Scaling Up Poverty Reduction Shanghai Conference The World Bank Institute May, 2004 Shanghai

1. Scaling Up Poverty Reduction Shanghai Conference The World Bank Institute May, 2004 Shanghai

2. The outreach of the Mexican financial system is still limited due to a lack of access of the population from the informal sectors in the economy Income pyramid of the Mexican population TRADITIONAL BANKING * Also provides services to sectors served by social banking institutions. • Commercial Banking • Development Banking * • Other intermediaries Mainly large and medium sized firms, and individuals with high to medium income Small- and medium-sized firms and individuals with medium to low income SOCIAL BANKING • Savings and Credit Institutions (SCI’s) • Microfinance institutions Self-employed/ populationand micro-enterprises Currently without access Currently without access

3. In the past, strategies to provide access to unbanked populations have failed. • Past attempts to provide access to the unbanked: • Market solution: • - Penetration and deepening of the financial sector by traditional financial intermediaries such as commercial banks. • State intervention solution: - As an alternative to market failures, the government implemented policies that relied on directed credit at subsidized interest rates, and subsidized credit guarantees through first and second tier development banks and trusts. • Failed or insufficient results: • Market solution: • - Failed due to lack of interest from commercial banks. No expansion of outreach was possible. • State intervention solution: - Derived in recurrent debt forgiveness and restructuring, due to inappropriate incentives; - The use of commercial banks as first tier intermediaries gave no results in terms of higher levels of outreach.

4. Population with Access: almost 600 SCI’s from the Social Banking sector provide financial services to around 3 million users. Organization / Federation Societies Clients 423 1,819,154 Sub Total COMACREP (9 Feds) 1/ 13 515,249 Federación Integradora (FINE) 10 41,845 Federación Atlántico Pacífico 8 40,186 Federación Victoria Popular 2 81,238 Federación José María Morelos 4 66,263 Federación CONTRAMEX Sociedades independientes y otras 132 356,674 Federaciones 2/ 592 2,920,609 TOTAL • Over five decades, a great diversity of SCI’s have been operating in the country, both in urban and rural areas. • However, most users have relied on loosely or completely unregulated financial institutions, putting their savings at risk. IntermediaryAuthorization Regulated and to take deposits Supervised - Sociedades de Ahorro y Préstamo (SAP’s) YES YES - Uniones de Crédito YES YES - Sociedades Cooperativas YES NO - Cajas Solidarias NO NO - Microbanks NO NO - Other*NO NO * Social Solidarity Societies, Private Assistance Institutions and other institutions without a specific legal form. Source: Census 1999.

5. The present strategy of the Mexican Government aims at formalization and institutional strength through a new legal framework and government support via fiscal transfers GOVERNMENT SUPPORT VIA FISCAL TRANSFERS A NEW LEGAL FRAMEWORK Effective since June 2001, the Ley de Ahorro y Crédito Popular (LACP) provides for the gradual incorporation of all non-bank savings and credit institutions into a new legal and regulatory framework over a four year period. This framework follows features of some of the most successful international schemes and best practices. In November 2001, the National Savings Patronage (PAHNAL) was transformed into the National Savings and Financial Services Bank (BANSEFI), in order to become the coordinator of temporary government aid, and gradually become a Caja de Cajas (or “Bank of Savings Banks”) through the provision of second tier central banking services to the sector. • A NEW MODEL • The new strategy will lead to the achievement of the following goals: • The development and consolidation of the sector, aiming at self-sustainable and adequately regulated (i) privately or (ii) collectively owned financial intermediaries, strongly linked with their communities; • The protection of depositors; • The increase in outreach among the unbanked; • The promotion of economic and social development at the community level, through consolidating sustainable financial intermediation.

