Empresas Publicas de Medellin (EPM), one of Colombia’s largest public utilities companies, has long offered electricity, gas, and water services to its clients, the majority of whom live in very low-income areas. Now, EPM has started offering microloans to selected customers, and, thanks to support from the Inter-American Development Bank and other partner organizations, it will be able to turn even more of its customers into borrowers.
Gaining access to credit, whether it’s to buy or improve a home, start or expand a business, or pay for higher education, can be a key part of helping a person or family climb out of poverty. But, since most people living at the base of the pyramid don’t have bank accounts or credit cards, in the past it has been almost impossible for them to get approval for a loan. For example, in Colombia, about 45% of the adult population is “unbanked” – they have no access to any formal financial services. In Medellin, fewer than 25% of residents have access to credit cards or consumer loans.
However, some utility companies, such as EPM, have begun to understand that they have quite a lot of information about the creditworthiness of their clients, since they have records showing who pays bills on time and is otherwise a responsible customer. They also have reliable contact information for their customers. So, in a pilot project, “Financiacion Social,” EPM started making small home improvement loans to approved clients, which could be used to purchase construction materials or household appliances. The recipient can pay off the loan in installments, as they pay their monthly utility bills.
With the support of a $10 million loan from the IDB, EPM should be able to offer such loans to 164,000 low-income households in Medellin by the end of 2015. The goods and materials they buy, such as refrigerators, heaters, plumbing equipment, or roofing supplies, will make their lives easier and more comfortable – and more importantly, they may also improve these families’ health, by making their homes safer and more sanitary.
Additionally, once customers start building a credit history through these EPM loans, they will be able to gain access to a wider variety of financial services, including savings accounts, credit cards, and other kinds of loans.
Francisco Mejia, IDB project team leader, said of the program, “The innovation is that EPM managed to break a vicious circle where low-income beneficiaries, excluded from the formal banking system, either lacked access to financing opportunities or fell victim of abusive interest rates. Financiacion Social not only enables access to credit at competitive rates but also contributes to the creation of a credit history that will eventually open the doors for these communities to enter the formal banking system and a new spectrum of products."
