Forced investments: what are they and what are the risks to your money if you apply this idea?

In order to boost the economy and move the ‘locomotives’ of infrastructure and tourism, among other sectors that are the backbone of the GDP, the National Government plans to present a project of forced investments, which consists of a minimum percentage of people’s savings being allocated to loans that must necessarily go to certain economic sectors.

(Read: Forced investments have already been attempted and had to be dismantled: what effects did they have).

According to what is known, this figure would be implemented through the private financial system, which would be temporary for two years.

“The government is preparing its economic recovery package for July 20, based on a percentage of forced investment of national savings for industry and housing. It will improve the financial situation of banks and will be temporary, for two years.”President Petro assured through his X account.

The Head of State maintains that the idea is that part of the investment capital is directed “towards the popular world, to work on the transformation of things, industry, in the furrow, agriculture and in tourism” and insisted that strengthening the country’s economy will help producers and workers to open up industry, agriculture and tourism.

(See: What has Colombia spent the two recent tax reforms on?).

However, the idea has not been well received in many sectors, as they warn that it could limit access to credit for micro, small, medium and large businesses, in addition to generating higher taxes.

“Returning to this idea of ​​’forced investments’ that the country developed strongly in the 60s, is a way of imposing new taxes on the productive and financial sector and thereby hindering or limiting access to credit for micro, small, medium and large businesses,” warns former Finance Minister José Manuel Restrepo.

For his part, Camilo Herrera Mora, founder of the firm Raddar, maintains that “In light of the President’s idea of ​​forced investments, it is good to remember that the money that banks lend does not belong to the banks, but to the savers and it must be protected”.

Although financial intermediation facilitates the channeling of resources from savers to those who need to finance investments, Corficolombiana has already demonstrated that it faces market failures due to information asymmetries between creditors and debtors, in which debtors tend to have more information, which can lead intermediaries to restrict credit.

(Also: The ministerial shake-up continues: Petro announces change in the Ministry of Agriculture).

“Furthermore, for small debtors, the high cost of individual transactions can significantly increase interest rates on loans. One measure to address these shortcomings was the implementation of forced investment, which required intermediaries to provide certain types of credit deemed insufficient by economic authorities.”they added.

In this way they highlight that in Colombia, This practice has been recurrent throughout the last century and they give as an example that Law 5 of 1973 required banks to allocate between 15% and 25% of their resources to the agricultural sector or acquire securities issued by the Bank of the Republic..

“Starting in the 1990s, it was decided to gradually eliminate these investments, although exceptions were made for the agricultural sector and social interest housing. The obligation to allocate a minimum portion of mortgage loans to social interest housing was eliminated in 2004 by Law 546 of 1999. The agricultural sector was the only one that maintained forced investment, although with a reduced subsidy and investment, rediscount and loan rates linked to the DTF.” the report says.

(Also: Government is unaware of news about alleged suspension of WOM services in Colombia).

With this in mind, they concluded by pointing out that increasing forced investments reduces the margin of intermediation, decreasing profits and the growth potential of the EC, deteriorating their liquidity and affecting decisions on placement, investment and financing, which they warned is worrying in the current context of adjustment of credit institutions.

“An increase in forced investments could reduce the relative share of the credit portfolio, especially affecting sensitive segments such as microenterprise credit. Forced investments represent debts for Public Financial Companies (SPF), increasing public debt, although not that of the Central National Government (GNC). Excessive use of forced investments could deteriorate credit quality and increase the cost of sovereign debt and the cost of equity capital.”said Corficolombiana.

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