“Highly-Rated” Public Banks Around The World: What Makes Them Stand Out? - FIRA’s Experience -

1. “Highly-Rated” Public Banks Around The World: What Makes Them Stand Out? - FIRA’s Experience - Presentation prepared by: Francisco Meré February 25, 2005

2. Agenda • Evolution to success • Case studies on financial innovation • Final remarks

3. From development banking • to banking development 1999 - Today Early 1990 - 1998 1954 – Early 1990 FIRA is a second-tier trust fund created by the Mexican government within the Central Bank 50 years ago • Bank Privatization • Financial Market Liberalization • Market Oriented Policies in Ag. • Tequila crisis • Lending to productive sector practically disappeared • FIRA ´s products not attractive to banks • Agricultural commodities challenged by trade liberalization, thus risk perception increased • FIRA´s loan portfolio was heavily subsidized • Original assumption was that enhanced funding would encourage an increase in credit to farming • Loans were concentrated in the primary sector (commodities)

4. Restructuring and a turnaround strategy were needed in order to survive in a new environment Product-driven Client-driven Evolution in focus Agriculture Fin. Sys.dev. From market players to market makers Investment banking Corporate governance realignment • Internal control fostering • Staff professionalization • Downsizing • Process-driven design • Performance-based reward Value-added products Subsidy-based operation

5. A comprehensive approach was used for implementing the new model Channels Products Organization • Reorganization to eliminate conflicts of interest • Adoption of a process-oriented organization • Corporate Governance & Internal Control strengthening • Performance-based employee rewards • Cost-cutting strategy • Elimination of red-tape • Value added for clients (users & distribution network) • Improved targeting of market-friendly subsidies • Smart subsidies • Markets development • Banking diversification • New intermediaries • Strategic alliances

6. With our new approach, FIRA has achieved higher private sector engagement (double digit growth for six consecutive years) Commercial banking Lending and Lending to low income producers Change in credit stock by commercial banks using FIRA´s funds CAGR 16.7% 1998-2004 CAGR 17% 1998-2004 3 non bank banks 2 Factoring companies 4 Leasing companies 1 Warehouse Source: FIRA. All figures in million usd

7. Agenda • Evolution to success • Case studies on financial innovation • Final remarks

8. Gradual phase-out of interest rate subsidies has been coupled with the development of innovative financial solutions through our new investment banking practice FIRA’s structured finance model offers value to agribusiness community and supports institutional development in the financial system Value chain integration Financial market development/lower transation cost Value creation for participants (income ) Development of analytical capabilities for financial intermediaries Examples

9. Before FIRA’s financial innovation, shrimp producers were using costlysuppliers´ credit Mexico exports US$264.1 million of frozen shrimps per year to the US; this industry employs over 176,000 persons. Financial schemes before structured credit : Feed companies Ocean Garden 50% cash 50% 7 month credit Feed delivery Working capital loans Future delivery of shrimp Shrimp producers Shrimp producers • Result: • High borrowing cost to shrimp producers • Liquidity constraints to OG and suppliers • Thus limitations to industry growth

10. Ships and firms In 2003, FIRA acted as structuring and distribution agent for a structured finance facility that helped to overcome limitation for growth and developed new financial markets • Profiting from successful experiences in other sectors, FIRA designed a securitization of account receivables (working capital loans for shrimp producers) that was privately placed by FIRA among the banking sector • FIRA provided enhancement (with a low VaR) to provide confort to investors INVESTOR Funding and partial enhancement Debt issue SPV Transfer of rights • Senior tranche • Junior tranche with cash collateral sinking fund 1. Supply agmt. 2. Loan

11. Development Financial Institutions are able to foster development with a market approach • Shrimp producers obtained a 30% discount in price of feed (which accounts for 70% of COGS) • Suppliers and OG freed-up their balance sheets and reduced their credit exposure • A new investment opportunity with low VaR, low transaction cost and high RAROC was offered to FI • FIRA contributed to financial system development

12. Structuring of an ABS financing mechanism for commodity inventory financing has been a key factor for financial innovation as well as for market and institutional development Warehouse company Portfolio sale Other Investors (Rabobank, Deutsche bank) Repo of CD Servicer Mexican Banks OTC hedge Credit derivative • Alliance with world-class partners, with right expertise • Warehousing sector development • Creation of risk assessment capabilities in financial sector • Broad acceptance of structure • Low VaR linked to price of underlying commodity • Commodities such as sugar, corn, wheat, sorghum, shrimp and live cattle • Portfolio has accounted for 10% of total loans

13. Outstanding book value in Mx. Ps. (End of month) Outstanding book value in USD (End of month) FIRA’s incursion in the derivatives market allows it to offer market risk hedging products to small producers and to improve FIRA’s portfolio yields • FIRA trades in the OTC market interest rate swaps in MXN to hedge risk in fixed interest rate lending and cross currency swaps to synthetically fund its USD credit portfolio • There is not additional risk in FIRA’s balance sheet because all derivatives positions are matched by FIRA’s credits disbursed • Both programs have allowed to reduce subsidies and to generate profitability through derivatives operations • Gives low income farmers access to sophisticated financial instruments Source: FIRA

14. Agenda • Evolution to success • Case studies on financial innovation • Final remarks

15. FIRA´s new activity aims to solve market failures/imperfections with a market approach and a clear vision of financial market development • FIRA evolved from a traditional development credit institution to a financial innovation entity that creates value for the agricultural sector and develops ag. financial markets • Through a market development approach, the small producers are able to access sophisticated financial instruments, such as interest rate risk hedging • FIRA’s innovative approach has allowed it to growth at a double-digit digit rate, which is significantly higher than agriculture GDP growth • FIRA has contributed to increase the number of FI serving the agribusiness sector

16. FIRA is considered around the globe as… Credit Bank for the Reconstruction "Formidable Organization”January 2004 “Organization guided by financial innovation”November 2004 Latin American Association of Development Financial Institutions “The Best Partner in Business”May 2004 Leading Business Magazine in Mexico “Innovative Enterprise”November 2004 The World Bank “An example of best practices in financial development institutions”September 2004 Leading Business School in Latin America “Strong and Dynamic Organization”April 2004

17. www.fira.gob.mx 01 800 800 FIRA