Almost 400,000 disadvantaged people in Medellín have no access to the formal banking system and, instead, take out illegal loans connected to organized crime. While these illegal loans, called “pagadiarios,” are marketed as a means to support employment, cover life-threatening needs, and meet daily needs, they subject the city’s poor to a stubborn circle of poverty, charging interest rates of up to 700 percent annually. This corrupt system uses violence and intimidation as a collection tactic, targeting those who are the most vulnerable and marginalized from the financial system.
The city will tackle these challenges through Bancuadra, “the world’s smallest bank.” Bancuadra is a network of neighbors who pool their financial resources. It provides access to credit, loans for work materials, and a jobs bank, with no complex procedures or requirements to join. Neighbors can make withdrawals at authorized central locations in their own neighborhood. These services operate on a digital platform accessible through multiple devices. Users are sent by text messages to ensure the traceability of transactions.
Bancuadra is innovative because it uses community trust as collateral. Networks are created by people who know each other and are available to serve as guarantors of loans. By doing so, the system reduces asymmetry of information between lender and borrower, providing financial access to many more people at affordable rates.
Medellin has conducted two pilots of Bancuadra. The program has already substantially decreased loan costs, received paybacks of almost 100 percent, reduced violence, and given families opportunities to access financial education. Building on early successes, the city is preparing to roll out the program at scale across the city.
“Our idea is a great opportunity to create a municipal venture aimed at offering easy, quick, and safe credit access to more than 36 percent of the population of Medellín.”