US Federal Reserve Report – Mexico’s New Banking Measures Aim to Help Entrepreneurs

The overhaul of Mexico’s banking laws, enacted as part of President Enrique Peña Nieto’s wide-ranging economic and business structural changes, could address the banking system’s greatest weakness: the availability of credit for small- and medium-sized business, while enhancing regulatory oversight and transparency.

Arguably the banking system’s greatest weakness involves small and medium-sized businesses’ difficulty obtaining credit. Only 32 percent of all established “formal” businesses in Mexico have arranged financing via either a loan or line of credit, according to the World Bank’s Enterprise Survey. By comparison, a rate of 80 percent is prevalent in Chile and 66 percent in Brazil. For small and medium-sized businesses, the situation is worse—18 percent of formal businesses with fewer than 20 employees have access to regular financial channels in Mexico, compared with 73 percent in Chile and 43 percent in Brazil.

dallas-federal-reserve-mexico-banking-report-2014-01af

Instead, both large and small Mexican businesses rely on their suppliers for financing. A recent academic study found that when compared with similar firms without credit access, small and medium-sized businesses with the ability to obtain any type of formal financing were better able to grow and increase employment. And, to the extent that access to credit helps firms grow, the economy as a whole realizes productivity gains, by absorbing workers from less productive enterprises, expanding the capital stock and achieving efficiency gains within individual firms.

Although the financial overhaul should help spread financial services and encourage economic development within Mexico, it does not address all the structural weaknesses impeding the development of the financial system. A high level of informality is the biggest issue.

Workers and businesses in the informal sector operate outside the regulatory umbrella and generally are unable to document their income or payment history. As a result, access to credit mostly occurs informally, such as from family or friends. Close to 60 percent of the country’s workers are employed outside the formal sector, and informal economic activity totals approximately 30 percent of GDP, according to estimates by Mexico’s National Institute of Statistics, Geography and Informatics.

Recovering collateral is yet another impediment to credit access. On average, it takes commercial banks three years to repossess a house after its mortgage has become delinquent. In some cases, the process can run 10 years.

The financial sector is anticipated to function as a more effective development tool. The goal is to establish a virtuous cycle allowing more Mexicans to acquire the necessary resources to make their business plans a reality and establish productive enterprises in the formal market, creating quality jobs and sustainable future growth.

>>PDF Report: Read More

SOURCE: US Federal Reserve Bank Of Dallas