Profitwise News and Views

December 2003 Special Edition

Financial Assimilation of Immigrants Conference

From the Editor
December 2003 Special Edition (PDF,227KB)

Keynote Speaker
Banking the Unbanked:
What the Mexican Government is Doing in Mexico

Keynote Speaker: Javier Gavito Mohar
Mr. Gavito is Chief Executive Officer of the National Savings and Financial Services Bank (BANSEFI), formerly Mexican Trust for National Savings (Patronato del Ahorro Nacional.) Formerly, Mr. Gavito was Executive Manager of Banking and Savings in the Mexican Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público). He was Vice Chairman of Financial Analysis and Development of the Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores). Prior to working in the banking industry, Mr. Gavito was a Professor of Finance at the Mexican Autonomous Technological Institute (Instituto Tecnológico Autónomo de México, ITAM), and was also head of the Academic Department of the School of Business and Coordinator of the Finance Department of ITAM. Mr. Gavito has published several articles, papers and essays dealing with financial issues, participating organization systems, development and supervision of financial services and institutions, and the impact of the North American Free Trade Agreement. Mr. Gavito holds an M.B.A. degree from Tulane University and a Bachelors Degree in Business Administration from Universidad Anáhuac (Mexico City).

Mr Gavito began his remarks by acknowledging that Mexicans emigrating to the United States largely do not bring experience with or detailed knowledge of financial systems in Mexico. Formal financial systems in Mexico do not reach the lower-income strata of the population. The Mexican government has begun a wide reaching program to bring financial services to Mexicans around the country, even the most remote rural areas.

The international target for money supply, meaning essentially bank deposits, as a percentage of GDP is 40 percent, compared with roughly 60 percent for the U. S.¹ In contrast, deposits in Mexico have been below 20 percent of GDP since 2000. Loans have decreased steadily since the 1994 banking crisis, and are currently below 20 percent of GDP. "The population has limited access to banking services because of their low-income level, their geographical dispersion and the high cost of the available information," Mr. Gavito stated. "This unattended demand for financial services by the formal sector..has promoted an array of options, mostly informal."

The informal financial service sector includes credit unions² (of the 256 total, only 32 accept deposits), savings and loans associations, cooperative associations, solidarity savings institutions and popular savings entities. This Association for Popular Colinias (ACP), as it is collectively known, consists of 657 intermediaries, providing financial services to over 2.6 million people around the country, with assets over 17.8 billion pesos (approximately $1.65 billion United States dollars (USD) ).

Not all agents in the ACP are authorized to mobilize savings. Of the 657 intermediary enterprises around Mexico, only 43 are regulated. This generates insecurity regarding the deposits taken, resulting in a limited development of the ACP, and keeping deposits and inclusion into the financial sector low.

The potential market is tremendous. It is estimated that formal financial intermediaries serve only 35 percent of the economically active population. The potential market is at least 20 million people (including those formal financial services intended for Mexican immigrants in the United States).

A new legal framework to give security to depositors and investors was approved by the Mexican congress in April 2001, which passed two new laws: the Popular Savings and Credit Law (LACP) and the Organic Law of the Bank for National Savings and Financial Services. The principal goals of the LACP are: organizing, regulating and promoting the popular banking sector in a way that is consistent with its nature and functions; strengthening operations; and providing protection for depositors. Many of the intermediary enterprises (known as cajas) that provide financial services to low-wage earners in Mexico have operated for decades, and range from small rural operations to a cooperative of 600,000 members with 350 branches around the country.

It is important to understand that the new banking model was not a government design, but one of people involved in the cajas who have long provided services to low-income customers. Essentially, the goal was to formalize (legally) the existing practices of the cajas. The cajas work very closely within the community. Because most are cooperatives run by members, the cajas are aware of key information (such as which members pay dues and installments on time) that the formal banking sector would find difficult to obtain. Accordingly, banks could not allocate credit efficiently. Evidence that the cajas are viable enterprises is the fact that they survived the banking crisis of 1994. While the Mexican government provided fiscal support for the formal banking sector, the cajas generally continued to do business without government assistance.

Achieving a New Model To support and coordinate the development of the popular savings and credit sector, in November 2001, the National Savings Patronage was transformed into BANSEFI, with three objectives:

Promote a savings culture
Become the bank of the popular savings sector
Coordinate government aid.

Promote a savings culture: the target population is low-income people with an anticipated account size in the range of $200 to $220 USD. From 2000 to date, BANSEFI increased its customer base by more than 65 percent. Total accounts are close to 1.5 million. Roughly 300 new accounts are opened daily. Any account can be opened with as little as $5 USD, with no fees charged.

Become the bank of the popular savings sector: BANSEFI distributes through its branches to qualified recipients, payments from the government benefit programs Oportunidades and Procampo. This distribution method ensures transparency and visibility of the programs while promoting use of bank accounts.

Oportunidades and Procampo have proven to be successful programs in providing health care, food and educational support to the poorest families, including those in remote rural areas. Deposit of funds through BANSEFI has brought several advantages for the beneficiaries such as: immediate availability of resources, competitive interest rates on savings, no commissions, access to financial services, financial education, and even a popular and traditional monthly raffle. Ninety-four percent of the beneficiaries have a positive balance in their account, and an estimated 500,000 receive benefits.

A commercial alliance has been established between BANSEFI and the regulated ACP called L@Red de la Gente. An Internet system that integrates the branch offices with BANSEFI to provide real time connection for network services. The alliance provides access to and distribution of government services, benefits, and basic financial services, including means to access remittances from abroad, in many rural areas where commercial banks have no presence. The L@Red de la Gente is seen as particularly useful in transferring remittances from the United States. The program will enable rural residents, in particular those receiving regular remittances, to access an array of financial, social, and healthcare services.

Coordinate government aid: BANSEFI will coordinate government aid and provide training and technical assistance to the ACP, to foster its growth and expansion. BANSEFI will also be responsible for designing a marketing campaign directed towards potential users and clients of savings institutions and the services they provide in order to generate awareness of a financial culture. Further (and importantly), it will develop the necessary methodology to evaluate and assess the impact that distribution of aid among the entities will have in the sector.

BANSEFI is responsible for coordinating support to the ACP provided by the Mexican government and the international community, including a credit from the World Bank of $45 million USD, and donations from the governments of Germany and the United States for technical assistance.

In Summary
The ACP is destined to play an important role in the future financial system of Mexico. The new legal framework is the first step to provide protection for depositors and investors and to provide new opportunities through the financial services for their families, businesses and communities. The ACP's new distribution network through the L@Red de la Gente will cover the areas where commercial banks have no presence or knowledge of local markets, especially rural areas of Mexico, a powerful tool to bank the Mexican people. The transformation and formalization of the ACP will help broaden and develop the Mexican financial system, allowing more Mexicans, particularly those at low-income levels, to have access to financial products and services and hence new opportunities.

Notes:
¹Bank usage is an indicator of level of economic development.
²While these terms generally connote "formal" banking institutions in the U.S., in Mexico they are largely unregulated, and are considered informal for purposes of this article, and by U.S. standards.