NEWS WIRE: Banco Azteca Exports Microfinance Formula from Mexico Southward

Original article available here.

LONDON, July 1 – Banco Azteca has achieved stellar growth with its microfinance formula in Mexico and is now exporting it across Latin America. Rodrigo Amaral reports.

Microfinance is a powerful tool to lift deprived populations out of poverty. Mexico’s Banco Azteca has shown that it can also boost a bank’s results. The microfinance specialist trebled its profits in 2007 – an impressive result, although not out of line in the context of its short but eventful life.

In a little more than five years of existence, Azteca’s rates of growth have been stellar and the bank has amassed 1500 branches around the country, becoming Mexico’s third largest banking network. Azteca has also made forays into other Latin American markets and now wants to conquer the region’s biggest prize, Brazil.

Banco Azteca was created in October 2002 by Grupo Salinas, one of the largest Mexican business groups. Since the beginning, it has targeted potential clients whose earnings start at USD 200 a month and do not go much further than that. The group estimates that this segment of clients represents 70 percent of the more than 100 million-strong Mexican population and most of them were not seen by traditional banks as worth the effort. Not surprisingly, Banco Azteca says that almost half of its clients are unable to present proof of income.

Niche and expertise

Mexico’s low bancarisation levels of less than 30 percent at the time created the opportunity; the expertise came from Grupo Salina’s long experience of doing business with popular segments via its mass retail subsidiary. “The group had been providing credit for the poor for over four generations, so the creation of the bank was a natural step,” Luis Niño de Rivera, vice-chairman of Banco Azteca, tells The Banker.

Grupo Salinas, which has been in existence for more than 100 years and is headed by controversial entrepreneur Ricardo Salinas Pliego, also has interests in the media and other sectors, and posted a turnover of more than USD 6 billion in 2006.

Product expansion

Banco Azteca started granting credits of up to MXN 250 (USD 23) to finance the acquisition of consumer goods, as well as personal loans of up to three times that value. The range of products quickly expanded, with current accounts, credit cards, telephone banking and internet banking following suit. A number of additional financial products, such as pensions and insurance, came next. Today, even mortgage and automobile loans are offered.

Mr Niño de Rivera argues that the secret to making money from people who do not have much of it themselves is to adapt banking products and procedures to the market. At Banco Azteca, clients can open an account with a deposit of just MXN 50, paying no fees. Mortgage loans are provided for the acquisition of houses subsidised by the government. Personal loans are paid in weekly instalments, so collection must be very efficient. In cases where consumer goods are confiscated due to lack of payment, they are resold through a network of shops that belong to the Elektra Group, part of Grupo Salinas.

Consumer groups have complained that interest rates charged by Banco Azteca and other microfinance companies in Mexico are well above the market average, and accused them of exploiting the poor. Mr Niño de Rivera retorts that interests are higher because the same applies to the risk faced by the bank. Delinquency rates are much higher than the market average, standing at more than 12 percent last September in the most recent statistics released by CNBV, Mexico’s financial regulator. But Mr Ninõ de Rivera points out that the number of loans deemed irrecoverable is much lower, at 3 percent.

In 2007, the bank posted a 196 percent net income increase, reaching MXN 664 million, while total deposits closed the year at MXN 44.3 billion after a 13 percent hike. Between 12,000 and 14,000 new credit operations are processed every day, with the number reaching 25,000 in peak weeks. Costs have to stay down for the sums to work, so Banco Azteca has invested more than USD 200 million in technology in the past five years to increase operational efficiency, Mr Niño de Rivera says.

The vice-chairman believes that the formula is a powerful one and, with a few adaptations, can be replicated elsewhere. “Our main goal now is to consolidate our growth in Latin America,” he says.

The bank already operates in Panama, Guatemala and Honduras, but more ambitious projects are now taking off. It is opening about 120 branches in Peru and, perhaps most daringly, is starting operations in Brazil, with its headquarters in the poor north-eastern state of Pernambuco. Argentina, Uruguay and Paraguay are next on the list.

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