REGULATION, DEVELOPMENT AND PERSPECTIVES OF THE MICROBANKING SECTOR IN MEXICO

1. REGULATION, DEVELOPMENT AND PERSPECTIVES OF THEMICROBANKING SECTOR IN MEXICO Rio de Janeiro, Brazil, September 9th, 2002 The biography of the speaker is in the last slide

2. Contents I. INTRODUCTION II. MICROBANKING LAW III. BANSEFI IV. PERSPECTIVES

3. Every kind of company (emphasis in large- and medium-sized) and Individuals with high/ medium income Small- and medium-sized enterprises (Pymes) and individualswith medium/ low income Self-employed/ marginalized population & micro-entrepreneurs I. Introduction... FINANCIAL SYSTEM • Financial services in Mexico are provided by a great diversity of intermediaries through a pyramidal structure which attends different niches of market. • A strategic approach of current Government is to promote the development of Social Banking with the purpose of increasing the depth of the financial system. * It also provides services to some sectors attended by social banking. TRADITIONAL BANKING Commercial Banking Development banking * SOCIAL BANKING Microbanking & Microfinance institutions Currently unattended Currently unattended

4. II. Microbanking Law (Ley de Ahorro y Crédito Popular) MICROBANKINGSECTOR • Because of the need to order, regulate and promote the Microbanking System, on April, 30th., 2001, the Legislature approved the Microbanking Law (LACP for its acronym in Spanish) and the the Organic Law of the National Savings and Financial Services Bank (BANSEFI for its acronym in Spanish). • The objective of the LACP is on one hand, to provide security for the savings of the population participating in the System, and to provide them with a stable funding source. • On the other hand, to promote the development of the Microbanking System, in an ordered way to allow: • Its conversion into an important source of financing for micro and small enterprises*, and for housing. • The provision of formal financial services for the sectors and regions that currently do not have any, incorporating them into formality and into the main economic flows, promoting in this way an inclusive development. • The design of the Microbanking Sector established in these Laws is presented in the next slide. * In those countries with a successful Microbanking System, this System represents nowadays the main funding source for small- and medium-sized enterprises.

5. II. Microbanking Law (Ley de Ahorro y Crédito Popular)... MICROBANKING SECTOR DESIGN COMMUNITIES Integral Financial Services Savings and products Distribution Branches Entities SLC SLC P F P P F P Integration Bodies FEDERATION FEDERATION CONFEDERATION SLC = Savings and Loan Cooperative; PFP = Popular Financial Partnership (Joint-Stock Company)

6. II. Microbanking Law (Ley de Ahorro y Crédito Popular)... CHARACTERISTICS • Only those intermediaries that prove their financial viability will be integrated to the new Legal framework. The LACP has the following characteristics: • It is a FUNCTIONAL Law.- All of the intermediaries that perform the same functions will have to comply with the same rules and to adopt one of the two allowed legal forms: • Savings and Loan Cooperative (Cooperative Partnership). • Popular Financial Partnership (Popular Joint-Stock Company). • It regulates according to the INDIVIDUAL DEVELOPMENT LEVEL of the intermediaries. • There will be 4 levels, defined according to these dimensions: Assets and Liabilities; Number of partners or clients; Number of Branches; Geographical Niche; and Technical and operational capacities. • As the development level increases, the intermediaries will be allowed to involve in more operations; as the complexity of the operations increases, a higher level of regulation will apply.

7. II. Microbanking Law (Ley de Ahorro y Crédito Popular)... CHARACTERISTICS • The LACP establishes a PRIVATE DEPOSIT INSURANCE FUND. • It is managed by the authorized Confederations, and it is integrated by annual fees paid by the Entities. • It allows that financial problems of one intermediary be absorbed by the common fund, providing incentives for reciprocal oversight. • The Law is supported in an AUXILIARY SUPERVISION SCHEME. • The National Banking and Securities Commission (CNBV for its acronym in Spanish) holds its supervision authority over the intermediaries and • Federations will have the task of enforcing the legal framework and will execute their auxiliary supervision and oversight faculties over the intermediaries through a Supervision Committee authorized by the CNBV. • The Law establishes a two year transition period in order that the CNBV issues the prudential regulation according to the LACP and that participants in the System adjust their operation so that they are able to fully comply with the Law. This period ends on June, 2003.

