Can a little really go a long way? Mexico’s case for microfinance

Renowned for its rich culture and history, the most populous Spanish-speaking country in the world has arrived at an economic crossroads. Mexico’s strong institutional foundations, extensive trade links and diversified manufacturing have given rise to significant growth across various sectors. 

Despite this, data across recent years has proven that poverty reduction policies have been sluggish to say the least, leaving inequality to emerge as a barrier to the creation of a sustainable economic environment. Deepening financial inclusion seems to be the key piece of the Mexican development puzzle but with less than 40% of the adult population possessing a bank account, there is still a long way to go. 

Rural areas are bearing the brunt of this economic oversight. An already firmly entrenched inequality gap between urban and rural areas has been exacerbated by the COVID-19 pandemic. While the overall economy is bouncing back, existing cracks seem to be widening. Historically poor provision of infrastructure beyond the bustling financial hubs has meant that peripheral provinces have fallen behind with lower-than-average incomes, education levels and healthcare standards compared to urbanised areas. 

With limited access to formal financial services, it comes as no surprise that a variety of alternatives have begun to surface in Mexico’s outskirts. Ranging from traders to input suppliers, rural regions have turned to informal or semi-formal financial institutions to prop up their local economies. Lacking regulation and proper management, these institutions often don’t have the capacity to provide meaningful financial support while their isolation from the national financial system allows room for exploitation. 

Combating these inequalities has been high on the agenda of the Mexican government for several decades, with a range of initiatives aimed at increasing the scope of mainstream financial institutions being implemented across the country. Microfinance has been a key driver of change in this arena. 

Microfinance provides opportunities for people to take on reasonable small loans safely. Compartamos Banco, the largest microfinance bank in Latin America, has been paving the way for financial inclusion since its initial formation in 1990. With women accounting for 88% of its clients in Mexico, Compartamos Banco is dedicated to closing the gender gap within finance, expanding fiscal resources for women and encouraging entrepreneurial pursuits.

Government initiatives have also made headway in expanding finance to include marginalised populations. Launched in 2020, the National Financial Inclusion policy aims for 77% of Mexican adults to have “at least one financial product” by 2024 and for more than90% of Mexican municipalities to have “at least one financial access point” by 2024.

With more than $50 billion of committed funds in 2020 from an array of donors ranging from government aid agencies to commercial banks and investment firms, the microfinance industry is booming, but is it really for all the right reasons?

Continuous claims from development banks that microfinance is still the most effective way of alleviating poverty through financial inclusion have been called into question. New academic reports begin to detail that even the most reliable lenders are now struggling to have a long-term impact.  

The evolution of the market over the years has resulted in several companies losing sight of their original pledges to supply loans for low-income individuals and groups. Instead, some companies are now lending to small and medium-sized businesses, prioritising profits over helping the poor. 

From 2015 to 2018, the $1.1 billion budgeted by the U.S. Agency for International Development for microfinance programs had produced “little evidence of sustained effects” according to a Government Accountability Office report. Meanwhile, investors and lenders have been richly rewarded with some microlenders reporting annual returns on equity exceeding 25%

Rebalancing financial access in Mexico is an ongoing and dynamic process. Increased commercialisation of the industry is a slippery slope for microfinance but despite its critics, this form of banking remains a powerful tool for inciting change. 

Tighter regulations and increased monitoring are necessary to ensure that this system which was originally built as a force for good does not fall into the sticky hands of greedy lenders.  

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