Mexico’s financial reforms could help the country’s microfinance industry fulfill its “huge potential” for growth, rating agency Standard & Poor’s said in a report.
Mexico is an ideal place for microfinance to thrive as traditional lenders are reluctant to provide credit to low-income segments of the population.
The country has one of the lowest microfinance penetration rates in the region, at 0.5% of GDP.
But despite the low penetration rate, the segment is highly competitive, as new players tend to target the same, highly indebted client-pool because of difficulties accessing new customers in remote areas.
This, S&P said, has led to certain bad practices in the segment, such as spreading false information about competitors, providing incentives for on-the-spot loans, and lending to clients who are already over-indebted.
These practices have raised the debt burden of the segment’s existing client pool and reduced the debt-repayment capacity of these borrowers.
But changes associated with the country’s recently introduced financial reforms could create the conditions necessary for the segment to take off, S&P said.
Financial regulator CNBV has sought to reduce the complexity of the financial services sector by consolidating financial institutions, including microfinance lenders, into a limited number of legal entities, S&P added.
Some 20% of microfinance entities could disappear as a result of the move, the rating agency said.
Additionally, financial entities must now provide information on their loans to at least one of the country’s two credit bureaus, which will bring increased transparency to the sector.
Regulators also have a broader mandate to increase financial inclusion in the country and take a more active role in imposing sanctions and resolving disputes in the financial sector.
Consumer defense commission Condusef is now responsible for a media campaign aimed at providing greater financial education to the population and encouraging citizens to take advantage of financial services.
“Microcredit has huge potential to thrive in Mexico because traditional financial services still haven’t reached a big proportion of the population,” S&P said.
Levels of success in tackling the lack of financial education, bad industry practices and rising indebtedness of the targeted customer base will determine whether the segment’s potential can be realized.
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