Why Formal Microfinance Institutions inMexico have Succeeded and Proliferated During the Last Decade1. Introduction With 987.30 billion dollars of GDP in 2017 and having agricultureas one of the most important economic activities with 3.
5% of GDP, Mexicorepresents the 15th largest economy in the world and the second in LatinAmerica. Additionally, the country possesses a population estimated in127.540.423 and is also considered as one of the most populated countries inthe world with a population density of 65 inhabitants per Km2 (Worldbank 2018).
From a general economic perspective, employment rates could beconsidered acceptable because according to the National Institute ofStatistics, Geography and Informatics (INEGI), the annual unemployment rate inDecember 2017 was 3.4% in comparison with total economically active population.However, 56.5 % of this group develop their activities within the informalsector, which represents 29.5 million people in different non-officialactivities; such as informal sectors, domestic jobs, household incomes,agricultural labor without any coverage and subordinated workers, who despitethey have a formal job, they have opted to join in additional economicactivities without social security (INEGI 2017). In contrast to relatively positive numbers and figures on Mexican macroeconomystats, the current microeconomic and social panorama its alarming due levels ofpoverty reaching 53 million people in 2017, which represents 45.5% of totalpopulation, with a monthly income average under 146 USD.
This factor, linked tothe lack of basic services among poor inhabitants, unsafe conditions in remoteor poor villages and low educational level in the country, makes difficult togain access to financial services for a big sector of the people (El FinancieroJournal 2017). Despite numerous attempts from local governments and federalauthorities to eradicate dramatic levels on poverty, the reality faced by manymillions is different from what social development and social inclusionprojects have achieved. 2.Literature Review2.1Microfinance Institutions Regulatory FrameworkIn this first section I will try to explain the economical elements andfacts that caused microfinance institutions emerged in Mexico and how thesefacts are aligned to political events between 2012 and 2014, when anextraordinary set of 11 structural reforms were approved by the MexicanCongress in order to boost Mexican economy (Mexican Economy State Department2012). The reforms aimed to promote the growth and development of the country in theeconomic, social, educational and legal sectors. In 2014 a new financial reformwas approved to provide a complete set of benefits on local markets includingthe microfinance sector.
With this change, the government strengthens itsinfluence and power in bank development activities, provoking at the same timea flourishing growth of new financial entities with product offerings designedfor specific economic segments. Fortunately, the Mexican bank regulations werestrict after the financial reform so that microfinance entities operate as anyother formal established bank in the country in accordance to the NationalCommission of Banking and Securities (CNBV). For instance, after the reform wasapproved new microfinance institutions emerged across all states in the countryto support low income families and small independent business in achievingtheir personal and professional goals with numerous products and servicesdesigned specially to their income profile and social needs.
Thus, new fiscalentities were created and operated under the new regulatory frame approved bythe CNBV so the internal market for financial products expanded its range ofcoverage with the purpose of facilitating access to microcredits, microloans,savings and other products, to the poorest sector of the population.Afterwards, the SOFIPOS (Sociedades Financieras Populares), the SOCAPS(Sociedades Cooperativas de Ahorro y Crédito), SOFOMES (Sociedades Financierasde Objeto Múltiple) and other non-regulated societies, appeared in the Mexicanbanking sector as competitors for stablished banks but with the main socialresponsibility of supporting low income families and poor households.Therefore, new formal microfinance institutions emergedto provide a reliable source of financial support and assistance to small andremote communities compared to other informal organizations operating outsidethe law and without any regulatory framework, usually informal relationshipswith borrowers that had no real legal or moral relationship with theircustomers.
2.2Types of Credit and Distribution In Mexicomicrofinance are divided according to their operating methodology and purposeunder they were founded (ProDesarrollo 2016). For this reason, we can identifytwo main categories which serve different market segments. On the first hand, wefind individual credits which are part of a robust financial structure and mostof the times they rely on foreign capital.
In order to grant a personal loan,the requirements and obligations are likely the same as a bank with adifference on payments, which are more flexible in schedule than banks. Usuallythey operate under an organizational scheme with different departments andofficers who interconnect activities. It is estimated that 51.0% of all microcredits in the country correspond to individual credits (HR Ratings Agency2016).Secondly, group credits are mostly granted to women, localinformal merchants or micro entrepreneurs. These credits differ from individualcredits because a group of solidary members gathers to ask for the loan bynaming a unique responsible who interacts with the microfinance institution.Under this figure, there is not a clear segregation of duties nororganizational structure because the sales force operates as a single unit bydoing promotion, organization, collection and administrative activities. It isestimated that 49.
