Microlending in Mexico

Topics: Poverty, Microfinance, World Bank Group Pages: 7 (2395 words) Published: November 30, 2012
Microfinance in Mexico:|
A Call To Reform|
Liana Robinson|


Table of Contents

I. Microfinance
1. About microfinance
i. Dr. Mohammad Yunus
ii. Types of Microfinance used by poor people (fig)
2. Microfinance institution (MFI)
i. Variable costs
ii. Fixed costs
iii. Interest rates
II. Mexican markets
1. Distribution of income
i. Poverty levels
ii. Extreme poverty (fig.)
2. Financial institutions
i. Wal-Mart Bank
ii. Banco Compartamos
III. A New Design
1. Proposed MFI plan
i. Mission
ii. Projected new MFI hub locations and target zones(fig.)
2. Cost/Funding
i. Joint venture/Alliance
3. Marketing
i. Push strategy
ii. Communication channels
4. Entry strategy
5. Organizational structure
IV. Conclusion

Microfinance is the provision of financial services to low-income clients including consumers and the self-employed, who traditionally lack access to banking and related services. In many developing nations when poor people borrow they often rely on relatives or a local moneylender, whose interest rates can be very high. Ensuring financial services to poor people is best done by expanding the number of financial institutions available to them, as well as by strengthening the capacity of those institutions. Microfinance is considered as a tool for socio-economic development, and can be clearly distinguished from charity. Families who are destitute, or so poor they are unlikely to be able to generate the cash flow required to repay a loan, should be recipients of charity. Others are best served by financial institutions (Kiva).

Credit unions and lending cooperatives have been around hundreds of years. However, the pioneering of modern microfinance is often credited to Dr. Mohammad Yunus, who began experimenting with lending to poor women in the village of Jobra, Bangladesh during his tenure as a professor of economics at Chittagong University in the 1970s. He would go on to found Grameen Bank in 1983 and win the Nobel Peace Prize in 2006 (Global envision). Since then, innovation in microfinance has continued and providers of financial services to the poor continue to evolve. Today, the world bank estimates that about 160 million people in developing countries are served by microfinance (World Bank).

A microfinance institution (MFI) is an organization that provides microfinance services. MFIs range from small non-profit organizations to large commercial banks. However, the majority of formal banks do not provide microfinance products as microfinance is an expensive enterprise – it is easier to make money on a large loan than a small loan, and banks won't make much profit holding savings accounts with very little funds in them. Financial institutions can always make more money if they only provide financial services to those who already have it. This creates little option for the poor.

The nature of microcredit - small loans - is such that interest rates need to be high to return the cost of the loan. Kiva International is a nonprofit entity providing small loans to the poor across the globe. They illustrate,

"There are three kinds of costs the MFI has to cover when it makes microloans. The first two, the cost of the money that it lends and the cost of loan defaults, are proportional to the amount lent. For instance, if the cost paid by the MFI for the money it lends is 10%, and it experiences defaults of 1% of the amount lent, then these two costs will total $11 for a loan of $100, and $55 for a loan of $500. An interest rate of 11% of the loan amount thus covers both these costs for either loan.

"The third type of cost, transaction costs, is not proportional to the amount lent. The transaction cost of the $500 loan is not much different from the transaction cost of the $100 loan. Both loans require roughly the same amount of staff time for meeting with the borrower to appraise the loan,...
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