regulatory framework until recently hampered its development<sup>40</sup> . The adoption of the _Ley de Habeas Data_ by Congress in June 2007, which has not yet been adopted pending its revision by Colombia’s Constitutional Court, addresses many of the key issues and would further promote credit growth, including to SMEs. However, the law includes an ‘amnesty’ provision that allows negative information on borrowers to be erased from their credit reports after only one year, as long as those borrowers pay or otherwise settle their obligations within six months from the date of entry of this law; subsequently to this period, such information will remain on credit records for four years. Although the omission of data from the report is only activated after a borrower’s overdue debt has been paid or otherwise settled (as opposed to when the loan goes into irregular status), the provision is overly lenient and not in line with good international practice. The interviewed banks have highlighted it as a factor that would inhibit the expansion of access to credit for those borrower segments where delinquent behavior is more common (e.g. certain types of agricultural lending), although its overall effect remains unclear.

Historical macroeconomic volatility and recent policy measures that provide conflicting signals were also mentioned as important obstacles to further expanding SME credit. A booming economy in the last few years has strongly benefited SMEs, which tend to be more susceptible to macroeconomic conditions than large corporates. However, a combination of an appreciating currency and accelerating inflation in recent months has led to concerns about possible overheating of the economy<sup>41</sup> . The gradual tightening of monetary policy by the central bank (the policy rate was raised from 6 percent in April 2006 to 9.25 percent in July 2007) has thus far been ineffective in limiting the growth of aggregate demand. In response, the authorities adopted a series of policy measures in May and June 2007 in order to directly limit credit growth and the appreciation of the peso<sup>42</sup> . Interviewed banks expressed some concern about a possible return of macroeconomic volatility and with the choice of measures to combat inflation, since they would directly result in an increase in banks’ funding cost that would have knock-on effects to the cost and availability of credit, including for SMEs. In fact, anecdotal evidence suggests that lending rates have already increased by 3 to 4 percentage points since these policy measures were enacted. In addition, banks pointed out the inconsistency between those measures and the stated government objectives to increase financial access (e.g. via the “ _Banca de las Oportunidades_ ” initiative), which sent unclear and conflicting policy signals to financial markets.

> 40 See Center for Latin American Monetary Studies – The World Bank – FIRST Initiative (January 2005), and Miller and Guadamillas (May 2006) for more details.

> 41 In particular, the Colombian peso had appreciated (in spite of sizeable exchange market intervention by the central bank) from around 2,400 COP per US dollar in August 2006 to below 2,000 by June 2007, inflation has broken above the official 2007 target range of 3.5-4.5 percent over the last few months, while the annualized real GDP growth for the first semester of 2007 has been 7.6 percent.

> 42 These included an increase in non-remunerated marginal reserve requirements on domestic bank deposit accounts, the imposition of non-remunerated reserve requirements on external borrowing and short-term portfolio inflows (“ _encaje_ ”), and limits on the amount of leverage that can be used by financial intermediaries in forward foreign exchange transactions.

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