SUBSECRETARÍA DE DESARROLLO RURAL Dirección General de Programas Regionales y Organización Rural

1. Challenges and Advantages of Serving Marginal Rural Markets through Financial Cooperatives: Lessons from Mexico’s Rural Microfinance Technical Assistance Project (PATMIR) Gabriela Zapata Álvarez COOPERATIVE FINANCE: GLOBAL GOOD PRACTICES The World Bank Washington, DC – 10 March 2007 SUBSECRETARÍA DE DESARROLLO RURAL Dirección General de Programas Regionales y Organización Rural Dirección de Fomento de Organizaciones Financieras

2. MEXICAN FINANCIAL SYSTEM

3. WHY  Household: • Income-smoothing • Asset accummulation • Investment opportunities P O V E R T Y R E D U C T I O N E F F O R T  Community: • Fuel local economy • Reduce income inequalities

4. WHAT financial services are needed? CREDIT • Integrated (savings, credit, remittances, etc.) • Adapted / Demand-driven according to market segments

5. WHO is best suited to provide them? • Commercial Banks? • Development Banks? • MFI’s • Savings & Credit Cooperatives • Other FI’s • Proximity • Mission • Market knowledge • Member-owned • Numerous

6. HOW should this happen? It won’t happen spontaneously (other than informally), in the short / medium term and even long term Assumption: Defining Government Intervention • Specific Regulation • Special Programs

7. POPULAR SAVINGS & CREDIT ACT FEDERAL GOVERNMENT SUPPORT PACKAGE TO PROMOTE FORMALIZATION MRA=Marginal Rural Areas MRA=Marginal Rural Areas

8. PATMIR'S OBJECTIVE Promote access to formal financial services that are savings-based, demand-driven and sustainable in marginal rural areas

9. PATMIR'S FOCUS BANKING THE RURAL POOR Savings Accounts • Investment • Credit • Remittances Insurance • Check-cashing • Utility PaymentsGovernment Transfers • etc. OUR TARGET POPULATION: All market segments living incommunities of ≤10,000 inhabitants in municipalities with very high, high & medium marginality levels* *CONAPO: Consejo Nacional de Población (National Population Council)

10. STRATEGY HOW? INTEGRATED REGIONAL STRATEGY …led by Specialized Technical Assistance Providers

11. FI SELECTION CRITERIA:  Willingness & capability to comply with the law  Willingness & capability to expand services to marginal rural areas  Willingness to work with specialized agency according to Contract & Work Plan INTEGRATED REGIONAL STRATEGY SPECIALIZED TA PROVIDER CONTRACT: Work Plan FI FI T A R E G I O N (3-5 yrs)   Field Promoters Branches Mobile Services  Service Point  CSG  CSG FI: Financial Intermediary CSG: Credit & Savings Group

12. PATMIR'S MAIN COMPONENTS

13. 7REGIONAL PROJECTS = 10 States TA CONTRACTS • Chiapas-Tabasco • Huastecas • Puebla-Tlaxcala Huasteca Puebla y Tlaxcala Michoacán Veracruz • Guerrero • Oaxaca Guerrero Chiapas y Tabasco Oaxaca • Veracruz • Michoacán

14. RESULTS, 2003-2006 APPROACHES: STRENGTHENED = 14  CREATED = 12  EXPANDED = 6 SOURCE: Julia Paxton, 2005

15. RESULTS, 2003-2006 US $31 M US$35 M

16. OPERATIONAL SELF-SUFFICIENCY OF NEW FIs SOURCE: Julia Paxton, 2005 74%

17. MULTI-LAYERED M&E SYSTEM F E E D B A C K • STUDIES • PANEL SURVEY

18. PANEL SURVEY Analyzes the use of financial services, household expenditures and assets, economic activities of the household, receipt of remittances, and economic shocks faced by the household • BANSEFI & SAGARPA • 5 years (2004-2008) • 5,800 households: • 1,492 in communities served by PATMIR FIs • 2/3 of sample is rural & 1/3 urban • Treatment: ½ “banked” – Control: ½ “unbanked” Analysis to-date:BASE-LINE (2004) , comparing clients of PSCS as a whole vs PATMIR FI clients

19. PAXTON STUDY OF PATMIR (2005) CREATED DEPTH OF OUTREACH INDEX (DOI) DOI = Sums differences between institutional outreach avg. (i) and country avgs. (c) for (N) categories of people excluded from formal finance (e) STRENGTHENED EXPANDED SOURCE: Julia Paxton, Analysis of Mexico’s PATMIR Project, 2005

20. DEPTH & COST BY APPROACH Jan. 2007: Strengthened US$336 Created US$272 Expanded US$90 CURRENT COST OF “BANKING” AN INDIVIDUAL

21. INVESTMENT, USERS & UNITARY COST, 2003-2007 (Mexican Pesos) US$190 • OUTCOMES: • Physical & Human Capital • Sustainable and Regulated FIs • Permanent access to integrated financial services by households and individuals in marginal rural areas NOTE: Unitary Cost is based on new users only.

22. KEY FINDINGS • The marginal rural population constitutes a viable market. • No single methodology / technical consultant is required for attaining good results. Various models and approaches can be used to reach the rural poor successfully and sustainably. Adapting to local conditions has been essential to success. • Existing institutions bring a pre-established culture, which has a high price. • New institutions require high start-up costs, but creation of a new FI can be justified in some cases and be successful with adequate support. • Providing financial services in marginal rural areas does not impede compliance with regulatory requirements. • Operational sustainability can be achieved by new FIs in 3-5 years. • Obstacles to providing services to the rural poor can be overcome through adaptation and innovation.

23. CHALLENGES • Governance • Human Capital • Portfolio quality • Remaining in marginal rural areas • Rural infrastructure and security

24. CHALLENGES • Institutional Context: • Regulation & Supervision • Sector Networks Congress CNBV Take action to close down? Gov. Auth. Capacity to autorize & Supervise Conf. Lobbying to change regulation Feds. Aux. Superv. & TA Mergers Incentives to Federate FIs COOPS. Organized NOT complying FIs. Not Organized Illegal  Financial Literacy UNSUPERVISED Cost vs Risk Role of Government & donors?