After the market overviews for Kenya and Uzbekistan, we’d now like to share insights about Mexico. We’ll look at the overall picture of Mexico, as well as cover how the country and the local lending companies have handled the pandemic. In addition to official sources, we’re adding our due diligence findings to the market overview.
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Mexico is famous for numerous things, including the Mayan temples, production of avocados, Mexican tacos and tequila, the “day of the dead” festival, and more.
Mexico is the 11th largest economy in the world with a GDP that crosses the $1 trillion mark. Meanwhile, Mexico has the second-highest degree of economic disparity between the extremely poor and the extremely rich.
The country is also the third-biggest importer for its neighbour to the north, the USA, right after Canada in the second place. All three countries are a part of the North American Free Trade Agreement (NAFTA) that has a history starting from 1994.
While Mexico is the 10th largest country in terms of population, it’s also one of the leading countries in cash use. Most of the population is underbanked or unbanked, with limited or no access to financial services offered by banks.
According to the Economist10, as of December 2020, only 37% of Mexicans over 15 years old have a bank account and some 86% of all payments in Mexico are in cash. Although it’s not stated officially, it is believed that the problem with financial exclusion in Mexico is associated with banks not being interested or incentivized to serve the needs of poor customers.11
With such a huge part of the population excluded from the regular financial system, it’s no wonder the fintech lending space in Mexico and the rest of Latin America is growing rapidly, with large investments flowing in from abroad. According to Addem Capital12, a total of $382.1 million has been invested in the top 15 equity rounds of Mexican fintech lenders from 2016 to 2020, with some of the investments coming from prominent US institutions such as Goldman Sachs.
Apart from credit cards, the most popular alternative lending products are short-term loans that are readily available to many borrowers. On Mintos, currently, the only active lending company offering to invest in short-term loans in Mexico is Sun Finance.
Many Mexicans have been using short-term loans and credit cards for a long time. On the other hand, vehicle leasing is something that has gained interest in recent years. The year 2019 was a good example when annual vehicle sales and financing dropped by 7.7%, whereas the vehicle leasing market grew by 8%13. Also, vehicle leasing companies are investing significant efforts in educating borrowers (mostly legal entities) on the benefits of a lease.
In Mexico, non-bank financial entities, including lenders, are called SOFOMs (Sociedad Financiera de Objeto Múltiple). A SOFOM is a special type of Mexican financial entity which can grant loans, finance leasing operations, and provide factoring services, plus act as a trustee in certain transactions.15 SOFOMs frequently serve as SMEs’ first source of formal credit.16
As of January 2021, 1 750 SOFOMs with a combined loan book of 1.2 trillion pesos ($57.2 billion) were registered in the country. SOFOMs are strongly regulated for AML purposes. They must comply with specific internal structures, systems, certifications, training, and procedures for any transaction.15
Mexico has a special system set up for lenders called Fideicomisos (Trusts). It’s widely used by alternative lending companies in Mexico and fully protects the creditors, who can avoid all the risks related to the funded claims.
Upon financing, the lender transfers the claim or collection rights to the Trust, notifying the creditor as a beneficiary. This notification is irrevocable and is stronger than a pledge over the portfolio, as the Trust collects all the borrower payments and has already reassigned the title. In case of the lending company’s default, the title is upon notice forwarded to the creditor, whereas the pledge would need to be executed in court.
As part of our due diligence, we studied the debt recovery market and concluded that Mexico has a well-established external debt collection (ECD) service market with a legal regulatory framework in place. More than 50 ECDs operate across the country, handling large volumes of portfolios.
As our due diligence process has identified, it is a common aim to be employed by a federal agency or the government, and people are highly unlikely to leave such a job later on. A job in the public sector opens up an opportunity to qualify for payroll loans that are often used to buy the everyday necessities of living and taking care of family.
A public sector job guarantees a safe retirement pension backed by the federal or state government, and employers such as hospitals, schools, and similar have contracts with the lenders. Lenders and retail investors who invest in such loans benefit from predictable repayments, meaning that the repayment of the loan is deducted at the source and, as long as the person receives salary or pension, the payroll lender will always get its money back first. Currently, only Dinerito on Mintos offers such an investment opportunity in Mexico.
During 2020, Mexico’s pandemic-hit economy shrank by 8.5%.17 Also, the local currency, the Mexican peso, plummeted by 24% once the Covid-19 pandemic began.18 In spite of such an economic fall, there was no formal country-wide lending moratorium for Mexico, only implicit moratorium measures.
Some banks offered deferral of principal and interest payments for loans, and fintech initiatives were being launched or put to the front to alleviate the liquidity problems of entrepreneurs. For example, Mexican fintech startup “Credijusto” raised $100 million (€92 million) to extend the loan offer for small and medium businesses.
Similarly to banks, some lending companies allowed some of their clients to extend their repayment schedules and only pay interest, so they could help their clients to overcome difficulties they were facing at that time This helped to control the non-performing loans (NPL) ratio. As a result, many clients were able to return to their original repayment schedules. Other companies were facing more difficult times, e.g. it took considerably longer for ID Finance Mexico to get back on track with regular borrowers’ repayment schedules.
Today, all lending companies operating in Mexico and offering loans for investment on Mintos have no pending payments or late commitments towards investors on Mintos.
If we look outside of the lending sector, the tourism industry in Mexico has already seen growth as regional authorities and tourism associations stepped in to support the local businesses. In the midst of the pandemic, Mexico was ranked third among the world’s most visited countries, after Italy and France.20
During the first months of the 2020 Covid-19 pandemic, the unemployment rate in Mexico surged from 3.3% in March 2020 to 5.5% in June 2020.14
As we’ve learned from the due diligence process we’re having with potential partners from Mexico, many people turned to entrepreneurship due to a job loss. Often, entrepreneurship meant a taco stand or a family-run neighborhood corner store.
Many such entrepreneurs are women, as there’s a significant gender bias in the country, making it easier for men to get employed. This has given rise to lenders such as Podemos Progresar that issue loans to women entrepreneurs only. These loans serve as working capital to buy inventory or expand the business. The loans are typically issued to groups of around 10 women who cross-guarantee their repayments. Podemos is also working to educate these women on entrepreneurship and finance.
Mexico is very different from the European markets. With problems such as financial exclusion, entering the Mexican lending space often comes with its challenges for foreign lending companies.
However, as many foreign companies have adapted well and as there’s an ever-increasing demand for funding also from local lenders, we expect to onboard even more Mexican lending companies to Mintos in the future.
We hope you found this market overview relevant for your investing experience on Mintos. If you have any feedback, feel free to share your thoughts in the Mintos Community.