REMITTANCES AND MIGRATION PART II: THE FINANCIAL

1. (SBU) Summary. Despite record amounts of remittances
flowing from the U.S. to rural Mexico, sustainable economic
development in those regions has been largely elusive. One
factor inhibiting productive investment of remittances has
been a scarcity of reliable financial services in rural areas
which receive the majority of transfers. Although financial
organizations in Mexico, including credit union chains and
traditional banks, are expanding their coverage and range of
services, there are a still a number of economic and societal
challenges limiting the effectiveness of these institutions.
According to Antonio Carranza of the government development
bank, (Bansefi), only 33% of the banking-aged population
utilizes saving or investment services, thus hampering the
positive long-term effects of the remittance flow into
Mexico. End summary.

THE EXPLODING FINANCIAL TRANSFER MARKET


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2. (SBU) According to the Bank of Mexico, in 2005 remittances
from migrants in the U.S. totaled 20 billion dollars, second
only to oil revenues (31.7 billion dollars) and nearly double
the value of tourism income (10.7 billion dollars).
Representing an increase of 17 percent compared to 2004 (16.6
billion dollars), this economic explosion is showing no sign
of slowing. According to Eduardo Gonzalez, an economist for
Banamex, remittance income in the month of January, 2006 was
estimated to have risen by 27 percent over the same time
period January 2005, from 972 million dollars to 1.582
billion dollars. The state of Michoacan, a predominantly
rural state with an agrarian economy, saw on an annual basis
an increase in 2005 of 399 million dollars to 2.594 billion
dollars, 13 percent of the national total (though Michoacan
accounts for less than 4% of the total population). Carlos
Garcia, Director of Migrant Services for the state of
Michoacan, estimated that 1.3 million Michoacanos currently
reside in the U.S., most of whom transfer funds home on a
regular basis.



3. (SBU) Supporting this growth is a booming money transfer
industry. According to data provided by a Mexican Chamber of
Deputies (lower house of Congress) study in December 2004,
from 1995-2004 the proportion of electronic transfers (as
opposed to money orders or cash deliveries) increased from 60
to 91 percent. As the sector has grown, it has also
diversified and fees have decreased. In 1995 the industry
was dominated by Western Union and MoneyGram, but by 2004
increased competition among money transfer organizations
(MTOs), along with market entry by banks and credit unions,
resulted in the average transfer fee falling from 18 percent
in 1995 to 4.4 percent in 2005 (according to Juan Lavalle,
National Director of Remittances for HSBC bank). However,
the participation rate of banks and credit unions in the
money transfer industry is still estimated to be less than 5
percent, according to Manuel Orozco of Georgetown University.
The increased participation of banks and credit unions in
this sector could be a key development in ensuring low-cost,
convenient transactions for low-income customers in the near
future.

THE POPULAR SAVINGS AND CREDIT LAW


--------------------------





4. (SBU) Credit unions (cooperatives) have existed in Mexico
for over 50 years, but underwent massive restructuring
mandated by the Popular Savings and Credit Law of 2001
(PSCL). The PSCL was passed as a response to the closings of
numerous credit unions in 1999-2000 due to poor management
and malfeasance, resulting in the loss of many members'
savings and a subsequent distrust of these organizations.
The PSCL requires that all non-bank financial institutions
that plan to offer savings accounts conform with a rigorous
standard of internal controls, a benchmark that has been met
by only a handful of the 650 credit union chains which
existed prior to 2001, according to Mario Gallarraga, Project
Director for the World Council of Credit Unions (WOCCU).

MEXICO 00002097 002 OF 005





5. (SBU) While the largest credit union chains, such as Caja
Popular Mexicana and Caja Libertad, are now licensed to offer
standard services, five years after the passing of PSCL, the
resulting scarcity of accredited chains has left many
unserviced, rural areas. Ironically, many of these
communities are most dependent on remittance income (in some
cases comprising 60-70 percent of the local economy), leaving
many residents no option but to utilize higher-cost money
transfer companies such as DineroExpress (which also do not
offer savings accounts and credit services). Although
Yolanda Luna, an assistant director for the National Savings
Bank, told Econoff that the number of credit union members
nationwide has increased to 3.5 million (from 2.0 million in
2004), additional branches of licensed cooperatives will be
necessary to ensure financial services in underdeveloped
areas.

CAJA POPULAR MEXICANA AND COOPERATIVES


--------------------------





6. (SBU) An example of the growing influence and scope of
cooperative financial institutions in rural Mexico, Caja
Popular Mexicana (CPM) is Mexico's largest and oldest credit
union, with assets of over 1.2 billion dollars and 327
branches in 22 states, according to Galarraga. Supported by
USAID since 1999, and WOCCU since 2001, CPM has demonstrated
strong growth, increasing its average rate of growth from 980
members/month in 2001 to 12,200 members per month in 2006. A
central challenge faced by any credit union chain seeking to
offer remittance services is establishing the systems
infrastructure to transfer the funds as well as having the
bargaining power to negotiate an agreement with a major MTO
in the U.S. CPM has had an agreement with Vigo, a company
with substantial experience with the Latin American
remittance market as well as branches conveniently located in
areas with large Mexican migrant populations in the U.S.
since 2003.