6. Structure of the Mexican Social Banking Sector IMMIGRANTS URBAN AND RURAL COMMUNITIES Integral Financial Services Savings and product distribution L@Red de la Gente Branches Entities Levels I to IV SLC SLC P F P P F P DEVELOPMENT BANKS FEDERATION FEDERATION Integrating Bodies CONFEDERATION SLC = Savings and Loans Cooperative; PFP = Popular Financial Partnership (Joint-Stock Company)

7. A new legal framework: The Ley de Ahorro y Crédito Popular (LACP) • It is a FUNCTIONAL law - Regardless of their present status, social banking intermediaries will have to adopt one of the following legal forms to be authorized to operate under a regulated scheme: 1. Savings and Loan Cooperative (Cooperative Partnership); 2. Popular Financial Partnership (Joint Stock Company). • The law rests upon AUXILIARY SUPERVISION: - It uses already existing integration bodies (federations) to perform the supervision of regionally dispersed intermediaries, lowering supervision costs considerably; - Federations will have to be fully authorized by the National Banking and Securities Commission (CNBV for its acronym in Spanish), which holds ultimate responsibility in the supervision of financial intermediaries and federations; - CNBV will issue the prudential regulation over capital, accounting, liquidity, reserves and risk management, among other issues.

8. A new legal framework: The Ley de Ahorro y Crédito Popular (LACP) • It protects deposits through a PRIVATE DEPOSIT INSURANCE FUND - Managed by federation’s integrating bodies (confederations), social banking intermediaries will provide fees determined on the basis of protected deposits. Losses of one intermediary will be absorbed by the common fund, thus providing incentives for reciprocal oversight; • The law allows for a differentiated supervision, based on INDIVIDUAL DEVELOPMENT LEVELS Development Level Level I Local and rather small popular banking intermediaries Level II Level III Level IV Quasi-Banks Institutions development level shall be defined by: - + • Assets and Liabilities • Number of partners or clients • Number of Branches • Geographical Niche • Technical and operational capacities. • As the development level increases, the intermediaries will be allowed to perform more sophisticated operations. • As the complexity of the operations increases, a higher level of regulation will necessarily apply.

9. BANSEFI: three main objectives • Since PAHNAL’s transformation into BANSEFI, the institution’s mandate follows three objectives: Promoting savings Becoming the Caja de Cajas (“Bank of Savings Banks”) Coordinating Government Support

10. BANSEFI: promoting savings among lower-middle and low income unbanked populations of both urban and rural areas Promoting savings through branches and accounts • BANSEFI inherited from PAHNAL 850 thousand savings accounts and 600 branches by the end of 2001. • Today, BANSEFI operates a total of 2.1 million accounts through 554 branches (an increase of 143% in the period 2001-03). By the end of 2004, total savings accounts will rise to 3 million. • From 2001 to 2003, transactions increased from 5 to 7 million per year. These are expected to reach 11 million by the end of 2004 (a growth rate of 120% in the period 2001-2004). • The minimum opening deposit is $5 USD, and no fees are charged. • 69% of BANSEFI’s costumers are women and the average savings account balanceis in a range of$140 to $180 USD. Providing access to the unbanked, via the payments of government programs through opening savings accounts • Oportunidades, a program that provides cash subsidies for education, health and nutrition expenses to the poorest Mexican families, and PROCAMPO, a program of incentives for agricultural production, started the distribution of payments through opening savings accounts to recipients. • As a result, recipients of Mexican social policy are introduced into the use of formal financial products, most of them for the first time in their lives.

11. BANSEFI: becoming the Caja de Cajas of the social banking sector As the social banking sector is consolidated, BANSEFI will shift its focus gradually, moving from the promotion of savings to the provision of second tier central banking services (such as liquidity management*, funds compensation and portfolio risk analysis, among others), so as to become a Caja de Cajas (or “Bank of Savings Banks”). This new role will strengthen the financial position of the sector through: • Increasing the Social Banking sector’s income sources; • Increasing the sector’s market share through facilitating the provision of more products and services; • Reducing costs of regulation and operation and • Improving management efficiency. BANSEFI will perform the tasks of a Caja de Cajas in a competitive environment, as financial intermediaries will be free to choose the provider of these services. Finally, BANSEFI will be controlled by the financial intermediaries of the sector in the near future, through the participation of federations in the equity of the bank. *By later December 2003, a total of 93 financial intermediaries had already invested US $ 55.8 million in BANSEFI.

