Building Colombian Capital Markets

Colombia’s growing capital markets have proved a fertileground for two projects supported by the Sustainable Finance Facility (SFF) thataddress persistent challenges across the developing world, not only in thisSouth American nation of 52 million people.

The first challenge involves the basic plumbing of capitalmarkets, and the availability to investors of a reference price – similar to aUS Treasury or German government debt – for other securities.  Another challenge reflects the persistent taskof improving access to credit for enterprises that traditionally lack the sizenecessary to access capital market financing.

In both cases, the World Bank, under the SFF, developedinnovative solutions in partnership with the Colombian government that addressthese challenges. One, called an issuer-driven exchange-traded fund (ID ETF)emerged after experiences in neighboring Brazil. Another, a debt fund aimed atmedium-sized companies, also draws on experiences in more advanced capitalmarkets. At a more general level, a gradual transition toward a morediversified and climate-resilient economy can improve both long-term economicprospects and environmental sustainability.

In Colombia, the economy grew 1.7 percent in 2024 aftergrowing 0.7 percent in 2023, driven by private consumption and modestinvestment, as inflation decreased, and interest rates fell. Colombia’s economyis projected to grow 2.4 percent in 2025 and reach its potential growth rate of2.9 percent by 2027, driven by private consumption and mildly rising privateinvestment.

In Colombia, the SFF facilitated a key step in financingsustainable development needs: the deepening of government bond markets throughthe issuance, with the support of the Ministry of Finance, of a new ID ETF. Atlaunch, the fund tracked 12 government securities. The fund will be dynamicallyadjusted to reflect new issuances and redemptions.

The ID ETF, launched in March 2024, aims to enhanceliquidity for secondary market trading, promote price transparency, lowertransaction costs for investors, and expand the investor base for governmentfinance. Additionally, the ID ETF can be used to hedge investors’ portfolio ofgovernment bonds. The fund exceeded its initial target of US$30 million.

The new fund is the first fixed-income ID ETF in Colombia and the second in the region, after Brazil. The successes in Brazil and Colombia are facilitating discussions in other countries, and the launch of a similar fund in Peru.

The ID ETF, an innovative concept pioneered by the World Bank, relies on the ongoing participation of the issuer to ensure the market is liquid. By ensuring access to the full basket of securities in sufficient quantities – only government securities with more than US$1 billion outstanding and more than six months of remaining maturity are eligible – Colombia ensures that purchasers do not face scarcity or liquidity constraints.

The government can also, in turn, tie the ID ETF directly to sustainable development goals, which strengthens support for the initiative. With a continuously quoted baseline price of government debt, denominated in pesos, investors have a reference price for other issuances.

The World Bank’s convening power brought together the resources needed to build and support the product. The bank’s global reach, in turn, allows it to set standards that can be replicated across other markets. Examples of these standards include:

• Minimum Asset Levels. The ID ETF launch must adhere to a minimum required amount and be conducted through a public offering. This feature enables the ID ETF to achieve immediate scale, unlike traditional ETFs that grow more gradually.
• Diversified Investor Base. The ID ETF is designed for both beginners and sophisticated investors. With strong focus on financial inclusion, it attracts beginners through its transparency, liquidity, low minimum investment requirements, and cost-effectiveness. At the same time, sophisticated investors can leverage the ID ETF as an efficient instrument for portfolio diversification.
• Liquidity and Price Discovery. The ID ETF becomes, from the moment of launch, an additional instrument that helps with secondary market liquidity and price discovery.

Credit Constraints on Smaller Firms

All too often, in economies with underdeveloped financial markets, small- and medium-sized business face the toughest constraints in obtaining credit. Banks, constrained by the need to curb long-term exposure to default risk, either limit lending, demand cash collateral, or offer only short-duration loans. The COVID-19 pandemic also drove home how bank liquidity issues can constrain financing to the real economy.

