Juan Carlos Elorza
Diana Mejía
Micro and small enterprises (MSMEs) are the backbone of the Colombian economy, representing 98.6% of the business fabric and generating 72% of the country's employment. In fact, according to data as of July 2024 from the Colombian Ministry of Commerce, Industry and Tourism, of the 1,561,021 Colombian companies, 1,539,383 correspond to MSMEs. In percentage terms, 94.4% are microenterprises and 4.2% are small enterprises.
Despite their importance, many of them face a critical challenge that puts their permanence and future at risk: lack of liquidity. Having sufficient liquidity not only allows them to operate on a day-to-day basis, but also to withstand periods of instability and take advantage of growth opportunities.
Financial inclusion is key to addressing this problem. When MSMEs have access to financial products designed to meet their needs, they can better manage income volatility, invest in their growth, achieve business goals and protect themselves against unforeseen events. However, in Colombia, many still lack adequate financial tools, which leaves them vulnerable to general or economic shocks.
Therefore, from CAF - Development Bank of Latin America and the Caribbean, together with the National Association of Financial Institutions (ANIF) and the Strive Colombia program (a Mastercard initiative to promote the digitalization of MSMEs), we are working on a project to promote the design and development of innovative financial products and services for MSMEs in Colombia, based on existing data from the “Small Firm Diaries” study and new financial diary data generated through a digital tool, on the financial needs and behaviors of MSMEs in Colombia.
The “Small Firm Diaries” study collected financial data from more than 120 small firms in Colombia between 2021 and 2022. The results highlight that a large portion of these companies value stability as much as growth. They are not in a critical financial situation, but they are stagnant in their growth and do not have the capacity to expand.
They also experience a lot of volatility, and do not have the financial tools to manage it. This reflects an important unmet need for financial products that respond to the high-income volatility and working capital needs of these companies. In turn, the lack of comprehensive and real-time data on MSMEs has prevented financial institutions from making accurate risk and creditworthiness assessments.
Similarly, the high volatility in income is passed on to employees who indicate that they have no sources of income outside of small businesses. Many of these employees are seasonally employed and their high turnover affects the growth potential of the firms. Vulnerable employees indicate that they rotate through similar businesses in the same industry with the same unfavorable and inconsistent conditions and must seek additional sources of income.
This context underscores the opportunity and the need to innovate in financial products that are well aligned with the financial dynamics of MSMEs, using the new data and analysis that the project will provide to overcome operational barriers and promote the financial inclusion of these companies. On the other hand, innovation processes in financial institutions are difficult and costly, so workshops will be developed with behavioral tools and real-time data on demand to facilitate innovation processes, and to design and carry out pilots of new financial products or products adapted to the needs of MSMEs.
For the development of the project, CAF, ANIF and Strive Colombia will develop, together with the executing agencies (New York University, the Common Cents Lab at Duke University and Fundación Capital), a series of activities that include the collection and analysis of financial diaries of MSMEs, as well as the interaction with financial service providers to design, pilot and implement new financial products focused on this type of companies, based on the findings of behavioral economics. Key project activities include analyzing data from previous studies, conducting workshops with financial service providers, and collecting new data through financial diaries using innovative technologies such as chatbots.
With this project, CAF seeks a clear objective: to strengthen MSMEs so that they can be sustainable, grow and generate employment. In doing so, not only the companies benefit, but also the economy and the well-being of millions of Colombians who depend directly or indirectly on them. Liquidity is not only a technical necessity; it is the pillar that ensures the vitality and projection of this essential sector.
