Borrower BR BR BR BR BR
Date of Agreement 1/75 9/77 12/80 9/84
Size of Loan US$6.5 mm USS15 mm US$32 mm USS40 mm USS80 mm
% of Subloan re- Lower of 100% Up to 100% of Up to 100% of Up to 80% of subloan
imbursed by the of subloan of subloan or 90% subloan or 90% and up to 80% of sub-
Bank 90% total fixed of total sub- of total sub- projects cost for exis-
assets cost project costs project costs ting firms or 70% for
ne4 firms.
Agency Responsi- CFP CFP CFP CFP Qualifying developments
ble for perfor- (CFs) and commercial
mance banks.
Interest Adjustment
to changes in rate
of inflation None None Yes Yes Yes
Approval of sub- ColS1.S mm USS100,000 USS100,000 USS100,000 US$400,000
loan by the Bank (US$20,000 fop
(free limit) technical assis-
tance)
Working capital None None Up to US$9 mm No special No special
financial allocation allocation
Rate of Interest 10.SX (pesos) 17-18.5% pesos 20.76-21.25% DTF -2.5 DTF -1.0 to DTF +1.0
to intermediary (adjustable
for investment 7.75% (US$) pesos)
projects
Rate of interest 12% (pesos) 12% (pesos) 12% (pesos) N.A. N.A.
to CFP for tech-
nical assistance
projects.
- 73 -
Annex 8
Page 8 of 9
STAFF APPRAISAL REPORT
COLOMBIA
FIFTH SMALL AND MEDIUM SCALE ENTERPRISE PROJECT
COMPARISON OF FEATURES OF THE PAST AND PROPOSED SANK LOANS TO COLOMBIA FOR SMEs
Category Loan 1071-CO Loan 1451-CO Loan 1834-CO Loan 2464-CO Proposed Fifth
Subloan Terms 4-10 years 4-10 years Normally 4-10 Normally 4-10 yrs. 4-10 years max.
years fixed 6 years for perm.
assets, except working capital
3-6 years pure
working capital
Grace period of
subloan 1-3 years 1-3 years 1-3 years 1-3.years 1-3 years
Cash flow analy- Not required Required for Required for Required for Cash flow up
sis loans exceeding exceeding loans exceeding to US$0.1. mm
Cols0.6 mm Co1S0.5 mm ColS2.0 mm (plus IRR over
the financial USS0.26 mm
rate of return
Financial Inter- 5.6% (pesos) 6.5 - 7% 4.75-6.26% 4.5 - S% S% for CFs, 4% for
mediary spread 5.26% (USS) (pesos) (pesos) commercial banks.
Maximum Debt/Equity
ratio required 4.0:1 5.5:1 8.0:1 6.0:1 CFP 7.6:1; other CFs
for financial 10.0:1, Banks 16.0:1
intermediary
Beneficiary 50% to enter- 50% allocated 10% to enterpri- Enterprises with Total assets of less
prises with to enterprise ses with assets total assets be- than USS1 mm equivalent
assets below assets below below low USS790,000
Coilo mm, US830.06 mm, US$100,000; equivalent. However,
50% to enter- 50% to enter- 42% to enterpri- expected subloan
prises with prises with ses with assets distribution among
assets between assets below below size of enterprises
Col$1-20 mm US$0.86 mm USS0.65 mm. would be in line
with Ln. 1834-CO.
- 74 -
Annex 6
Page 9 of 9
STAFF APPRAISAL REPORT
COLOMBIA
FIFTH SMALL AND MEDIUM SCALE ENTERPRISE PROJECT
COMPARISON OF FEATURES OF THE PAST AND PROPOSED BANK LOANS TO COLOMBIA FOR SMEs
Category Loan 1071-CO Loan 1451-CO Loan 1834-CO Loan 2464-CO Proposed Fifth
Initial Loan USS$00,000 USS100,000 USS600,000 USS0.40 mm N.A.
Technical Assistance
allocation
Average investments
financed USS50,000 US$65,000 USS50,000 US$66,000 USS115,000
Subloan rate 24% (pesos) 24% (pesos) 28% adjustable Floating DTF +6% max.
of interest 1.3% (US$) (pesos) rates based
on a weighted
average of:
(a) CFT and 3 percentage
points and
(b) adjustable rate
determined between
BR and IBRD with a
2 percentage points
difference depending
on location of
subprojects.