12. US $ 120.2 million* US $1.2 million US $ 3.5 million World Bank (loan) IDB/FOMIN (grant) German Gvt (grant.) BANSEFI: Coordinating government support The Federal Government’s efforts to consolidate the social banking sector in Mexico gained attention and attracted funding from international sources. An initial grant from the Interamerican Development Bank (IDB/FOMIN) acted as seed capital. Subsequently, a loan from the World Bank and a second grant from the German Government added up to US $ 124.9 million in financial resources to strengthen the sector’s institutional capacity, through a model based in temporary fiscal transfers, mainly. Funds are being allocated to the following projects: • 1. Technical assistance.- Customized technical assistance to the financial intermediaries and integration bodies of the social banking sector will strengthen performance and will allow operations according to the standards of the new law. * US $ 75.5 million of this loan are scheduled for approval by the World Bank in 2004.

13. BANSEFI: Coordinating government support • 2. Training.- Training programs directed to employees of the social banking sector and supervision units will increase human capital and ensure an improved performance. • 3. Technological platform.- A state of the art technology platform will link financial intermediaries, their integrating bodies and the financial authorities. This will permit the reduction of operating costs and will improve the efficiency of administration processes and regulation compliance. • 4. Financial culture.- A campaign has been designed in order to generate a participating and responsible culture among users of social banking financial services and potential new clients. • 5. L@ Red de la Gente.- L@Red de la Gente, or The People’s Network, is a commercial alliance that has emerged between BANSEFI and the regulated financial intermediaries of the social banking sector that join voluntarily. With this alliance, a series of homogeneous financial services is provided through an expansive network of branches. The transfer of remittances and the distribution of payments from social programs stand out among these services. • 6. Impact evaluation.- Impact evaluation uses standard methodologies (a panel survey, qualitative case studies, performance indicators) to assess the impact of the government’s support to the social banking sector at the household and institutional levels.

14. 1. Technical Assistance • BANSEFI is providing technical assistance to 375 intermediaries of the social banking sector, most of them affiliated with 15 federations. • The evaluation standards and diagnose methodologies include the main financial indicators and fundamental aspects of the new legal framework and its regulation. They resulted from the work of a group of international and national experts financed by the World Bank, coordinated by the CNBV and BANSEFI. Evaluation standards classify the financial intermediaries of the sector as follows: • A. Intermediaries that are ready to be authorized; • B. Intermediaries that require an improvement program to be authorized; • C. Intermediaries that will have to split, to merge or to reorganize their structures and internal control; and, • D. Intermediaries that will have to be liquidated in an orderly manner. • International consultants and federation’s supervision committees diagnosed and classified recipients of technical assistance in order to establish customized work plans aiming at the future incorporation of each participant into the new legal framework. Work plans include the following subjects: constitution bases, conformation of government bodies, general operations program, business plan, manuals, pursuit of financial indicator performance and training.

15. 2. Training A substantial part of the training has focused on the new legal framework: • Regional Workshops to inform about the new legal framework and discuss selected topics have been organized since 2003. During 2004, over 600 participant intermediaries are expected. • These workshops represent an important tool in the creation of a new culture of duties and responsibilities, free from the misconceptions of failed policies of the past. Over 409 financial intermediaries have benefited from courses provided by expert consultants. With the training component of the project, BANSEFI expects to complement Technical Assistance with enhanced human capital capacities. Almost 3,000 people have attended the courses. Out of these, 1,300 are employees from intermediaries or their integrating bodies and 1,700 are senior managers. Topics covered are: • Accounting (levels I and II); • Credit; • Risk Management; • Diploma in Financial Analysis.

