A bank created to phase out illegal loans with community-backed mobile credit has increased residents’ access to finance and reduced violence in the city of Medellín in Colombia.
Bancuadra, nicknamed ‘the smallest bank in the world’, targets more than 40,000 of the city’s 2.5 million residents who risk turning to illicit loans that charge interest of up to 700 percent annually.
The poorest residents of Medellín are often drawn in by the loans known as “pagadiarios” that claim to provide short-term solutions to needs such as healthcare and basic sustenance.
By contrast, Bancuadra allows users to easily take out a loan pooled from their neighbour’s financial resources and withdraw the funds from local points via text message to ensure traceability.
So far the city has completed two pilots of Bancuadra in local communities, the results of which have led to a plan to scale the programme across the entire city. These pilot communities have shown a decrease in the cost of debt with a success rate of repayment at close to 100 percent. Bancuadra has also reduced violence in these areas.
In 2016, Bancuadra was given the Bloomberg Philanthropies Mayor’s Challenge award for enabling neighbourhood loan funds and reducing illegal lending.
The success of Bancuadra builds on the strength of Colombia’s financial sector, which contributes to the country’s standing as one of the fastest-growing economies in the Latin American region.