Looking Elsewhere

Financing non-traditional segments

Financial institutions are increasingly catering to SMEs and individuals with non-traditional income sources, the most underserved segments in Mexico.

Banking in Mexico is undergoing a revolution to make loans available to more business owners and create opportunities for new segments of society. For decades, the financial sector has taken a conservative approach to lending, giving preference to clients with a proven track record of loan repayments, while avoiding the risk associated with many SMEs and entrepreneurs looking to make their business ideas come to life.

Such tendencies have locked out many potential start-ups and private business ventures from the funding they need to expand their enterprises. Yet, in recent years, an increasing number of national and international consortiums have opened their doors to smaller, more ambitious clients, resulting in a resounding impact on the nation’s rapidly growing economy.
In Mexico, SMEs account for nearly nine out of every 10 businesses, but only a third of such companies have access to bank financing. As of March 2019, SMEs represented 9.1% of all the loans in the country, the equivalent of just 2% of the GDP, according to Moody’s.

“In the financial sector in particular, the demographic profile of the country (a young population), the low levels of bankification, and the growing digitization, especially the wide and growing use of smartphones (nearly 70 million), open a huge opportunity to grant millions of Mexicans and small businesses access to formal financial services,” Ernesto Torres, CEO of Citibanamex, told TBY.

In response, many financial institutions, including Indigo Capital and PlusCorp, see the gap between supply and demand as an opportunity to extend their banking services to accommodate new clients in underserved sectors. By offering innovative, data-driven services to more non-traditional segments, such as SMEs and individual entrepreneurs, the new approach could bring greater sustainability to Mexico’s long-term economic prospects.
To date, one of the main obstacles to faster credit growth has been the large size of Mexico’s informal economy. According to the census bureau, about 60% of the nation’s workforce is employed in the informal sector. As a result, many workers and their employers lack the necessary accounting information and credit history normally required when applying for bank loans.
Further complicating the issue, only about 39% of the population has a bank account, and 75 million people remain without access to any financial services and lending support that might help them grow their family-run or private business ventures. Taking the staggering figures into account, some Mexican banks have estimated the market for small business loans to be as high as USD20 billion.

Using some of the principles innovated by microfinancing in recent decades, national banks are now taking a proactive approach in reaching out to clients who could benefit from fresh cash inflows. Increased access to bank loans would not just reduce stagnation in the small business sector, but also generate more employment and jobs.
Yet, the impacts would go deeper than simply encouraging job growth, as the many businesses currently operating in the informal sector would be need to register with state institutions to acquire the necessary documentation in order to qualify for financing. As more firms register, labor conditions will improve for the millions of employees currently working without documentation.

As more businesses comply with state laws, more employees will be eligible for state mandated protections such as minimum wage, improved health and safety regulations, as well as access to workers’ benefits programs.
The initiative to open Mexico’s banking sector has also gained support from leading international institutions such as Goldman Sachs, which in March 2019 allocated USD100 million to bolster the SME funding capacity of the Mexican fintech lender Credijusto.

“[Our] innovative technology and its disruption of traditional underwriting models are reshaping the lending landscape,” said Allan Apoj, the co-CEO of Credijusto. “This financing will further support our growth trajectory and enable us to continue offering credit to the perennially underserved Mexican SME market segment.”

Like other banks expanding their SME and entrepreneur loan offerings, Credijusto has sought to promote financial inclusion by providing affordable asset-backed loans and equipment leases to a wider spectrum of business owners. As such banking options become more accessible in Mexico, the SME sector will undoubtedly grow in the coming years, generating sustainable social and economic impacts that will benefit both workers and business owners.