VZCZCXRO7921
RR RUEHCD RUEHGD RUEHHO RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHMC #0219/01 1632230
ZNR UUUUU ZZH
R 122230Z JUN 09
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 
 
 
¶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