7. (SBU) A key factor in its success, CPM possesses a
sophisticated information technology system called IRnet,
which is provided to all credit unions who work with WOCCU,
and is also utilized by Mexico's second-largest credit union,
Caja Libertad. According to Luis Ortiz, a CPM branch manager
in Pastor Ortiz, a small farming community in Michoacan, the
number of remittances processed by CPM's remittance service,
Pagomex, increased from 2,921 transfers in 2003 to 142,567 in


2005. This pace is showing no signs of diminishing, with
25,833 transactions made in the first two months of 2006
alone. However, although CPM has aggressively marketed
Pagomex in Mexico, Pagomex is still virtually unknown in the
U.S.



8. (SBU) CPM faces formidable competition from other credit
unions as well as national banks in larger communities.
While credit unions generally do not yet offer many of the
services banks do, such as ATMs, internet banking, and credit
cards, Santiago Alvarez, branch manager in Puruandiro, a
larger agricultural community of 70,000 located 60 miles west
of Morelia in the state of Michoacan, explained to Econoff
that CPM's competitive advantage versus the larger banks was
the non-intimidating, personal service provided by their
employees. Puruadiro is an exception due to the presence of
Bancomer and HSBC branches, although Alvarez estimated that
only 5 percent of local residents are bank customers, while
the 18 credit unions capture the majority of business.



9. (SBU) In contrast to the commercial banks (Bancomer and
HSBC) located on the central plaza, the CPM in Puruandiro was
opened on a side street next to the bustling fruit and
vegetable market. In some ways, the branch looks like a
garage, lacking a door but having an inviting atmosphere.
Clients who regularly receive remittances there attested to
Econoff that their previous distrust of financial
institutions had been overcome by the friendly, helpful
atmosphere of the company. One customer, Maria Ramirez
Arriaga, stated that "I am a poor person, and of course we
don't use banks, who only steal from us anyway. However,
Caja Popular Mexicana has treated us with respect." Ramirez
went on to mention that since becoming a member, she had
applied and qualified for a loan based on the remittance
income she receives from her sons, which she used to purchase
an additional tractor. Other clients cited lower fees
(compared to banks) as the primary reason for their loyalty.

MEXICO 00002097 003 OF 005


The lack of certain services offered by banks did not appear
to be a detriment to most rural customers, many of whom now
have access to financial services for the first time.
Marketing credit products to previously un-banked customers
appears to be an important key for credit union
profitability, given the low money transfer profit margins.




10. (SBU) There has also been a change in the perception of
the credit-worthiness of remittance recipients. While
historically wire transfers (even those sent on a regular
basis) were not considered dependable indicators of solvency,
today clients of cooperatives such as Ramirez can obtain
credit based solely upon remittance income. The new ability
of many people to obtain loan products from credit unions may
significantly boost productive economic activity in many
rural areas, and illustrates a major difference between
cooperatives and traditional banks.

THE NATIONAL SAVINGS BANK


--------------------------





11. (SBU) Created by the Popular Savings and Credit Law,
Bansefi serves as a second-tier bank designed to offer
savings accounts to the unbanked population as well as to
strengthen a network of smaller credit unions across the
country. Authorized by the federal government to create a
national remittance delivery network in 2003, it developed
"La Red de la Gente" (The People's Network), which has
negotiated agreements with 10 money transfer organizations
(MTO) including MoneyGram, Vigo, and USBank. "La Red de la
Gente" has been marketed heavily by Bansefi, utilizing former
migrant stars such as Andres Bermudez (The Tomato King) as
spokespeople. Presently, La Red includes over 750 branch
offices, many of whom are small chains of only one or several
branches and would have little or no chance of negotiating
agreements with U.S.-based MTOs. Antonio Carrasco, National
Director of La Red, explained to Econoff that Bansefi is
aggressively pursuing agreements with large national banks
and credit unions in the U.S. in order to expand the reach
and capabilities of La Red. Carrasco and his colleagues,
Yolanda del Rosario and Jaime Reynosa, fervently described
their desire to include not only banks but universities,
governmental institutions, and even the U.S. Embassy in the
network in the future.



