Notes from the Field: Mexico

The first test of CGAP’s Country-Level Savings Assessment Tool was conducted in Mexico in March 2005. Through individual meetings, two industry roundtables, and a conference on rural finance organized by the Latin American and Caribbean Forum on Rural Finance (FORO LAC FR), the three reviewers spoke with approximately 60 people. Interviewees included policy makers, regulators, donors, practitioners, federation/association representatives, and TA providers. Using the savings behavior and demand of low-income clients as the starting point, our investigation aimed to assess the strengths and weaknesses of the Mexican financial system. Specifically, we looked at three levels: micro (institutional capacity), meso (second-tier and support services), and macro (policy environment).

With upcoming elections in 2006 that could produce fundamental changes in the regulatory framework, we see this as an important juncture for the "popular finance" sector in Mexico. It is the ideal time to stimulate debate and reflection on what further actions are needed to improve small-balance deposit services in the country.

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» Client Level: Raise Awareness of Demand for Small-balance Deposit Services

In the words of one Ministry of Finance official, Banco Azteca’s success has "opened his eyes" to the feasibility of reaching low-income customers with savings services on a massive scale.

Informal savings patterns and the success of a new market entrant demonstrate the significant latent demand for small-balance deposit services. Several studies have shown that low-income clients save informally in both financial and non-financial forms. And when institutions offer appropriate, convenient deposit services, low-income Mexicans seem to respond. Banco Azteca – a new "niche" bank built on a pre-existing retail infrastructure – is a case in point. Its account base has grown to about 5.6 million accounts in the three years since new management took over. In contrast, the penetration of banks and "popular finance" institutions (dominated by cooperative savings & credit institutions providing services to the low-income/mass market) is limited. In a country of 106 million people, the entire popular finance sector has roughly 3 million accounts after 50 years of existence.

This is not necessarily an endorsement of Banco Azteca’s overall business, but it does signal what the right model can achieve. In the words of one Ministry of Finance official, Banco Azteca’s success has "opened his eyes" to the feasibility of reaching low-income customers with savings services on a massive scale.

» Micro Level: Bringing the Right Products and Services to the People

» Transforming Compartamos: Episode 2 Through the eyes of its employees, see how Compartamos’ is transforming to serve the needs of its clients.

The two major constraints are: physical distance to points of service, and inappropriate product offerings. Research has shown that people are willing to travel a lot further for a loan than to make a deposit in their savings accounts. Physical proximity to branches is essential for savings mobilization. Unfortunately, bank branches are scarcest in precisely the rural and poor urban areas where low-income clients live.

• 1770 of Mexico's 2446 municipalities have no bank branches
• 10 states have 70% of bank branches and 77% of savings

These maps of Mexico City and the state of Chiapas are further illustrations of the inequality of access to financial services in both urban and rural areas.

Not surprising, most banks' cost structures, institutional cultures, and product designs are not geared to serving low-income clients. Deposit product offerings typically trap low-income clients between time deposits (which are remunerated but have prohibitively high minimum balances) and transaction accounts (which have lower minimum balances but high fees and little or no interest). Unable to afford the former, low-income clients attempt to save in transaction accounts, only to watch their balances eaten away by fees – a phenomenon certain industry observers have labeled “predatory savings.”

Cooperative institutions have better success in reaching poor areas, but their outreach is also hampered by product design (e.g. non-remunerated mandatory shares as high as 1000 pesos) and cultures (slow-growth and supply-led, with credit tied to savings).

There are some bright spots in the landscape. To overcome the proximity challenge, a number of institutions are experimenting with different, low-cost ways of branching out into rural areas. One cooperative, for example, finding that most clients are not willing to travel more than 45 minutes to reach a branch, has started a system of mobile banks and salespeople, which together can serve people located up to two hours away from the office.

» Meso Level: Develop the Right Incentives and Infrastructure

An abundance of subsidized lending funds and underdeveloped financial infrastructure dampen the ability and incentives for popular sector financial institutions to mobilize savings. There are approximately 30 microfinance-related programs sponsored by different government agencies – many of which are subsidized on-lending funds. These cheap sources of funds discourage deposit-taking institutions from mobilizing more savings, especially from relatively high-cost, low-balance customers. Ironically, many of these lending subsidies are restricted to the strongest categories of deposit-taking institutions, dampening incentives for savings mobilization in precisely those institutions in the best position to do so.

The popular finance sector in Mexico is organized into 16 federations, which are to be capped by a new confederation in accordance with the new Popular Savings and Credit Law (LACP in Spanish). Despite (or perhaps because of) this proliferation of meso-level institutions, provision of second-tier services to the sector remains somewhat ineffective. For example, the LACP stipulates that the confederation set up a deposit insurance scheme for the sector. However, as this confederation does not yet exist, individual federations are making arrangements to provide this service for their members.

Links to the payment systems and provision of a common IT platform are being arranged through BANSEFI, a government-owned savings bank. Although by all accounts these systems are technically excellent, major cooperative networks are reluctant to join for fear of involving the government in their operations and because BANSEFI competes with them in retail savings services. Although plans to sell BANSEFI to the sector have been mentioned, lack of a clear announcement and concerns over the future governance structure are muting sector interest in the deal.

The second-tier function for which we found the most need among popular sector FIs – liquidity management – is one on which least progress seems to have been made. Theoretically this will be a future function of BANSEFI, no concrete plans have been announced. In the meantime, almost every single institution we spoke with confirmed that they were over-liquid, with loan to deposit ratios as low as 25%. Given the high cost of mobilizing small savings, institutions currently lose money on their deposits in commercial banks (although placing excess liquidity in government treasuries, sometimes through BANSEFI, can earn between 7-8%). This over-liquidity reinforces disincentives for savings mobilization and further calls into question the need for the plethora of government on-lending funds described above.

» Macro Level: Get the Government Role Right

The fragmentation of public policy on popular finance gives conflicting messages and incentives to the sector; at the same time, the government’s actions could be more limited in scope. It is perhaps not surprising that the popular finance sector is receiving mixed policy messages with so many government agencies involved in some way. On the one hand, the government is directly involved in service provision (through BANSEFI and other funds). On the other, it will need to take stronger actions to fulfill its essential role of ensuring an enabling environment.

The LACP, passed in 2001, has yet to actually enter into force because no institution had come up to the necessary standards. The deadline for institutions to enter into regulation has therefore been postponed three times in the last 4 years (most recently in April 2005). The resulting uncertainty has discouraged institutions from applying to become regulated – even the several that are strong enough to do so right now.

On the supervision front, the LACP requires auxiliary supervision through the federations. However, having multiple federations with relatively few institutions in each not only introduces extra costs into the system but also raises potential conflicts of interest (because the federations are funded by the institutions they supervise). Moreover, supervisory costs weigh disproportionately on smaller institutions, both within and among federations.

» Next steps: Stimulate Debate

Now is the ideal time to stimulate debate and reflection on what further actions are needed to improve small-balance deposit services in the country. Elections in 2006 could produce fundamental changes in the regulatory framework, making this is a very important juncture for the "popular finance" sector in Mexico.