16. 3. Technological Platform The technological platform will allow the social banking sector to operate in a network that centralizes information, so as to take advantage of economies of scale and minimize operating and supervision costs (through the provision of back office services by BANSEFI), permitting, at the same time, to integrate the supply of financial products. The platform is being designed under the following principles: • The technological design is based in the autonomy of institutions in the administration of their own resources and contents, and is scalable according to individual needs. • Technical neutrality and open architecture: technological standards of the industry, modern, flexible and adaptable solutions. • Modular : the services of processing and networks will be outsourced, allowing the service to grow on demand and not to start off initially with a great unused capacity. • Hacker-proof: Ethical hackers will perform periodic audits of the systems in order to check for security leaks. • Technology services will be provided monthly through outsourcers.

17. 3. Technological Platform The technological platform will have the following components: • The platform is characterized by its applicative systems shared with the necessary functionality to manage its products, clients, branches, internal operations, planning and compliance with the regulation. • The platform offers operation and technological support to the financial intermediaries, branches andintegration bodies. These services include personal computers orterminals, printing and additional devices for security, image capture, cash dispensers, etc. according to the needs ofeach intermediary. • The platform will share a transactional and operative data center, that will contain the systems and the data of each intermediary securely and independently. • The platform will have a communications network that interconnects all intermediaries with their branches and external institutions with which they will collaborate for commercial or regulatory issues.

18. 4. Financial Culture The Mexican Government’s effort to formalize and strengthen the Social Banking Sector has no precedents in past experiences of policy making. In that sense, the communication strategy acquires particular relevance in the construction of awareness about the sector and its importance in social development. The strategy comprises the following elements: • A three phase nationwide campaign about the new legal framework, launched in 2003. It will continue to operate until June 2005, when the deadline for intermediaries to comply with the LACP expires. The campaign is carried out through printed material, radio and TV; • A nationwide promotion of L@ Red de la Gente through electronic means; • Surveys and qualitative studies, carried out in different phases to assess the impact of the communication strategy. The results provide feed-back for the design of the following phases of the campaign.

19. 5. L@ Red de la Gente (The People’s Network) • L@Red de la Gente is a commercial alliance that has emerged between BANSEFI and the regulated entities of the sector that join voluntarily. L@ Red links BANSEFI’s 551 branches to more than 180 offices of 19 participating institutions and creates an expansive network of 754 branches in urban and rural areas. At the moment, 76 more intermediaries representing 221 more branches are applying to become new members. • This alliance facilitates the supply of products and services among populations deprived of access to financial services, and permits the distribution of payments from federal social programs through savings accounts. • As a result of the latter, the alliance will strengthen the income and market penetration of its members; • L@Red de la Gente will be supported by a platform that will use state-of-the-art technology and will allow BANSEFI branches and regulated entities of the social banking sector to connect to the network through the Internet in real time. • Some of the services provided are: • Remittance payments; • Delivery of payments from the Federal Government’s socialprograms (Oportunidades and Procampo); • Savings to access loans from Mortgage Federal Agencies; • Distribution of health insurance to low income population (in process).

20. 5. L@ Red de la Gente (The People’s Network) • With 19 members representing 754 branches, L@ Red de la Gente is expected to reach 2,000 points of service in Mexico in the coming years.

21. 5. L@ Red de la Gente: Remittances • The network has signed agreements with 9 firms specializing in remittance transfer services, representing around 27,000 points of service in the US; • The network has channeled more than US $ 53.6 million in remittance payments sent from abroad; • L@ Red will offer accounts that link different products together, permitting migrants to choose among different savings and investment options from remittances sent; • The possibility to access a wide variety of financial services and products through remittances sent is unique to L@ Red de la Gente, and represents its comparative advantage vis-à-vis other intermediaries. Among the value added features, the access to federal government’s housing and health insurance programs stand out as particularly relevant options for immigrants.