Average subloan
amount USS17,900 USS24,000 US$20,000 USS25,000 USSS7,000
- 75 -
ANNEX 7
Page 1 of 4
Colombia
Fifth Small and Medium Scale Enterprise Proiect
Guidelines for the Restructuring Program
Background
1. The recessionary period of the early 1980s encompassed a very
serious decline among many SMEs in debt service capacity and real
investment rates, combined with increasing real rates of interest and a
tendency for formal banking institutions to shift their modest SME lending
to larger-scale industries. These problems have been slowly alleviated
since the mid-1980s with rapid overall growth rates of the industrial
sector in Colombia. Nevertheless, a significant share of non-performing
SME loans continue to resist resolution among those institutions with all
or a significant share of their portfolio in this area (6.3 percent of
CFP's average total assets in 1987, or twice the average for development
banks, and 5.8 percent for Banco Popular). In addition, the operational
efficiency of many segments of SME production is expected to be able to
benefit from reconfiguration of the production structure and its support
systems.
Objectives and Target Groups
2. A restructuring investment is a set of substantial adjustments to
an enterprise's existing operations aimed to make it economically efficient
and financially self-sustaining. Enterprise restructuring distinguishes
itself from investments aimed purely at the expansion of productive
capacity of financially healthy entities, Basically, twG groups of
enterprises are targets for the Restructuring Program under the Project:
(a) those which have satisfactory financial performance but have
significant scope to increase operational productivity and profitability
within existing capacity; and (b) those which require significant
reconfiguration of their operations and must also be returned to financial
health. Undertaking restructuring in cases (a) and (b) also is directly
linked to improving the portfolios of banks and other creditors associated
with the enterprise. Such exercises would probably take place in
connection with financial engineering of the financial structure of the
firm.
Restructuring Measures
3. Restructuring is likely to include both "hardware" and "software"
components and cover one or more of the following areas: modernization and
rehabilitation of plants; changes in technology; changes or diversification
of product lines; reorganization of production, marketing and distribution;
and changes in human resource skills, levels and/or uses. Where changes in
the financial structure of the enterprises are also required, eg., when
- 7' -
ANNEX 7
Page 2 of 4
substantial losses have been incurred, agreements are frequently sought in
which both debtor and creditors would share in the solution. A typical
workout would have some or all of the following financial characteristics:
(a) the provision o~ new equity and/or quasi-equity from shareholders' own
resources and from the Project's resources, (b) write offs of part of the
accumulated penalties and interest due on existing loans, (c) conversion of
part of the debt to equity, (d) rescheduling of debt consistent with the
SME's new cash flow projections, (e) new financing for the purchase of
fixed assets and for other expenditures (see para 8-12) constituting the
new investment.
Enterprise Elixibility
4. To be Eligible for the Restructuring Program, enterprises first
have to meet the eligibility criteria for the SME 5 Project, ie., that they
operate within manufacturing, mining and related service industries with
total assets of less than US$ 1.0 million equivalent. In addition, such
enterprises must demonstrate (a) an inability to meet current or long-term
liabilities, or (b) their readiness to undertake restructuring investments
designed to lead to increased factor productivity of the existing
facilities of the enterprise.
Restructuring Plan
5. Candidates for restructuring will be actively sought by PFIs among
their own portfolios and other sources. PFIs will act in partnership with
those enterprises idencified, usually also with the help of consultants
under the Project's technical cooperation component, to develop a
restructuring plan for each enterprise. Where several PFIs are involved,
one will be appointed lead bank to act as interlocutor and negotiator in
the exercise. Each plan should highlight at least four elements -
production, marketing, financial and management plans - and layout in
detail the restructuring measures to be undertaken by the enterprise.
6. PFI financing of investments under a restructuring plan is subject
to the same procedures and free limits for approval under the Project's
rediscount facility where expenditures to be financed are confined to those
traditionally eligible under previous Bank-financed SME projects: machinery
and equipment, spare parts, construction and/or purchase of industrial
facilities, and permanent working capital. Where categories of
expenditures outlined in paras. 8-12 are involved, ex ante examination and
approval is required by BR and the Bank.
7. Each plan must be accompanied by financial statements reflecting
agreement between creditors and equity partners, in particular on the
enterprise's net worth and outstanding liabilities. Where applicable, each
plan should indicate the explicit willingness of equity partners to put up
additional capital or accept dilution of their ownership in the firm, and
the readiness of creditor banks to accept losses, postponement of interest
income, or whatever steps are indicated. Restructuring investments must
achieve a FRR of at least 11 percent, consistent with all other investments
supported by the Project.
- 77 -
ANNEX 7
Page 3 of 4
Restructuring Expenditures Elizible for Financing
8. It is unlikely that the expendituree traditionally financed by the
Bank, which are most common to the expansion of productive capacity, will
cover all the requirements of industrial restructuring exercises.
