Newspaper article The Christian Science Monitor

Is Easy Credit Coming to Mexico?

Newspaper article The Christian Science Monitor

Is Easy Credit Coming to Mexico?

Article excerpt

Miguel Angel Riva Palacio stuffs his savings in his sock drawer. He pays his bills and expenses with cash, doesn't have a bank account, and never uses debit or credit cards - neither of which are accepted at the mom-and-pop dry cleaning shop he's worked at for the past 43 years.

"It's something that has never interested me," he says of opening a bank account.

Mr. Riva Palacio is among the millions of Mexicans operating outside of a banking system that has produced robust profits in recent years, but has failed to embrace customers among the unbanked or extend credit to entrepreneurs. Mexico has one of the lowest rates of commercial lending in Latin America, which has been blamed for stunting economic growth.

But a series of banking reforms introduced Wednesday by a coalition of political parties aims to change that. The legislation aims to encourage competition among banks and increase the accessibility and accountability of financial institutions. It also intends to create incentives for lending to both individuals and the private sector.

"It is a reform that will encourage banks ... to lend more and for lower rates," President Enrique Pena Nieto said in announcing the reform proposals.

Banking sector that 'lends little'

The Mexican government projects an economic expansion of 3.5 percent in 2013 and President Pena Nieto is promoting a series of economic reforms in areas such as energy and taxation, which he says will tack an extra two percentage points annually on to the country's GDP growth in future years.

But banking has long been a sore spot in an otherwise optimistic economic outlook, especially since Mexican financial institutions lend little in comparison to their counterparts in other emerging markets. What credit is extended often goes to state governments, whose debts have swelled, or is lent at high interest rates. Many credit cards carry interest rates often topping 40 percent.

"Mexico has ... a solid banking sector. However, it's a banking sector that lends little," Finance Minister Luis Videgaray Caso said at the unveiling of the reforms.

Bank credit amounts to just 26 percent of GDP in Mexico, according to Mr. Videgaray. This compares to more than 50 percent of GDP on average in Latin America and nearly 100 percent of GDP in Chile. Mexico boasts solid macroeconomic fundamentals with relatively low inflation and interest rates, and a stable currency. But Videgaray said that fundamentals have been insufficient to boost economic growth due, in part, to the lack of bank credit available to businesses and entrepreneurs.

Mexican banks lend just 43 percent of their assets to the private sector, Videgaray said, compared to the Chilean rate of 73 percent.

The financial reforms - not to be confused with a long-pending fiscal reform meant to raise more non-oil revenues for the government - propose overhauling bankruptcy proceedings, which currently can drag out for years. …

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