22. 5. L@ Red de la Gente: Oportunidades, an example worth noting in the financial transfer of social policy • Approximately 750,000 savings accounts have been opened as a new way to transfer the payments from Oportunidades, one of the most successful antipoverty programs in Mexico that provides cash subsidies for education, health and nutrition; • This mechanism has given more transparency to government transfers, as the risks of allocating through other types of intermediaries are eliminated; • As of December 2003, 97 % of recipients that had received at least two deposits through L@ Red had savings accounts with positive balances; • Additionally, recipients have the following advantages: - Immediate availability of resources; • - Interest payment with competitive rates; • - No commissions; • - The possibility of winning prizes in the traditional monthly raffle; • Access to other types of savings alternatives and products offered by L@ Red de la Gente. • L@ Red de la Gente expects to open 1 million more accounts of Oportunidades recipients during 2004.

23. 5. L@ Red de la Gente: Oportunidades, an example worth noting in the financial transfer of social policy • Jóvenes con Oportunidades: by the end of March 2004, more than 64,428 young students that finished high school through the support of Oportunidades received an additional government support of 120 to 300 US dollars (per school cycle) in their account to promote savings and continue their studies. This program will grow to over 189,428 students by the end of 2004 and will reach 355,428 recipients by 2005. • Oportunidades targets already over 5 million families at the national level. L@ Red de la Gente expects to eventually cover the full universe of recipients of the program, through the financial transfer of the payments in savings accounts. This will definitely contribute in the achievement of higher levels of outreach, by introducing financial services into the welfare dynamics of poor families.

24. 6. Impact Evaluation: Studies, Monitoring and Evaluation System • A PANEL SURVEY is expected to be carried out once a year for five consecutive years, in order to evaluate the impact of the use of financial services at the household level. The first round of the survey is currently being fielded. • In-depth QUALITATIVE CASE STUDIES will be carried out at the household level, in order to complement quantitative data stemming from the panel survey. These are expected to be carried out yearly (once for every round of the panel survey). • INSTITUTIONAL PERFORMANCE STUDIES envisage the elaboration of research permitting an “Organizational Performance Benchmarking” against which future changes associated with BANSEFI’s Technical Assistance may be compared. Indicators will cover productivity, efficiency, outreach and sustainability related issues.

25. FEDERATION Technical assistance Supervision committee Classification of the microbanking entities Work Plan A B C D Liquidation Savings recovery Fusion or Acquisition Transformation process AID FOR THE AUTHORIZATION PROCESS L@RED DE LA GENTE Network creation Generating additional income Increasing number of products and services Market penetration TECHNOLOGICAL PLATFORM Reducing costs Improving efficiency Improving supervision Increasing services A new model to consolidate the Social Banking Sector

26. Final Remarks • Government intervention can effectively increase access to financial services for low income households and businesses by: • (i) getting the regulatory framework right as a first step to give certainty to depositors and investors participating in the social banking sector; • (ii) building the institutional capacity of financial institutions, and • (iii)subsidizing the deployment of modern technology to increase the efficiency of service providers. • Packaging the development of adequate regulations and supervision, institution capacity building, and technological infrastructure is more likely to yield sustainable results and cost less over time than traditional interventions which focus on increasing credit flows. • The sector has a distribution network well positioned to reach areas where commercial banks have no presence or knowledge of the local markets. This will be a powerful tool to bank the unbanked, especially through strategic alliances such as L@ Red de la Gente. • The incorporation of technology, administrative processes, regulatory compliance and governance will be key drivers in the sector. • The transformation of the sector will contribute to deepen and fill in the gaps in the penetration of the Mexican financial system, allowing more people –particularly those with low levels of income– to have access to financial products and services and hence to new opportunities to participate in economic development.