0% of these credits correspond to group loans. In this section it is important to explain, what are the mainproducts offered by microfinance institutions, who are their targeted customers,what is the amount of loans granted and how interest rates are calculated onloans. If analyzing this scenario, it is possible to identify the proportion oflow income households which are being included in the scope of micro financeinstitutions. 2.3 PovertyLevels in the Country It is also important to compare the past, currentand forecasted levels of poverty in Mexico to see how they are categorized andgraded by the NationalCouncil for the Evaluation of Social Development Policy (CONEVAL).
Since incomeis an important factor for poverty measurement, the Council also considersother factors that are relevant to the poverty measurement in accordance to theGeneral Law of Social Development (LGDS, Ley General de Desarrollo Social). Thecategories which are also included are educational gap, access to healthservices, access to food, access to social security, quality and spaces of thedwelling, access to basic services in the dwelling and the degree of socialcohesion. Studies and reports are generated and made public every two years atthe national and state level, and every five years at the municipality level.For this purpose, CONEVAL uses the information generated by the NationalInstitute of Statistic and Geography (INEGI, Instituto Nacional de Estadísticay Geografìa). This institute is responsiblefor performing the population census every ten years; as well as the economic censusevery five years and the agricultural, livestock and forestry census of thecountry. The job of gathering statistical information of the Institute includesthe monthly gross domestic product, consumer trust surveys and proportion ofcommercial samples; employment and occupation statistics, domestic and coupleviolence; as well as many other jobs that are the basis of studies andprojections to other governmental institutions (Wikipedia 2018).
2.4 PovertyMeasures by the World Bank Besides analyzing poverty from local institutes and organization,it is critical to compare these data to data obtained from Internationalorganizations to see if data is consistent. On this matter, measuring povertyand communicating poverty reduction results is a long-standing priority for theWorld Bank, which according to their website, work together with localgovernments to share statistical data and current strategies in place, designedto fight poverty and reduce social exclusion. They also state that help nationsto develop and implement their poverty surveys and to assess results obtained.
The World Bank possess official global, regional and country poverty resultsthat are stored on databases. Data obtained is shared to general public throughonline portals such as “PovcalNet” and “the Poverty &Equity data portal” (Worldbank.org). In this case a secondary source of information for the thesis willbe taken from these portals and will be compared to those numbers given bylocal Mexican Institutes regarding poverty and social development. 2.5 Ethical Dilemmas and Crisis inMicrofinanceFor this purpose,I will analyze books and articles suggested in the MBS Microfinance course. Thesedocuments discuss the waymicrofinance has become subject of an ethical dilemma since they are beingaccused of using unfair lending techniques and charging usurious interest ratesto their customers; many detractors question the ability of microfinance toalleviate poverty.
They could provide a clear idea on how poverty is definedand why in the late years it is difficult to observe a right balance betweentheir financial and social goalsHudon,M., & Sandberg, J. (2013). The ethical crisis in microfinance: Issues,findings, and implications. Business Ethics Quarterly. Schmidt, R. H. (2010), Microfinance,Commercialization and Ethics.
Poverty & Public Policy, 2: 99–137.doi:10.2202/1944-2858.1020 Malkin,Elizabeth (2008).
Microfinance’s Success Sets Off a Debate in Mexico. The NewYork Times. Hudon,M., & Sandberg, J.
(2013). The ethical crisis in microfinance: Issues,findings, and implications. Business Ethics Quarterly. Hudon,M., & Traça, D.
(2011). On the efficiency effects of subsidies inmicrofinance: An empirical inquiry. World Development Karlan,D., Ratan, A.
L., & Zinman, J. (2014). Savings by and for the poor: Aresearch review and agenda. Review of Income and Wealth.
Robinson,M. (2001). The Microfinance Revolution: Sustainable Banking for the Poor.Washington, DC: The World Bank.
3.Problem Description Due today dayand despite the incredible growth of microfinance institutions in the past 3years, it is noticeable that firms are not fulfilling their obligations andcommands towards the excluded sector of population who have no access to formalbanks. Moreover, microfinance institutions are operating and acting as anyother bank in the region with even higher interest rates, unfair contractconditions and taking advantage from the most needed and vulnerable customers,in order to make huge profits from them, but most critical to turn them intoperpetual borrowers for long periods with unpayable debts in their accounts,which sometimes are transferred to either, a close relative or to their directdescendants. With these unethical practices many institutions affected severelythe current status of poor people who had the intention to find a financialalternative to have a better life. As they were deeply in debt they lost thechance of gaining access to future financial services since their credithistory will now be negative.According todata extracted from Global Findex agency, only 38,7% of adults had an open bankaccount at any financial institution.