8. III. BANSEFI RESTRUCTURING • In order to support the ordered development of the Microbanking sector, in November, 2001, the National Savings Patronage (PAHNAL for its acronym in Spanish) transformed into the National Savings and Financial Services Bank (BANSEFI), according to the organic law approved by the Congress on April, 2001. • BANSEFI will perform three main tasks: I. To continue its role as promoter of the savings culture and to collaborate with other Government agencies in the distribution of subsidies and other supports, II. To become the Banker of the Microbanking Intermediaries, providing financial services to the intermediaries in the Microbanking Sector and developing complementary products, which will be offered to the population through these intermediaries; and III. To coordinate temporal supports of the Mexican Government to integrate the necessary infrastructure to help the Microbanking Sector to operate in an efficient way and according to the new legal framework. These supports include: Technical assistance, Training, Technological infrastructure, and an information campaign to promote the LACP and the Microbanking Network.

9. III. BANSEFI... “CENTRAL BANK” OF THE MICROBANKING INTERMEDIARIES • The actions performed and the products developed by BANSEFI, will have the objective of increasing the profitability of the entities which participate in the Microbanking sector. • BANSEFI will focus preferentially in: • Expanding the range of products and services offered by Microbanking intermediaries, • Increasing Microbanking sector entities’ income, • Reducing the costs of regulation and operation, and • Improving efficiency in the management of Microbanking intermediaries. • Some of the financial and governmental products and services which are currently offered, or that BANSEFI will be able to provide soon to the users of the Microbanking sector are: • Remittance payments; distribution of Insurance products at low cost; Prior-to-Housing Savings; distribution of Government Payments and Subsidies; trusts and management of liquidity for Microbanking intermediaries. • As the Microbanking sector is capitalized, the participation of the Microbanking integration bodies in the paid-in capital of BANSEFI will be promoted.

10. III. BANSEFI... PEOPLE’S NETWORK • BANSEFI is promoting different actions to develop the infrastructure of the Microbanking sector, as follows: • Development of the Microbanking distribution network, which could integrate 3,000 centers for the provision of services, conformed by branches of BANSEFI and regulated and supervised entities in accordance with the Microbanking Law. • This network will be positioned in strategic areas of the country, allowing the distribution of financial products and services according to the needs of the attended population. The network will also allow the distribution of governmental supports, even in regions difficult to access. • BANSEFI has considered the design of a network of networks based on Internet, which will facilitate the access to all of the products and services in almost any part of the country. • As well, it will allow to centralize the information, for a better decision-taking process and it will facilitate the supervisory tasks.

11. IV. Perspectives MICROBANKINGSECTOR • The enforcement of the Microbanking Law implies the start of a consolidation process. • There will be entities which are able to adjust their operation without problems, in accordance to requirements of regulations established in the Law, • Other entities will require support in order to adjust their operation to the Law, and will have to merge or even to exit the system and stop offering Microbanking products and services. • During the transformation process, technical assistance will be offered to the entities, with support of international experts, according to standards established with CNBV. • The considered design of Microbanking sector allows to take advantage of the successful experiences observed in other countries: • To keep the presence of efficient financial intermediaries linked to their communities. • To benefit of scale economies which arise of the organizations in federations and of the products and services which will be offered by BANSEFI.

12. IV. Perspectives… MICROBANKINGSECTOR • The transformation and formalization of the Microbanking sector will contribute to the development of a deep and complete financial system, which will allow to offer financial products and services to the majority of the population. • The technical advisory, development of human capital, provision of financial complementary services and the access to advanced technology, all of them linked to adequate regulation and supervision, will be of great importance for building solid basis for developing and expanding the Microbanking sector. • The System’s future viability depends on the foundations in which it is supported. These basis must be solid and institutional. The main foundation is the ordered development of intermediaries specialized in Microbanking. • The role that Federal Government has to play must be centered in: • The supply of an adequate regulatory framework, that supports the security and efficiency of the System, and • The provision of support on infrastructure and technical assistance to intermediaries in order to strengthen their efficiency and capacities.

13. Biography of the speaker Aarón Silva is Deputy General Director for Strategic Planning and Evaluation in the Bank of National Savings and Financial Services in Mexico, formerly Mexican Trust for National Savings(Patronato del Ahorro Nacional, PAHNAL). From December 1999 to February 2001, he was Deputy General Director for Financial Regulation and Popular Banking in the Mexican Ministry of Finance and Public Credit. In 1995-1999 Silva was Director of Accounting Projects at the Mexican National Banking and Securities Commission, having been its Director of Special Projects previously.