Posted on February 26, 2009 - by Gavin

Microfinancing still resilient in Mexico…

Financial Times

Until a year ago, microfinance and low-income banking in Mexico were a joint success story, growing at rates that made the rest of the country’s banking sector look sluggish.

But since the beginning of last year, as credit began to dry up on fears of global recession, the fortunes of the two sectors have diverged markedly.

Hardest hit has been low-income banking, where past-due loans have risen alarmingly. In the case of Bancoppel, for example, a bank built up around a well-established Mexican retail chain, past-due loans rose from 4.39 per cent of total loans in December 2007 to 20.12 per cent in December last year.

Guillermo Babatz, president of Mexico’s National Banking and Stock Market Commission (CNBV), expects consumer lending to be the only area in which loans will actually contract this year. “These banks’ problems have been much more acute than those of the rest of the [financial] system,” he says.

Indeed, only Banco Azteca, which belongs to the powerful Salinas Pliego group, seems to have come out of the changing conditions relatively unscathed. In late 2007, it reinforced its team of collections officers from 4,500 to 6,000, as well as giving bonuses to clients who paid their loans on time. “We started taking action a long time before we hit the bad spot … getting repaid is the key to how you can lend,” says Luis Niño, the bank’s president.

Mexico’s microfinance sector is a different story. At Compartamos, which started life as a non-governmental organisation and has grown to become Latin America’s largest microfinance organisation by number of customers, past-due loans have increased only marginally, from 1.37 per cent to 1.71 over the past year – considerably better than Mexico’s traditional banking sector, which saw an increase from 2.38 per cent to 3.21 per cent.

Carlos Danel, co-executive director and co-founder, credits the “resilience” of his account holders.

“As the jobs market deteriorates, the repayment ability of people with consumer loans also deteriorates,” he says. “With our clients, their businesses may shrink but they still have a productive activity.”

A second reason is that loans usually go to groups rather than individuals. At Compartamos, about 90 per cent of loans are what it calls “income generator” loans: business credit for a 16-week period for groups of at least 12 women.

Other reasons include the fact that microfinance clients tend to set up businesses that sell basic necessities such as food, clothing and shoes, and that they tend to be in rural areas, less affected by violent swings in the economy.

Yet none of this suggests that microfinance organisations will keep growing and low-income banks are doomed. One important change in Mexico brought on by the global financial crisis has been increasingly restricted access to credit. Banks such as Banco Azteca have largely overcome that problem thanks to a highly aggressive strategy to win clients with deposit accounts.

By contrast, microfinance organisations by and large obtain funding from the market – a fact that presents obvious challenges this year and possibly next. As Mr Danel of Compartamos says: “As a whole, microfinance faces a challenge in terms of how to finance growth.”

Source: http://www.ft.com/cms/s/0/37addbce-0270-11de-b58b-000077b07658.html