Research in Colombia: The “drop by drop” method charges over 10 times the interest rate cap to people and almost 22 times more to businesses

Bogotá, January 23, 2025 — Access to formal credit is vital to improving household living conditions and stimulating economic growth. In Colombia, the financial system and credit market have been evolving with the emergence of new players like fintechs and technology use. However, the country still faces a significant challenge, with about 65% of Colombians unable to access credit.

In this context, Colombia Fintech, in collaboration with ANIF, Nu Colombia, and other partners, held a study on changes in interest rate cap methodology and their impact on financial inclusion, with a focus on sustainable economic development that included a survey on the Real Debt Rate in the country. The survey, which included 1,221 households and 1,009 SMEs, provides a clear view of indebtedness dynamics and the factors influencing access to formal and informal credit.

The public policy recommendations presented in this study form part of Colombia Fintech’s strategic roadmap, based on the financial inclusion triad revealed during the 2024 Latam Fintech Market. This strategy seeks to boost interest rate liberalization, democratize access to financial data, and implement real-time payments as pillars to energize formal credit and reduce dependence on informal mechanisms.

Several fintech companies have embraced this approach. Among them, Nu, whose proposal for accessible, transparent, user-focused services has been crucial to expanding financial inclusion in Latin America.

In the words of David Vélez, founder and CEO of Nubank, “ANIF’s study figures clearly display the exclusion caused by the interest rate cap on more vulnerable populations: nearly 4 out of every 10 low-income Colombians resort to informal lenders paying rates up to 360%. The interest rate cap needs review because it’s the type of public policy that starts with good intentions but ends up significantly hurting those it seeks to help. In this case, nearly half of Colombians end up paying exorbitant interests with no law to protect them.”

The results show a concerning reality: credit access in Colombia is deeply unequal and unfair. Although banks are the most common lenders among people (35.8%), as their income level decreases, their dependence on informal financing sources such as the drop-by-drop method and family and friends increases. In businesses, the picture is similar: as company size decreases, the participation of informal mechanisms increases.

How do Colombian households fall into debt? The average indebtedness in Colombian households reaches $10,300,000, with informal schemes carrying a heavy weight. Of that total, banks finance 34%, equivalent to about $3,500,000; relatives and friends contribute 15.4%, approximately $1,600,000; and the drop-by-drop method represents a worrying 12%, meaning nearly $1,300,000 per household.

This study revealed information about the financial wellbeing of Colombians. Around 1 in 3 people in Colombia allocate more than 30% of their salary to pay debts, endangering their financial stability. Regarding businesses, it was found that the vast majority pay more than 30% of their monthly income on outstanding debts, affecting their growth potential and sustainability. In order to generate information about the real indebtedness dynamics in the country, this study estimated the drop by drop’s real loan interest rate. According to the results, “drop-by-drop” lenders charge an interest rate of around 380% to people, over 10 times the interest rate cap, and to businesses, the “drop by drop” charges average rates of 666.5%, nearly 23 times the legal limit.

In this study, Colombia Fintech presents a series of public policy recommendations to stir up the credit market in the country. In particular, it suggests establishing a clear IBC calculation methodology that includes the separation of consumer and regular loans to adequately represent market conditions. According to estimates, this change could lead to an expansion of up to 10 trillion, or 4.9%, in the total stock of the available consumer credit portfolio, by raising the regulatory cap and allowing the placement of loans to higher-risk profiles. In practical terms, this would correspond to an increase in 8.9 million average low-amount consumer disbursements.

The study also proposes that all credit modalities existing on the market be granted via credit cards and other technological systems. The current regulation states that only consumer credit can be granted via credit cards, which limits financial inclusion.