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Micro-entrepreneurs in Mexico are turning away from banks to obtain loans

Micro-entrepreneurs in Mexico opt for financing with Asofom, fintech companies and pawn shops rather than banks, due to high interest rates and slow response time.In the case of BBVA Mexico, the largest bank in the country by number of assets and clients, the interest rate for microcredits was 31.65% per month on average, according to figures from the Bank of Mexico (Banxico).

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Despite the economic crisis and the fact that the interest rate of the Bank of Mexico (Banxico) is at low levels, the micro-entrepreneurs face high costs in order to obtain financing from traditional banks. However, far from giving up, entrepreneurs are looking for other ways to obtain credit, with fintech companies, Asofom, and even pawn shops serving this market.

The main reasons why they turn to these options range from shorter processes to obtain financing to lower interest rates.

For the Asociación de Sociedades Financieras de Objeto Múltiple (Asofom), this combination of factors was an opportunity for its members to achieve greater penetration in their markets during the pandemic.

“Asofom have processes closer to the entrepreneurs, we try to understand their business models, we know what their processes are like and, based on the business, we create tailor-made products. This has allowed us to have more SMEs (as clients),” said Fernando Padilla, former president of Asofom.

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Other companies, such as Monte de Piedad, also serve micro-businesses, mainly those led by women.

“In 2020 there were small and large entrepreneurs who came to us in search of rescuing their businesses and making some expenses; I can tell you that two out of every three loans historically in Monte de Piedad are aimed at small and medium-sized businesses,” Luis Enrique Padilla, director of Pledge Operations at Nacional Monte de Piedad, explained in an interview.

The executive commented that women mainly lead businesses such as coffee shops, esthetics or laundries. In 2020, the average amount granted per pledge was 3,800 pesos due to an increase in the price of gold; they also launched a program where frequent customers who recover their pledges in a timely manner also get more money at a lower rate.

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Monte de Piedad’s average weighted monthly rate was 4.25% in 2020 and compliant customers were given up to 97% of the value of the pledge at a monthly rate of 2%, which was attractive to customers.

In the case of BBVA Mexico, the largest bank in the country by number of assets and clients, the interest rate for microcredits was 31.65% per month on average, according to figures from the Bank of Mexico (Banxico). For Citbanamex, the monthly rate was 24.86% at the end of 2020.

In March 2020, the federal government issued a regulation to provide banks with facilities to help their clients

Banks that go to the base of the pyramid, such as Compartamos, the rate increases to 82.03% monthly, BanCoppel has a rate of 60.96% and Banco Azteca 59.21%, according to Banxico figures. For Sofomes such as Mifel or Consubanco, the rate becomes 23.40% and 49.79% per month, respectively.

Another option that micro-entrepreneurs are finding are fintech companies such as Pagaloop, which offers financing according to the credit limit that the micro-entrepreneur has on his or her credit card.

This company’s rate is 4.7% plus VAT per transaction and according to Alejandro Servín, co-founder of the firm, MSME owners prefer them because of the fast response time with which they obtain the credit.

The banks have said through the Association that represents them, the ABM, that Mexican micro-entrepreneurs are the ones who have slowed down the demand for credit due to the uncertainty of not knowing if they will be able to meet their payments in a timely manner.

In March 2020, the federal government issued a regulation to provide banks with facilities to help their clients. The measures consisted of credit deferral plans for up to six months. The most recent figures from the Association of Banks of Mexico (ABM) highlight that 8.6 million people benefited from this scheme for more than 1.1 billion pesos.

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For Sofomes, loans could be restructured beyond six or eight months due to the closeness they maintain with their clients, while fintechs could see month by month how their borrowers were performing.

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(Featured image by pasja1000 via Pixabay)

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First published in EXPANSION, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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Anne Kings is a reporter for the financial sector, often tackling Wall Street and shareholders' interests. She also covers the intersection of media and technology, and delves into interesting topics on entertainment. Sometimes she also writes about the cannabis industry, in particular CBD and hemp. She is currently based in New York.