Capital markets, on the other hand, have two drawbacks for smaller firms: First, they primarily serve much larger companies that have the sophistication to navigate equity and bond offerings. Also, foreign-currency debt, if available, exposes borrowers to exchange-rate risk they cannot manage in a cost-effective manner. In Colombia, these problems constrain lending to otherwise creditworthy companies. Domestic credit to the private sector stands at about 50 percent of GDP, less than the 54 percent average for Latin America and the Caribbean, and dramatically lower than the 116 percent of GDP in the region’s standout, Chile.

Bank loan portfolio as a percentage of GDP is about 35.5 percent in Colombia, a level that in other similarly situated countries coincides with more vibrant capital market funding than currently exists. Colombian banks typically provide short- and medium-term loans; credit portfolios have a weighted average life of 1.5 years. Between 2017 and 2021, 63 to 73 percent of the banking system’s credit portfolio was concentrated in tenors of up to three years, a serious constraint on productive investment.

Private Credit Fund

A capital market solution to Colombia’s constraints involves channeling peso-denominated savings into a pool designed specifically for larger loans and longer maturities. To facilitate the flow of credit to smaller firms, the World Bank proposed the creation of a private credit fund, denominated in Colombian pesos, that would focus on the sector and set an example for other institutional investors that might follow with similar undertakings. The fund, in contrast to bank-based lending, would be more flexible and have the expertise to analyze the risk profiles of small- and medium-sized enterprises (SMEs) that banks cannot. Providing longer tenors and more customized and flexible forms of finance fosters entrepreneurship and helps borrowers scale-up their businesses while contributing to economic growth.

Mobilizing Institutional Investors

The fund was established by Credicorp Capital, a Peru-based financial services company that is a leading asset manager in Colombia, and has a target size of approximately US$200 million, or about 1 billion Colombian pesos.

The International Finance Corporation (IFC) anchored the effort with a promise of an investment of up to US$50 million investment, a sum that will not exceed 15 percent of the fund’s total. With the IFC investment, Credicorp Capital agreed to enhance its environmental and social management system, further strengthening its commitment to sustainable finance. The new fund provides loans with maximum tenors of up to 10 years with grace periods and amortization repayments toward the end of the life of the loan.

Apart from the IFC, the largest investors in the fund are currently:  Protección (33 percent), Porvenir (22.5 percent), IDB Invest (16 percent), Seguros Generales Suramericana (4.7 percent), and Credicorp itself (3.0 percent). The fund – FCP Credicorp Capital Deuda Privada – has a contractual life of 10 years, ending in January 2033.

The World Bank and the IFC also provided knowledge, innovation, and capacity-building to many entities in the process. Fund managers and institutional investors received training in international best practices related to investment analysis, credit scoring, corporate governance, risk analysis and mitigation. This work took place in coordination with the Colombian banking regulator.

More Loans, Longer Maturities

The new fund has proven an effective vehicle for providing credit to Colombian enterprises that might otherwise lack access to bank loans. By March 2025, the fund had already invested in ten companies with the peso-equivalent of about US$107.6 million.

The fund’s clients are a diverse group, both in size and sector. They include:

• Amarilo SAS, a company dedicated to the management, construction, and promotion of real estate projects
• Comestibles Integrales SAS, which manufactures crackers and cookies
• CrediOrbe SAS, a provider of financing for motorcycle purchases
• Conaltura SAS, a real estate company
• ExcelCredit SAS, a firm that offers payroll lending and other financial services
• Kredit SAS, a non-banking financial institution that lends to pensioners and teachers
• Universidad Manuela Beltran, a Colombian university

There are encouraging signs that the fund is extending the average duration of business loans in Colombia. The current pipeline shows that potential clients have credit ratings between A+ and AA- (in local scale) and the average tenor of loans is 7.5 years.

The fund itself has set a positive example for capital market lending in Colombia. The World Bank and the IFC have been contacted by private-sector companies wanting to establish similar funds. Creditcorp itself is establishing a second fund, without IFC investment.