Microlending in Mexico: Still Extortionate

Includes: C, HSBC, WMT
by: Felix Salmon

BusinessWeek has a big (3,000-word) story on Mexican microlending, by Keith Epstein and Geri Smith. It's heavy on the anecdote, and it comes down hard on one lender in particular: Ricardo Salinas's Banco Azteca, which specializes in consumer finance. I'm no fan of Salinas, who's a very shady businessman indeed. But I find it interesting that BusinessWeek concentrated on Azteca.

It's well known that Azteca is extremely profitable and charges very high rates of interest – that's why everybody from Wal-Mart (NYSE:WMT) to HSBC (HBC) is trying to muscle in on Azteca's territory and enter the same market. But the thing is, Azteca never really claims to be a microlender in the way that Compartamos, say, does. Azteca is unashamedly a for-profit institution, and doesn't even attempt to justify its activities by pointing to the way in which they help the poor.

Meanwhile, Compartamos, which was founded with money from the likes of CGAP, charges just as high interest rates, but dresses them up in all manner of development and social-welfare frippery.

This is why I welcome Wal-Mart's move into the Mexican banking system: it's the only way that interest rates are really going to fall. That said, BusinessWeek's example of a Wal-Mart television-finance plan with an APR of 86% does give me pause: it might be that Wal-Mart becomes just another usurer, rather than a real force for driving lending rates down to sensible levels.

Where I have no faith at all is in the ability of the big foreign-owned Mexican banks to help solve the usury problem. Citi's (NYSE:C) Banamex has its Crédito Familiar brand; HSBC has a 20% stake in Financiera Independencia. Both are an entrenched part of the Mexican banking system, where there has historically been very little competition on retail lending rates: there's a very small number of banks, and consumers find it impossible to find one which lends at a much lower rate than the others.

If there is any hope, then, it lies either with Wal-Mart or else with Mexico's dysfunctional legislature, which could presumably cap interest rates were it so inclined. I'm not holding my breath.

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