Therefore, under this component of the proposed Project, the range of
eligible expenditures and financial instruments will be broadened.
9. Restructuring Activities. The process of reorienting the
operations of an enterprise to make it more efficient and self-sustaining
may require confronting problems of overcapacity, new product development,
redeployment of labor, major changes in technology employed, etc. To
facilitate this effort, the Bank's loan will finance under an approved
enterprise restructuring plan (a) applied research and development costs to
establish aew product lines, (b) worker retraining, and relocation in cases
where restructuring affects the skill composition and size of the work
force, (c) permanent working capital to cover expenditures of all physical
production inputs (instead of only spare parts) over a time-slice within
the restructuring plan timetable, based upon the complete production cycle
from purchase of production inputs to sales receipts; and (d) the marketing
and distribution co3ts under the restructuring plan which are above current
expenses of an enterprise and associated with such items as (i) trade
fairs, exhibits and other promotion campaigns, and (ii) investanents in
distribution systems. Such financing would be subject to verification
through documentation required to support statements of expenditures.
10. Equity and Quasi-Equity Investments. The Project will seek to
make a contribution to the mobilization of domestic equity by permitting
the World Bank's loan to finance up to 80Z of equity investments by PFIs or
individuals, as long as such investments amount to no more than 50Z of the
total new equity financing for the restracturing plan on the SME. The
amount financed by the Bank's loan will alsu be limited to not more than 30
percent of the total outstanding equity of the enterprise including the
project. Such financing can be provided to the-PFI as shareholder, where
permitted by law (CFs), or onlent to individual or enterprise shareholders
under an acquisition arrangement or an issue of new shares.
11. The .Ivestor will be charged an interest rate and given terms on
rediscounted Bank loan funds used which will be identical to the Project's
credit program. Terms and conditions for equity and quasi-equity
instruments will be negotiated on a case-by-case basis between investor and
representatives of the enterprise.
12. The proceeds of the loaa must be used for the procurement of
additional goods and services for the enterprise under a restructuring plan
rather than purely for the transfer of ownership of existing assets or the
- 78 -
ANNEX 7
Page 4 of 4
repayment of existing indebtedness. Similar to equity financing, loan
proceeds could be injected by PFIs as subordinated and/or convertible debt
as a means of attracting other financing for- a restructuring plan and
strengthening the capital structure of an enterprise, providing the
possiblility of higher levels of return, etc.
- 79 -
Annex 8
COLOYB-A
FIFTH SHALL- AND MEDIUM-SCALE ENTERPRISE PROJECT
TECHNICAL COOPERATION PROGRAM
Outline of Terms of Reference
1. Technical cooperation (TC) costing a total of US$0.2 million, to be
borne by the Government, would be included in the Project to prepare under the
aegis of BR in-depth studies on public policies likely to have a significant
influence on the performance of SMEs. These studies will distinguish
"natural" limitations on SMEs due to the relative absence of economies of
scale in relation to large firms from those which are explicitly introduced by
public policies. They are intended support a dialogue with the Government and
to develop recommendations as required to modify the regulations and policies
infuencing capital intensity of enterprises, business establishment, and
operations, so as to help establish a more neutral policy environm?nt for SME
development.
2. Detailed terms of reference will be prepared following a review of
the results of a series of industrial sector studies already underway tor a
Bank industrial sector memorandum. However, the following subjects are
presently expected to be examined to determine the implications of
regulations, documentation, procedural requirements, and enforcemer.t on market
entry and cost to SMEs in r"'ation to large firms:
(a) Government industrial policy incentives and practices directly
influencing the capital intensity of firms under the Colombian
Investment, Trade, Commercial and Tax Codes--for example, with
respect to customs exemptions on imported equipment, tax holidays
based upon fixed asset depreciation, and subsidized credit;
(b) the financial burden of non-wage benefit requirements in the Labor
Code and their implications for the legalization of small
enterprises;
(c) building and operating permits, as well as other major municipal
regulations in Colombia's four major urban areas; and
(d) the major financial and operating policies and practices of power,
water supply, and transportation services in these areas.
