Javier Cortina and Edgardo Mendoza of Mijares, Angoitia, Cortés & Fuentes in Mexico City look at the attempts made to increase access to legitimate financial services
Mexico, like many emerging economies, has been taking important steps to accomplish financial/banking inclusion. Financial/banking inclusion is an evident and proven path to increase the size of a middle class through access to financial services and to formalise an economy. With this goal, Mexico has undertaken several actions, including the enactment of a financial reform in year 2014.
The financial reform aimed to, among others: (i) govern the expansion of financial and banking services, products and activities in Mexico, including microfinance services, (ii) tighten anti-money laundering provisions, and (iii) structure and formalise the Mexican economy.
Such financial reform and other reforms passed over the last 10 years have followed the model regulations of international organisations and directives of international treaties of which Mexico is a party. As is well known, all recent model regulations and international directives relating to financial services have a strong focus on tightening anti-money laundering regulation.
The ensemble of reforms enacted in Mexico has been quite successful in achieving financial inclusion at almost all economic levels, in some cases even in rural areas. However, such inclusion has yielded its best results in availing the population of consumer loans, group loans and other type of microfinance loans and, to some extent, certain savings products offered by some types of popular financial entities; such financial inclusion has not been successful in granting the population access to financial services offered by mainstream banking institutions. In summary, financial inclusion has been successful, but banking inclusion (i.e. “bancarization”) has not had the same results.
Having access to lending, leasing and payment services provided by microfinance entities, chain stores, convenience stores, and other commercial businesses is not being “bancarized”. “Bancarization” is reached when an individual has access to services and products that a bank offers (money lending, saving, teller and ATM cash withdrawals, money transfers, services payment, tax payments, debit/credit cards services, Internet banking, mobile banking, etc.).
A friendly legal environment towards the granting of loans generally and the enhancement of “ancillary” financial entities has resulted in the creation and growth of an important number of financial entities such as Credit Unions, SOFIPOs (Popular Financial Entities) and SOFOMEs (Multipurpose Financial Entities). These “ancillary” financial entities have designed their business models attending to the informality that is predominant to the low income families and groups which are not serviced by banks; most of their loans and products are cash based. Group lending, consumer loans, payroll loans (loans repaid by payroll discounts made by employers) and some rudimentary forms of savings (e.g. saving books), have shown a continuous growth in Mexico; the opening of formal bank accounts and the granting of loans by banks to low income individuals has not shown the same progress.
Some of these “ancillary” financial institutions have even become licensed banks. However this transformation has been made in order to access inter-bank funding while maintaining their credit granting activity pursuant to their original business models.
Unfortunately, this successful financial inclusion has not resulted in the formalisation of the market place. Individuals benefited by these “ancillary” financial entities continue to conduct most of their transactions in cash and remain unidentifiable by mainstream banks and tax authorities.
Who or what is to blame? There are several factors; among them we consider the following to be the main reasons for this situation:
1. These “ancillary” financial entities have made huge investments and undertaken significant risk in order to target and maintain a good client base. To protect their business, they commonly use credit bureaus only to learn about bad borrowers (if the information is available) or to report bad borrowers, but not to contribute to a good credit report of an individual (sharing such information can make their client base identifiable by banks). We cannot underestimate the investments made and the risks taken by these entities, but the financial inclusion that they are accomplishing is not resulting in the bancarization and the formalisation of our economy.
The common notion in the country is that credit bureaus exist to identify bad borrowers (to be used as black lists). This needs to change, a good credit report needs to be perceived and treated as an absolute right of the borrower and all financial entities should be required to provide complete and correct information of all their borrowers.
2. The other factor, which as the title shows is the main focus of this article, is that following international models and international directives for financial regulation, all laws enacted in Mexico which regulate mainstream banking institutions have increasingly tightened anti-money laundering provisions.
Mainstream banks designing “popular” or “low income” financial products and services go to great lengths to maintain such products and services below the thresholds that may trigger stricter anti-money laundering requirements (resulting in products for very small amounts). As a result, such products and services, which have a high cost of penetration because of the volume of the targeted population, are not necessarily a good investment (a single housing mortgage may represent a few hundred of these tiny products placed in the market).
The necessity of anti-money laundering regulation is undeniable, particularly in a country that has the level of organised crime that currently exists in Mexico. However, the international models designed for more developed economies, when applied in Mexico (particularly to the case of low income individuals), is resulting in a slowdown of the country’s bancarization and eventual formalisation of its economy.
This is not to advocate a loosening of anti-money laundering provisions across the board; however changes need to be made in Mexico so that mainstream banks can successfully target low income individuals in order to achieve the formalisation of the economy. Once an acceptable degree of bancarization and formalisation of the economy exists, there will be less cash in the streets and thus there will be a better environment for a truly efficient anti-money laundering system to work.
Mijares, Angoitia, Cortés & Fuentes
About the author
Mr. Cortina has represented several financial intermediaries and microfinance companies in setting up operations in Mexico, obtaining governmental licenses, contracting and restructuring debt and launching new consumer products and electronic payment systems.
Mijares, Angoitia, Cortés & Fuentes
About the author
Edgardo Mendoza is an associate at MACF’s Corporate Department. Mr. Mendoza has a diverse practice, with an emphasis on mergers and acquisitions, financings and real-estate development. Mr. Mendoza has represented several domestic and international clients including private equity funds in Mexico, the United States of America and Europe. He has participated in several national and cross-border transactions which include global mergers and acquisitions, joint ventures, strategic partnerships, and syndicated loans. Mr. Mendoza has also advised issuers and financial institutions in domestic and international public and private debt and capital offerings. Likewise, Mr. Mendoza has represented several investors in the start-up and development of business in Mexico and in the incorporation and establishment of financial entities including banks.