Similarly, 10,4% stated they had beengranted with a personal loan. (Microfinancegateway 2016. By considering thesenumbers, there is evidence that show although micro finance institutions inMexico are growing in number and in territory coverage, poor people are notgetting benefited from them and in some cases these institutions are pushingdown small communities, villages and households to a deeper level of underdevelopment and poverty. With thisthesis work I try to demonstrate how microfinance are proliferating in Mexico thanksto the government reforms and to the need of finding new ways of financing asector of the population with null or low access to bank resources, howeversocial development studies and poverty analysis made by official organizationsand NGO’s have demonstrated the number of population surviving with less than 10USD per day has increased in the last 4years, but most important the breach between rich and poor is getting largerevery day.
Microfinance and social unions mission is intended to fill a needed gap within the financial servicesindustry by offering savings, small loans, or micro-loans, to people unable toaccess conventional financial services nevertheless they are turning intooperating extensions for existing banks and, in most cases, have become directcompetitors for large banks corporations. If microfinances are operating justas any bank in the region, how can we expect to see that under developedregions, low income households and people living under extreme povertyconditions, get beneficiated from the products and services offered by theseinstitutions. In addition, loan repayment interest rates of microfinance range onaverage around 97 to 98 percent (Developing World Markets) and they are resultsfrom the approach methods used to connect within communities. It is truethat classic theory and regular microfinance financial structures, considerhigh interest rates as a critical point to survive, mainly due high operatingcosts for no having both guarantees or guarantors over loans, but also for workingon communities located in remote regions which makes expensive for them togrant and collect payment. This situation should not remain as it is, becausenowadays microfinance institutions are now regulated they typically work handto hand with government offices and larger global organizations so that theiroperating costs can be reduced, if also considering modern technologiesavailable at various levels in a microfinance value chain, it should bepossible to cut operating and marketing costs.
Considering the facts surrounding current Mexican microfinanceregulatory situation, aligned to elevated levels of poverty observed in thecountry, raises several questions about microfinance institutions performanceand commitment to social welfare when being a mean for poor to subsist andimprove their living conditions.Why are microfinance institutes proliferating in the country,but at the same time poverty levels are increasing? Are these institutionscommitted to promote social welfare and financial support to low incomehouseholds? Is it possible for them to reduce their interest rates in favor ofthe debtors?4. Methodology UsedThrough the review of the literature proposed on this thesis, it is myintention to prove microfinance institutions are not operating according to itsmission and values, under which they were founded and promoted by the Mexicangovernment. In fact, I try to demonstrate their structure points towardsrevenue increase and sales growth, rather than helping poor to raise theirincome.
Anyways poor people seem not have other options for financing thanexisting microfinance offerings which at the long term is counterproductive fortheir goals.I will apply the qualitative method to get specific data, statistics andfacts about poverty levels in the country, microfinance coverage in thecountry, types of credits granted, % of low income households benefited frommicrofinance and the correlation between both microfinance growing rate and povertylevels in Mexico. Databases under the scope for analysis are “PovcalNet” which worksas an interactive computational tool that allows you to replicate thecalculations made by the World Bank’s researchers in estimating the extent ofabsolute poverty in the world. It also allows researchers to calculate thepoverty measures under different assumptions and to assemble the estimatesusing alternative country groupings or for any set of individual countries ofthe user. The next one to consult is the Poverty and Equity Data Portal, whichis the World Bank Group’s comprehensive source for the latest data on poverty,inequality, and shared prosperity. I will also use data taken from the NationalInstitute of Statistics, Geography and Informatics (INEGI) which concentrateshistorical data from national polls and surveys.
5.Plan In additionto the analysis of data collected, I will conduct surveys to real micro financecustomers in order to identify what is the real perception they have towardsthe use of these institutions while asking for a specific product or service. Iam very interested on what is the service provided at the time they were incontact with the executives to ask for a loan. I believe that the executivesdon’t offer the most economical options for financial services demanded butthey offer what generates either long debts, credits with high interest ratesor, saving accounts with null benefits for the account holders. In the surveysI will make sure to select people with low income living in under developedareas which necessarily need from micro finance to improve their livingstandards.
At the end, I will compare survey results to the current data fromorganizations and hopefully will demonstrate that microfinance in Mexico is notdesigned and intended for the poorest.