- 80 -
ANNEX 9
COLOMBIA
STAFF APPRAISAL REPORT
FIFTH SMALL AND MEDIUM SCALE ENTERPRISE PROJECT
ESTIMATED QUARTERLY DISBURSEMENT SCHEDULE FOR THE PROPOSED BANK LOAN 1/
(US$ Million)
Bank Fiscal Year Disbursements Cumulative and
and Quarter in Quarter Disbursement
FY89
June 30. 1989 0.3 0.2
FY90
September 30, 1989 0.8 1.1
December 31, 1989 2.5 3.6
March 31, 1990 3.0 6.6
June 30. 1990 3.4 10.0
FY91
September 30, 1990 4.0 14.0
December 31, 1990 4.6 18.6
March 31, 1991 5.4 24.0
June 30, 1991 2/ 6.7 30.7
FY92
September 30, 1991 7.2 37.9
December 31, 1991 7.2 45.1
March 31, 1992 6.9 52.0
June 30, 1992 6.4 58.4
FY93
September 30, 1992 5.2 63.6
December 31, 1992 4.0 67.6
March 31, 1993 3.4 71.2
June 30, 1993 3.2 74.2
FY94
September 30, 1993 3.0 77.2
December 31, 199; 3/ 2.8 80.0
1/ Based on average disbursement profiles under the previous four loans.
2/ Estimated end date for submission of subloans.
3/ Closing Date
- 81 -
ANNEX 10
Page 1 of 2
Colombia
Fifth Small and Medium Scale Enterprise Project
Rey Reporting Indicators for Proiect ImDlementation.
(To be prepared by agency and timetable noted below)
A. Credit Program
(Semi-annually, except as noted, by Banco de la Republica and
Participating Financial Intermediaries)
1. Number of new participating financial intermediaries (PFIs);
2. Number of subproject investments financed by each PFI and
characteristics of each - new or existing enterprise, business
activity, asset and employee size, location, local. or export
market orientation;
3. Financing plan of SHE investment and utilization of proceeds -
fixed investment, working capital, construction, technical
cooperation.
4. SHE loan characteristics - interest rate, grace period and
maturity;
5. Average subloan applice%.lon processing time;
6. Earnings performance - interest income and operating expenses
(including overhead charges) from SME portfolio (annually);
7. SME risk management and collection performance - overdue
interest and principal, provision for losses, write-offs and
recoveries; comparison with overall portfolio quality
B. Technical Cooleration
(Semi-annually, by Banco de la Republica and Participating
Financial Intermediaries)
1. Number and cost of TC operations with SHEs;
2. Purpose - management and adminstration, Froduction,
marketing, quality control, bulk purchasing, etc.;
3. Estimated contribution to SME performance;
- 82 -
ANNEX 10
Page 2 of 2
4. TC operations for CFP to improve project appraisal and
supervision, data bank and publications;
C. Evaluation (sample 10 percent of total SME loans and equity
investments financed by SME 5 project)
(End of Project, by Banco de la Republica in collaboration with
Participating Financial Intermediaries)
1. Sales and profitability trends since SME loan approval,
including FRR and ERR calculations
2. Employment creation - number of new employees hired per
investment, total number of employees of enterprise, and
investment cost per employee
3. Average wage rate and efficiency changes for reatructuring
loans
- 83 -
Annex 11
COLOMBIA
Fifth Small and Medium Scale Enterprise Project
Documents Available in the Project File
A. Sector Related Reports
1) Pinto, Juan S. and Arango, Juan F. La Peguefta y Mediana Industria
en Colombia. Situacion y Perspectivas. Universida Externado de
Colombia, Bogota, 1968. Also, additional DANE date for 1984-85
provided by ACOPI.
2) Cortes, Berry, and Ishaq. Success in Small and Medium Scale
Enterprises: The evidence from Colombia. The World Bank, 1987.
3) Hammond, Colombia Private Sector Investment Paper (draft). The
World Bank, September 1988.
4) El Eiemplo Colombiano en la Agilizaci6n del Crddito de Fomento a la
Peguefta v Mediana Industria. ACOPI, 1988.
5) Evoluci6n Reciente de las Exportaciones Manufactureras. Banco de
la Repdblica, 1987.
6) Plan Nacional Para El Desarrollo de las Microempresas. Departamento
Nacional de Planeaci6n, 1984 y 1988.
7) Informe de la Misi6n de Preparaci6n de un Quinto Credito para la
Peguefia v Mediana Industria en Colombia. Eduardo Moyano, December
1986.
8) Linea de Credito para la Peguefia y Mediana Empresa, Provecciones de
Demanda. Banco de la RepAblica, 1988.
B. Proiect Participation Financial Intermediaries.
1) Intorme Financiero Comparativo, 1985-87.
2) Programaci6n de Credito, 1988-91.
3) Informe Anual del Estado de la Cartera, 1987.
4) Plan Estrategico de Acci6n de Cartera, 1988.
5) Reforma a las Corporaciones Financieras, Banco de la Repdiblica,
1988.
6) Operaciones de la Corporaciones Financieras, Banco de la Repuablica,
1988.
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NOVEMBER 1 988