The State of Microfinance in Mexico: Uncertainty Ahead?

> Posted by Sergio Guzmán
Mexican microfinance leaders and industry observers are becoming alarmed that the country’s microfinance market may be over-heating, and they are especially concerned about future client indebtedness and political risks. In past posts, we have discussed Mexico’s great need and potential for financial inclusion. Several factors have led to an expansion of the industry in recent years, including state intervention and subsidization, regulatory approaches that eased NGO-to-finance-company transformations, and of course market leaders who created a strong business case for new entrants.
A new study (unfortunately, Spanish only) by Marulanda Consultores and commissioned by DAI Mexico  looks at the Mexican microfinance industry with a critical eye and offers fresh insights. The study says that the Mexican microfinance industry is in a state of “precarious maturity” and that its potential for success can only be reached if certain challenges are addressed.  These must-address challenges include a risk of market over-heating, the strengthening regulatory and supervisory agencies as microfinance becomes a larger part of the financial pie, and growing attention from politicians and journalists in the run up to next year’s elections. Some of these concerns echo the Center’s recent “Opportunities and Obstacles to Financial Inclusion” paper, which contains a special addendum about Mexico.
One concern is that new market entrants (e.g. consumer lenders, pawn shops) eager to grow their portfolios may be doing so without tested methodologies or sufficient understanding of client needs. The Center’s “Weathering the Storm: Hazards, Beacons, and Life Rafts” paper, and its counterpart by Marulanda,  “Taking the Good from the Bad in Microfinance: Lessons Learned from Failed Experiences in Latin America”  also point out that lack of solid methodologies is a frequent cause of organizational failure in microfinance.
More than a pat in the back to Mexico, the Marulanda report advises the Mexican microfinance industry to “buckle your bootstraps” foreseeing stiffer regulations (e.g., in PAR accounting and pricing transparency), shifting and intensifying competition (product diversification, price competition and new market entrants) and credit bureau reporting norms.
Providers of public funds and investors will play an important role in the promotion of microfinance reforms in the country. The study calls on them to participate actively in the process. These challenges paint a preoccupying future for the Mexican industry. Granted, it has come a long way, but now it faces the challenges that come with growing up.
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Image credit: Ssolberj
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