Identifier
Created
Classification
Origin
09MONTERREY219
2009-06-12 22:30:00
UNCLASSIFIED
Consulate Monterrey
Cable title:  

MICROFINANCE INSTITUTIONS CREATE OPPORTUNITIES DESPITE THE

Tags:  EAID ECON SOCI PGOV MX 
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DE RUEHMC #0219/01 1632230
ZNR UUUUU ZZH
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FM AMCONSUL MONTERREY
TO RUEHC/SECSTATE WASHDC 3769
INFO RUEHME/AMEMBASSY MEXICO 4840
RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHMC/AMCONSUL MONTERREY 9360
UNCLAS SECTION 01 OF 03 MONTERREY 000219 

SIPDIS

DEPT PASS TO AGENCY FOR INTERNATIONAL DEVELOPMENT

E.O. 12958: N/A
TAGS: EAID ECON SOCI PGOV MX
SUBJECT: MICROFINANCE INSTITUTIONS CREATE OPPORTUNITIES DESPITE THE
ECONOMIC CRISIS AND BUREAUCRATIC HURDLES

MONTERREY 00000219 001.2 OF 003


UNCLAS SECTION 01 OF 03 MONTERREY 000219

SIPDIS

DEPT PASS TO AGENCY FOR INTERNATIONAL DEVELOPMENT

E.O. 12958: N/A
TAGS: EAID ECON SOCI PGOV MX
SUBJECT: MICROFINANCE INSTITUTIONS CREATE OPPORTUNITIES DESPITE THE
ECONOMIC CRISIS AND BUREAUCRATIC HURDLES

MONTERREY 00000219 001.2 OF 003



1. Summary: The state of Nuevo Leon is home to a number of
private and public sector sources of microfinance which have
helped borrowers to start informal family businesses. However,
the unforeseen devaluation of the peso versus the dollar has put
significant pressure on microfinance institutions that borrowed
loan funds in U.S. dollars. Also, loan repayment rates have
been declining due to the ongoing economic crisis. To facilitate
a greater volume of microfinance lending, the state government
will have to improve the governing legal framework, perhaps by
removing barriers to the seizure of collateral on defaulted
loans. End Summary.



The Promise of Microfinance




2. NGO microfinance institutions and government microfinance
programs see significant unmet demand for microfinance loans in
northern Mexico. As a result, microfinance lenders continue to
sprout in Monterrey. Microfinance is generally more available
in urban areas than rural areas and can be delivered in a number
of ways, including through NGOs, government programs, credit
cooperatives and banks. While the leading NGO lender in
Monterrey, ADMIC, has been making microfinance loans for 30
years, new microfinance organizations, such as Credito Familiar
and Credito Si are entering the market and Comportamos, a bank
with its roots in microfinance, is also lending in Monterrey.
Criditos Pronegocios, a microfinance subsidiary of Banorte
Financial Group, is offering microfinance service as an
outgrowth of its traditional banking activities. Even with these
new entrants, there is room for greater market growth.




3. Private sector microfinance lending tends to carry high
interest rates; five percent per month is not unusual. The
government microfinance program has much lower rates at eight
percent per year, but its repayment rates are considerably worse
than NGO and private microfinance institutions. Banks do not
generally see microfinance institutions as competitors.




4. By spurring the creation of informal family businesses,
microfinance can make a big difference to families working their

way out of poverty. Access to microfinance loans is of great
importance to these family businesses and it does contribute to
greater family stability. ADMIC has a loan portfolio of 12,000
loans, of which 90% are for informal, family businesses.
Typical enterprises that rely on microfinance are taco stands,
small corner grocers, beauty salons and craftsmen. These
businesses often do not increase employment beyond immediate
family members, and the businesses usually do not grow beyond
their humble beginnings. Often, their accounting is basic at
best, with family expenses often paid from the same cash box
used to run the business. Nuevo Leon's state
government-backed microfinance programs also recognize the
limits of creating jobs through traditional microfinance
lending. Its FORECE program is working together with
prestigious Monterrey TEC University to finance more
sophisticated micro businesses through a business incubator.
Note: In meetings with state officials last year, conoffs urged
greater cooperation between government and academic institutions
such as Monterrey Tec. End Note. ADMIC has also lent to micro
enterprises through this incubator with loans of four to twenty
thousand US dollars.



