My first stop in Mexico was a place I first heard about nearly two years ago: Chiapas. The state is in many ways one of the centers of Mexican microfinance. According to ProDesarrollo’s 2013-14 Benchmarking, Chiapas is tied with much larger Veracruz for the largest number of the network’s members (32). The number of MFI branches per population is nearly double the national average. It’s also Mexico’s least developed state.
In all, I spent about 22 hours in Chiapas. But even that paltry amount of time can prove revealing. Among the first things I noticed was the degree that credit is embedded in the culture (and apparently, this is nationwide, not just Chiapas). For example, at many retailers the prices quoted are not so much prices as monthly (loan) payments. The price is included, but often in small print. The example here shows a washing machine at a major retailer (Coppel) that’s priced at 6,999 pesos ($520), but the big number you see is 258 pesos ($19) – a fortnightly payment for 18 months. The interest rate is nowhere to be seen, though this one works out to 39% APR. Interestingly, the price of the washing machine is nearly identical to the average microcredit amount in Mexico, which ProDesarrollo reports is now 7,147 pesos ($530). So, at the outset, the interest rate offered by the store is much lower than the MFI rates in Mexico, which often approach (and even exceed) 100% APR.
The point here isn’t to discuss interest rates. No doubt, the store selling its goods on credit is making quite a markup on the items themselves, so the comparison with loan rates isn’t really appropriate. Moreover, the buyers here are quite likely different – many are probably wealthier than the typical MFI client. Indeed, from my conversations with a handful of borrowers in Tapachula and a nearby village, MFI clients are not big users of store credit – not a single person mentioned buying goods on store credit, though they were quite open discussing their microfinance borrowing.
And on that point, I discovered some interesting things. First, of the eight individuals I spoke with at some significant length, there were two types: 1) active microfinance borrowers, each of whom had 2-3 loans, and 2) non-borrowers. I didn’t meet a single individual who had just one loan – for most markets, that’d be very unusual, but it wasn’t unexpected in Mexico.
Both groups were largely made up of the same individuals – small vendors in two of the local markets we visited. However, there were also notable differences: all borrowers were women, while the non-borrowers were split roughly evenly between women and men.
Half of the non-borrowers also expressed a negative attitude towards microfinance, saying they would never borrow, certainly not at the rates charged by the MFIs. Two were particularly passionate on this point, one saying that the high interest rates amount to “robbery.” Both also said that it was impossible to grow a business relying on such expensive, short-term credit. A couple of the non-borrowers said that the loan officers visiting the market would ignore them – most likely because they didn’t have permanent sales locations, and were selling from boxes or temporary stalls set up outside the market. This differentiating tactic is very common for loan officers in other countries, since such clients can be harder to track down for repayments.
The feedback from non-borrowers is important to bear in mind, particularly when seeking to model demand. As is the case in many other places, the target market for MFIs is substantially narrower than just the poor in Mexico. Even among those who work in the informal sector, a substantial proportion will be seen as either too poor (i.e. no permanent place of sale) or simply uninterested in borrowing.
Meanwhile, the borrowers all viewed MFIs as generally positive, and all were long-time clients (7+ years). Again, the sample is too small to extrapolate, but it is instructive when juxtaposed with the non-clients. The average years clients have been active in microfinance is something to consider when evaluating capacity for continuing growth, especially in mature areas like Chiapas. What is likewise notable is that at least two borrowers suggested that one of the loans they’d taken were intended not for them, but for someone else, i.e. family or a friend. This appears to be quite a common practice in Mexico, and is well recognized by those working in the sector.
Regarding the economic profile of the borrowers: the vendors in the Tapachula markets had permanent stalls in the market area, and sold a mix of goods, from shoes, to poultry, and so on. The borrower in a nearby village was much poorer. Indeed, the village – which had no paved road, a polluted and partly flooding stream, and very basic homes in various states of completion – could be easily compared to poor villages in Cambodia or India. It was a world away from the upper middle income Mexico that one might see in the country’s capital or other developed areas. Such borrowers form a major part of MFI portfolios, so this is consistent with the hypothesis that the sector’s clientele are truly among the poorest in the country.
Finally, the question of competition – Tapachula was clearly a competitive market. The borrower in a nearby village could recall six separate MFIs active in there, though each recall was prompted by mentioning a specific MFI. Presumably, there were others that we simply failed to mention. But in light of the fact that Chiapas is the most densely served market in a country that with a uniquely high level of multiple borrowing, the situation on the ground didn’t seem exceptional. I didn’t see multiple competing branches next to each other, as I’ve seen in Lagos, for example.
So what to make of this extremely brief visit to Chiapas? First, Mexico’s credit culture arguably creates more credit demand than comparable markets. Second, the target population of MFIs does seem quite narrow, and within that narrow slice, there are many who are not (and are unlikely to become) clients. And finally, the market is clearly competitive, but on the surface, it doesn’t seem to be exceptional.
Perhaps the most important thing is what I didn’t find – though some borrowers knew other clients who had defaulted, not a single borrower mentioned overindebtedness as a major issue.
More to come.