12. (SBU) Although Bansefi enjoys the advantages of being
promoted by the Ministry of the Economy, a distinct product
(La Red) and brand name, and a single-minded philosophy
("bank the un-banked"), it has suffered setbacks in its
attempt to create additional financial opportunities for
Mexico's poor. One problem is that Bansefi does not allow
member organizations to join other financial networks, such
as WOCCU's IRnet, which has resulted in the two largest
credit unions in Mexico, Caja Popular Mexicana and Caja
Libertad, deciding not to join La Red. Another concern
voiced by several branch managers with CPM and Caja Libertad
is that Bansefi, rather than supporting the credit union
industry as was originally intended, actually is focused on
competing with and even subverting "rival" cooperatives.
When asked about Bansefi and La Red, several Caja Popular
clients responded with comments such as "they're not
trustworthy," and "they charge way too much." Privately,
Carrasco admitted to Econoff that Bansefi was suffering from
public relations problems issues in 2005 concerning suspected
financial mismanagement and malfeasance. In addition,
Carrasco also mentioned that Bansefi and La Red are
priorities for the Fox administration; the incoming
administration may not be as supportive.

THE TRADITIONAL BANKING SECTOR


--------------------------





13. (SBU) The traditional banking sector is also targeting
the remittance market, aggressively leveraging partnerships
with U.S.-based banks to offer convenient transaction
services to account holders on both sides of the border.
Armando Albores, Regional Director of Banamex in the state of
Michoacan, explained to Econoff that more effectively
penetrating the remittance market is a top priority. Banamex
is cooperating with Citibank, their parent company, to offer
low-cost wire transfers (five dollars per transaction)
between U.S. and Mexican account holders. While stating the
Banamex was a "financial institution for all," Albores

MEXICO 00002097 004 OF 005


admitted that the cost of opening a branch in a community
with less than 30,000 residents was prohibitive, thereby
restricting coverage where many of Mexico's remittance
recipients live. (According to the National Institute of
Statistics, 35-40 percent of the population lives in
communities smaller than 30,000 residents).



14. (SBU) Attempting to overcome their poor reputation among
many in rural Mexico, some banks are offering services that
do not require opening an account. Juan Lavalle of HSBC
described a new program which offers a debit/credit card to
anyone (not only account holders) receiving remittance funds.
Lavalle informed Econoff that while HSBC will not reap a
large amount of revenue from this program, its value lies in
tracking recipients' spending habits, in order to market
additional services to this growing sector in the future.
Realizing that migrants' reluctance to frequent banks in the
U.S. is also an important prohibitive factor, HSBC is
utilizing outreach programs in areas of high migrant
populations. There are clear opportunities for the
traditional banks, especially as more migrants begin to
utilize banking services in the U.S. Due to a limited client
base, however, the banking sector may not be an huge driver
of economic growth in Mexico's rural areas in the near future.

NEW GOVERNMENT PROGRAMS


--------------------------





15. (SBU) The issue of utilizing remittance income to spur
rural economic development has been a central issue for the
state government of Michoacan for a considerable period of
time, given the state's position as the remittance leader of
Mexico. In 1990, Michoacan became the first state to create
an Office of Migrant Affairs (there are now equivalent
offices in 26 of 32 states), which is tasked with providing a
variety of services to migrants, such as notarial services.
Considering accessibility to low-cost electronic transfers in
rural areas as a humanitarian and social issue as well as an
economic one, the Office of Migrant Affairs initiated the
first government subsidized financial transfer program in
Nahuatzen, a small, underserviced farming community in
northern Michoacan, in January, 2006. Alejandra Contreras,
director of remittance services in the Office of Migrant
Affairs, explained to Econoff that this pilot program
provides a platform for migrants in the Washington, DC area
to make a transfer to a government operated cashier in
Nahuatzen for a flat fee of three dollars, far below the
average cost. Contreras also stated that the program was
just beginning but so far had exceeded all of its benchmarks,
and that her office was considering opening two additional
branches by the end of the year. However, some view the
concrete effects of such a program as being limited, while
potentially undercutting private financial institutions and
being counterproductive in the long-term. Regardless, this
program illustrates that ensuring low-cost financial services
and encouraging subsequent economic development in rural
areas is an important issue for local and state policy makers.

COMMENT


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16. (SBU) The challenge of ensuring access to financial
services in rural areas in order to harness the incredible
economic power of remittances will be one of Mexico's biggest
economic and social challenges in the immediate future.
While there are a number of positive trends, such as the
increased coverage and competency of cooperatives in
underserviced areas, new programs by banks to attract
migrants and their families, and greater attention to this
issue by local and state governments, many obstacles remain.
While credit union chains such as CPM are continuing to
expand and recruit clients, it will take time (and marketing
finesse) to overcome a strong reluctance in many areas to
utilize financial services. In addition, many of the
financial products obtained are used for basic daily
consumption, instead of long-term economic investment.
Although new services offered by the banking sector should
enable less expensive, more convenient financial
transactions, many of these services will probably still be
restricted to a relatively small percentage of the population
in the near term. With the amount of remittance income
likely to continue to grow at a strong rate, some economic
development should occur in many rural areas. However, this
growth will probably occur at a slower rate than could be

MEXICO 00002097 005 OF 005


expected given the explosion of remittance income to
Michoacan and Mexico.


Visit Mexico City's Classified Web Site at
http://www.state.sgov.gov/p/wha/mexicocity

KELLY