The Emerging Legal Framework for Microfinance Institutions




5. As the legal structure of Nuevo Leon's microfinance
institutions (MFI) continues to evolve, the regulatory
uncertainty is sparking institutional reorganization.
Initially, microfinance organizations often started as civil
associations that did not take savings. Mexico approved a new
savings and credit law in 2001 that has stimulated growth of
credit cooperatives, similar to US credit unions, that are
allowed to take savings. This form was called the Sociedad
Financero Popular (SUFIPO); dozens of microfinance NGOs changed
their legal status to SUFIPO to take advantage of attracting
savings depositors. ADMIC remains an NGO that does not take
savings deposits, but notes that other NGO MFIs have reorganized

MONTERREY 00000219 002.2 OF 003


as cooperatives that can take savings deposits, thus lowering
their loan costs. Yet another form for MFIs is the Sociedad de
Objeto Multiple (SOFAM). This kind of MFI can be established
with as little as US$5,000 in capital. Opinion is split among
financial practitioners whether there is too little regulation
of MFIs. The future for regulation is uncertain as some
legislators want new laws that could further fracture MFIs into
even more legal entities.



Economic Crisis Hampers Microfinance Lenders and Reduces
Repayment Rates




6. Leading NGO lender ADMIC notes that it along with other
microfinance institutions and banks made the mistake of
borrowing in dollars without hedging the risk. Lulled into
thinking that the dollar peso rate was more or less constant,
ADMIC borrowed up to 30% of its funding in dollar denominated
loans, so the deterioration of the exchange rate from 10 pesos
per dollar to 13 or 14 pesos per dollar caught the institution
off guard. ADMIC, however, is carrying the burden of the
exchange rate risk; its clients borrowed only in pesos and are
therefore shielded from the exchange risk burden. The president
of ADMIC averred to us that microfinance institutions should
carry foreign currency exchange risk; its clients are not
sophisticated enough to plan for that kind of risk.




7. Microfinance repayment rates have worsened over the past six
months, further aggravating microfinance operations. Although
part of the lower repayment rates is due to the worldwide
economic crisis, another cause could be easy lending practices.
One microfinance practitioner saw a parallel with Bolivia's
microfinance market that heated up a decade ago when Chilean
investors injected easy credit into that market, distorting it
and spoiling credit discipline among borrowers. ADMIC has seen
its repayment drop below 90% and is taking administrative
actions to tighten policies. The state government microfinance
program based in Monterrey, FORECE, stated that its repayment
rate has dropped to 80%. Easier lending practices are part of
the problem but another part is lack of good credit bureau
information that results in undetected refinancing of loans by
borrowers in financial distress (see paragraph 9).




8. Group lending along the Grameen model (to cooperatives, for
instance) is not as popular in Monterrey as compared with areas
in southern Mexico. Compartamos uses group lending successfully
in southern Mexico and in rural areas, but it is having
difficulty expanding this approach in Monterrey. ADMIC, while
having 86% of its MF loans in individual loans, notes that its
small portfolio of group loans does have an excellent repayment
rate in Monterrey.



Legal Limitations Limit the Growth of Microfinance Lending




9. Microfinance lenders recognize that due to the increased
numbers of microfinance providers, it is difficult to know how
much a borrower is in debt to other MFIs. The lack of complete
and consistent credit bureau information hampers the lender's
ability to control its risks. New services, such as Circulo de
Credito, are attempting to provide better credit information to
microfinance and consumer lenders, but these services still must
develop further before microfinance lenders get complete credit
information on their clients.




10. Both government-sourced lenders and microfinance lenders
agree that one additional barrier to more efficient lending is
the difficulties experienced when an MFI tries to recover
collateral from a lender in default. The process involves the
courts and is expensive and time consuming. Lenders lack a
stream-lined approach to seizing collateral. The cost and
difficulty collecting on collateral also contributes to greater
risk for the lenders.



MONTERREY 00000219 003.2 OF 003




11. Comment: Microfinance loans in Monterrey typically help to
keep micro businesses afloat, but usually do not lead to
significant business expansion. But microfinance does provide a
credit lifeline to poor families who can shore up informal
businesses, thereby increasing family stability. Microfinance
will continue to grow in Monterrey despite the legal and
economic challenges it faces today. End Comment.
WILLIAMSON