Mexico: Microfinance: Thriving industry is proof the poor can, and do, save

Dec 2007
London, United Kingdom, December, 12 2007 - Over the past few years, banks and specialised lending institutions have developed financial products for a sector of the 106m population that had previously been almost totally ignored.

In the shade of a stained tarpaulin stretched across a dusty courtyard in Chalco, adesperately poor neighbourhood on the outskirts of Mexico City, María Guadalupe Fierros is collecting the weekly contributions of a group of friends who have taken out loans to fund their small businesses.

Ticking off the names of her friends as they make repayments, she stuffs the notes and coins into her syndicate’s makeshift treasury for safekeeping: a scuffed cardboard box with the words “Price Shoes – making the most of your fashion” on the side. With a broken-down car on one side of the courtyard piled high with egg cartons and cardboard, a wall covered in coils of hosepipe, with rusty metal and plastic crates on the other, the local meeting place may not look like much. But this is the visible face of the most dynamic area of Mexico’s banking sector: microfinance.

Over the past few years, banks and specialised lending institutions have developed financial products for a sector of the 106m population that had previously been almost totally ignored.

The result has been an astonishing growth in the number of banks catering to what is often called “bottom of the pyramid” clients – families who have a typical monthly income of about 6,000 pesos ($552) or less. Last month, for example, Walmex, the Mexican arm of Wal-Mart, the US retailer, opened the first branches of its recently-created bank. Even Volkswagen, the vehicle manufacturer, has announced plans to do the same.

Today, there are about 40 such banks and institutions providing savings and loans products to lower-income families in Mexico. Less than a decade ago, there were barely 10.

Compartamos, which started life as a non-governmental organisation, is the biggest provider of microfinance in Mexico with a total loan portfolio of roughly $300m spread among more than 700,000 clients. About 90 per cent of those loans are what the bank calls “income generator” loans: business credit for a 16-week period for groups of at least 12 women.

The band of women in Chalco is one of the recipients. Each of the 20 members is involved in different businesses and each has taken out different-sized loans to suit her needs – even though paying back the 182,000 pesos total they have borrowed remains a group responsibility. Repayments are made punctually every week and members are fined 5 pesos for arriving late, 10 pesos for not arriving at all and 50 pesos for not sending the money with someone else in the case of absence. “The idea of the fines is to buy supplies for a party or to cook some food all together at the end of the credit cycle,” explains Ms Fierro, the group’s treasurer. But she admits the circle is so punctual that there is usually not enough to fund the party.

Arleth Ortiz Molina, a thick-set 22-year-old and a member of the group, is now on her third 16-week loan. In the first, she borrowed 2,000 pesos: this time, she has a 5,000-peso loan to grow a clothes-manufacturing business that she runs with her mother. They sell the children’s pyjamas, T-shirts and jackets that they make to friends and in the local market. “Business is pretty good,” says Ms Ortiz Molina.

Banco Azteca has adopted a different tack. The business, which belongs to Mexico’s Salinas Pliego group and grew out of the Elektra consumer durables chain, provides mainly consumer credit for poor families rather than loans for working capital.

Since it was founded five years ago, the bank has opened 1,480 branches, most of which are located in the group’s existing outlets. With 7.5m savings accounts, 7.2m credit accounts and a total loan portfolio of just over $2bn, the bank is now the 10th biggest in Mexico in terms of assets.

In the past 18 months alone, it has handed out more than 3m credit cards, and it plans to provide another 3m between now and the end of next year. Yet Luis Niño de Rivera, the bank’s president, admits things were much less clear five years ago. “Banco Azteca was born under a lot of suspicion,” he says. “People just didn’t know whether there was a business or not, whether customers would pay their loans. We have proven that poor people can and do save.”

With two interest rate rises so far this year, and signs that the credit cycle in Mexico is starting to soften, there are some fears that businesses such as Banco Azteca and others will find it much harder over the coming year to keep down non-performing loans. In the case of consumer credit, for example, loans that are overdue have risen from about 3 per cent of the total two years ago to about 6 per cent now.

Other concerns in the sector centre on how much these banks charge their customers. With an annualised interest rate of about 82 per cent for Compartamos’s “income generator” loans, they sound expensive.

But Carlos Danel, Compartamos’s co-executive director and co-founder, says it is unfair to compare them with more traditional loans. For example, his bank has to employ a large sales team to promote loans among often far-away rural communities in a process that is both time-consuming and expensive. “The operational costs are very high,” says Mr Danel. “If we charged the annualised equivalent of 62 per cent we would only just break even.”

Even so, he is convinced competition and consolidation in the sector will bring down rates. For the 1.5m poor who have taken out microfinance loans, that can only be good news.


Source : Financial Times

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