High Levels of Indebtedness and Low Levels of Savings and Employment for Youth and Poor
Colombia, where Investing Hope is currently focused, is one country of many that has seen a significant change in the percentage of its population accessing formal financial services in the past eight years, but more frightening trends have been seen in levels of indebtedness and lack of savings prompting a call for more informed consumers of financial services. Whereas the Colombian government has been successful in encouraging citizens to open bank accounts through subsidy programs like “Familias en Accion” and thus increasing the percentage of individuals with bank accounts from a dismal 23% in 2006 to over 62% currently, many of those accounts, however, are pass-through savings accounts which are depleted each month for covering household expenses. Of the 2 million savings accounts established by Familias en Accion (a Colombian government welfare program), over 51% of the accounts are inactive. True economic security and growth will only come when the population generates income and safeguards a portion of it for future purchases or expenses. According to the article "The Financial Capacities of the Colombian Population" published in Portfolio, a Colombian economic newspaper, on July 12, 2012 the results of a survey of Financial burden and education of the Colombian households showed that 80 percent of those surveyed confirmed that their monthly expenditures have been equal to or more than their total monthly income.
OUR SUCCESSFUL MODEL
Additionally, the levels of indebtedness are rising dramatically in Colombia. According to information from Banco de la Republica, between 2010 and 2011 the amount disbursed in loans grew by 22%. Further evaluation showed that most of that growth was in homes that already had high levels of debt. Mr. Carlos Gustavo Cano, Co-Director of the Banco de la Republica stated, "'Personally, I am concerned about the publicity that tends to seduce the homes into a greater level of debt and this can become a risk for the stability of the financial system should a portion of those homes find themselves in economic difficulties". Nearly 16 of every 100 pesos in Colombian homes was used to pay for loans. Since that study was completed, consumer debt levels have continued to grow by 13.9%. There is a need to provide sound financial advice to Colombian families, especially those with lower levels of financial education.
Many of the lower socio-economic classes are not using formal bank accounts because of multiple factors including a) complicated application process, b) elevated minimum balance requirements, c) poor customer service in banks, and d) high transaction fees for savings accounts. Instead, these people tend to save in their homes in traditional piggy banks or with funds hidden within the home. With the savings close at hand, it becomes very easy to access the savings and use them or for other family members to take the funds thus depleting the savings..
With youth, the situation is even direr. Youth between the ages of 14 and 28 years represent 26.7% of the population of Colombia. 41.5% of the young men and 45.7% of the young women are classified as poor according to a United Nations study. The situation of poverty is even higher in the rural areas where 61.2% of rural youth are classified as poor. The study went on to state that 29% of the youth neither study nor work with female youth registering an even higher level of 39%. Unoccupied youth are at a much higher risk of getting involved in illegal activities like gangs, prostitution, terrorist groups and drug consumption and trafficking. Their lack of skill sets and low education levels make for few options for employment.
Accessing financial services is a double edged sword opening the door to loans but causing deep damage to those that do not understand how to use the system responsibly. There is an urgent need to educate the population on the benefits and dangers of the system and how to use it responsibly or offer alternative programs. Additionally, many of the microfinance organizations and formal financial institutions are not able to reach the poorest of the working poor because of misconceptions of the poor, low risk appetites and burdensome methodologies that prohibit these organizations from attending those in greatest need.
Savings Groups, Youth Entrepreneurship, Church Based Loan Funds and Other Innovations
Investing Hope is currently working with 30 low-income youth and 61 adults in poor communities to increase their financial awareness, promote a culture of savings and wise money management and encourage entrepreneurship as a way of increasing income. It incorporates Biblical principles for money management and social justice for dealing economically with the poor. The foundation hopes to expand this number to over 1500 individuals by working with churches and foundations in 4 communities in the next 24 months.
The YES program (Youth Entrepreneur and Savings Program) works in collaboration with churches and Christian foundations in poor communities to provide the youth with training, supervision of income generating activities and encouragement to develop a culture of savings.
The program begins with training on basic principles of product development and marketing. Students discuss different products and the markets in which they will be introduced. Additionally, training includes discussions on price and promotional or sales strategies. The youth are almost immediately given opportunities to produce low cost products (candy kabobs, chocolates, brownies, etc.) and are encouraged to sell the products to family and friends. As their confidence increases, they are able to produce more product and increase their sales.