27. ANNEX 1 Technical Assistance: Providers and Participants Guanajuato and Michoacán Jalisco, Michoacán and Guanajuato Querétaro and Mexico City Cajas Solidarias Oaxaca and Yucatán Jalisco and Nuevo León PROJECT 60/FINE, Victo- Ria Popular 42/Occidente, Fortale- za Social, Alianza Mex., AMACREP, Indep. 35/Alianza, FMEAC, indep. 25/FAP, Coopera, Indep. 157/Cajas Solidarias 61/UNISAP, Noreste No. of Intermediaries/ Federation Total members 151,675 413,283 627,778 180,217 1,007,225 235,559 Assests (Million pesos) 992 3,994 6,354 749 13,622 2,122 Consultant DGRV SBFIC DID SBFIC WOCCU PLANET FINANCE Date project started Sept. 15th 03 Feb. 1st 03 June 9th 03 Feb. 1st 03 Oct. 1st 03 March 1st 03 Sept. 15th 05 Date project finishes Feb. 1st 05 June 9th 05 Feb. 1st 05 Oct. 1st 05 Feb. 28th 06 At the moment, Technical Assistance projects are reaching close to 75% of the members of the social banking system

28. RURAL MICROFINANCE TECHNICAL ASSISTANCE PROJECT (PATMIR) MEXICO by GABRIELA ZAPATA, PROJECT COORDINATOR

29. PATMIR'S OBJECTIVE Provide access to widespread formal financial services that are savings-based, sustainable and adapted to local conditions in marginal rural areas

31. RESOURCE FLOWS IN & TO RURAL AREAS $ $ SUBSIDIES REMITTANCES 10.5 billion USD in 2004 $13.2 billion USD in 2003 $ Federal Government State Governments Special Funds National & Int’l Donors $ Salaries $ $ $ $ Various incomes $

32. REGIONAL STRATEGY PATMIR supports the development of financial systems networks, focusing on both the supply side as well the demand side, through an INTEGRATED REGIONAL STRATEGY led by specialized technical assistance providers • CONSOLIDATION • EXPANSION • CREATION MAIN COMPONENTS

33. MFI 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 SPECIALIZED TA PROVIDERS REGIONAL STRATEGY Contracts: Work Plans MFIs MFIs R E G I O N (3 yrs)   Field Advisors Mobile Services  SMALL MFIs or BRANCHES   SLG SLG SLG

34. TECHNICAL ASSISTANCE & TRAINING SPECIALIZED TA PROVIDERS • Restructuring • Regulation & Supervision • Financial Discipline • Specialization • Competitiveness

35. EXPANSION OF SERVICES FEDERATION Branch. Branch. + BANK MARGINAL RURAL SECTOR Branch NEW OR EXISTINGMFI S & L COOPS Service Point INCOME LEVEL POPULATION DENSITY Group RURAL SECTOR RFIs URBAN SECTOR Group Branch/ Service Point CSF ONGs _ CSF _ + CLOSENESS TO URBAN AREA

36. FEDERATED MFIs FEDERATIONS NON FEDERATED MFIs Urban sector Rural sector Consolidation Expansion Creation PATMIR Marginal rural sector

37. SPECIALIZED AGENCY FEDERATION MFI MFI MFI MFI MFI COOPERATION PATMIR

38. CONSULTANTS & PROJECT OBJETIVES

39. RESULTS & PROJECTIONS 2004 TOTAL SAVINGS March 2004

40. Lessons • Lessons • 1. TRUST is essential: • - Gainingtrustwithin the sector is best achieved through demonstration. Thepromotion and disclosure of successful stories is key; • - Supporting the sector’s leaders in this effort of radical institutional change is the best way to show the benefits of regulation; • 2. Government agencies should move from market makers to partners. • Self-sustainability rather than government dependency through subsidies (the traditional approach) is the best way to achieve permanent goals. • Achieve economies of scale and scope through network building and consolidation. • Regulation MUST be seen as an opportunity (not a burden), an investment to upgrade financial intermediation through access to a wider scope of financial products and services.

41. Challenges • Challenges • 1. Achieving depth and breadth of outreach sustainably, while complying with regulation. • Opening the way for large scale penetration into rural markets – How many others will follow the lead and be successful at it? • Promoting replicable aspects.

42. THANK YOU