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The Petro plan that could take a stab at the dangerous (and abusive) 'drop by drop' credits in Colombia

The “cheap credit” initiative not only offers an alternative to small merchants, but also represents a direct attack on the mafias.

More than a loan, an extortion. Credits called “drop by drop” or “pay daily” are a modality that exists in Colombia for people who cannot access the bank for legal financing, for this reason, President Gustavo Petro has declared war on them.

The trap of these loans is that debtors end up paying interest ranging from to the 30 % monthly , which is typified as a crime in the Penal Code. Failure to pay can also cost them their lives.

Last week, the president delved into his proposal to eliminate the ‘drop by drop’ from the popular economy to replace it “with a cooperative credit system”, which can even be digital, and that it would operate publicly. In his words, it is “a development bank” for historically excluded sectors.

Is this proposal viable?

This is not the first time that Petro has made this statement. A few days after being elected, the president proposed three tasks to the banking system that would allow him to wage an all-out war against usurious lenders: democratize credits ; give more financing to the agricultural and industrial sectors; and advance in a “more decarbonized economy”.

But on the first two points there is the hard nut to crack to combat the practice of ‘drop by drop’, which has been implemented for decades by mafias, since the difficult access to banking and formal financing in Colombia is the main incentive for small merchants to resort to “borrowers”.

From the banking sector they assured that they were willing to “work together” with the Government to open these possibilities, even from the private sector, although they insist that there is still a long way to go to close the gaps.

Petro’s proposal is that the “popular” financing, with fairer interests, be in charge of the Agrarian Bank, and that this entity allocates at least six billion of pesos (equivalent s to 1,21 millions of dollars) to inject money into the productive sectors of the economy.

“That the Agrarian Bank become the largest in Colombia,” he said. Along these lines, Petro proposed that the loans be granted with the interest rate of the Banco de la República – which was recently raised to %–, which would mean “cheap” financing when compared to the rates charged by illegal lenders.

“Thus, the measure of the Banco de la República it can be transformed into a positive fact,” the president said on Friday, although he recognized that the implementation of this policy would directly involve the State in all its phases to give a real boost to the popular and peasant economy.

Illegal, juicy and underground economy

According to Global Findex 2019 of the World Bank, the 60% of the adult population is banked in Colombia, which leaves another 40% outside the formal system To this reality is added the difficult access to credit, which deepened even more during to the covid pandemic-.

If the magnifying glass is put on the small merchants and sellers of the informal sector, the situation is more dramatic DANE data, cited by Forbes, point out that the number of micro-businesses that went to the banking sector to request cr edits dropped from 72,2% in 2019, a 52,8% in 2021, a drop of 19,4 % that turns on the alarms.

In parallel, ‘drop by drop’ loans were increased. If in 2019 the 13, 9% of the microentrepreneurs opted for the ‘ borrower’, in 2021 the percentage was extended to 10, 4 % of merchants, to despite the risks that this practice entails.

El Banco Central de Colombia sube las tasas de interés y Petro lanza duras críticas: ¿cuáles son las discrepancias?

Although the mechanisms may vary, it is generally people who have only 28 days to pay the full amount of the loan obtained and interest, through daily installments (hence the name drop by drop). The mafias generally use other citizens –called ‘drippers’– to act as collectors and they, in turn, use methods of intimidation to avoid delinquency.

If someone fails to daily payment, the consequences can range from threats to the business or relatives, and even the murder of the debtor. As it is a loan obtained irregularly, the victims of these extortions rarely report to the authorities and, paradoxically, end up working just to keep up with their financiers.

Despite the absence of official data, a study by the Central University, cited by Forbes, details that these mafias -often linked to drug money laundering- move about 84.400 million pesos per month (about 21 millions of dollars).

For Petro, this money that circulates within the economy is put at the service of the mafias, who take advantage of it to legitimize capital using the needs of the poorest. Thus, it is expected that his “popular” financing proposal will not only have the challenge of being negotiated in several instances before becoming a reality, but also that it will probably encounter opposition from those who profit from a business with little visibility, but extremely powerful.

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