National Savings and Financial Services BankNational Savings and Financial Services Bank (BANSEFI)(BANSEFI)

““Public Banks in latin America: Myths and Realities”Public Banks in latin America: Myths and Realities”Interamerican Development BankInteramerican Development Bank

Washington, D.CWashington, D.C

February, 2005February, 2005

In Developing Countries...

• Formal financial systems are characterized by lack of depth, leaving the majority of the population without access to financial services.

• Consequently, low-income households use informal financial markets, that functions with high interest rates and no regulations, which makes transactions insecure.

• This situation has limited the growth of the productive activities, as well as the economic development at the regional level. Additionally, it becomes an obstacle to alleviate poverty.

• In order to address this problem developing countries have opted for two formal solutions.

1) Market Solution trough the traditional financial sector.⇒2) State Intervention by creating development banks or targeted funds⇒

• None of these options have been able to overcome this market failure and thus complete and deepen the financial system, therefore the demand for financial services for the poor remains unsatisfied.

In México…

• Both, the market and the state intervention models have not been able to cope with the challenge to deepen the financial system.

• This situation generates the creation of multiple entities with different legal status aiming at serving the demand for financial services of the poor. Many of these have been in the market for more that 50 years and most of them have not been regulated and supervised by the financial authorities.

• Thus the semi-informal solution has had a life of its own and has marginally been able to attend the demand.

• The Sector is formed by more than 480 privately or collectively owned financial intermediaries, strongly linked to their communities.

Mainlylarge

and medium sized companies, and

individuals with high tomedium income

Small- and medium-sized enterprises and individuals with

medium to low income

Self-employed/ populationand micro-enterprises

• Commercial Banking• Development banking

• Other intermediaries

TRADITIONAL BANKING

• Microbanking institutions

• Microfinance institutions

SOCIAL BANKING

Currentlyunattended

Income pyramid of the Mexican population

Currentlyunattended

Implementation of Social Banking will cover for actual market failures

The Creation of the Social Bank

• President Fox Administration, with the help of Congress, design a Public Policy in order to transform the semi-informal financial sector into an opportunity the deepen the financial system.

• This policy includes the following:

– Legislative action by Congress in order to approve an adequate Legal and Regulatory framework according to international standards.

– Creation by a law approved by Congress of a Developing Bank (BANSEFI) as the state vehicle to promote and coordinate the transformation of the semi-formal sector.

– Governmental temporary investment through fiscal transferences in order to strengthen and upscale the institutional capacity of the sector:

• Technical Assistance• Training• Technological Platform• Network Creation: L@ Red de la Gente• Communications Campaign

This legal framework aids achieving a new model

URBAN AND RURAL COMMUNITIES URBAN AND RURAL COMMUNITIES

Branches

Entities

Integral Financial Services

Savingsand

productdistributi

on

SLC SLC P F P P F P

FEDERATION FEDERATION

CONFEDERATION

L@Red de la Gente

MIGRANTSMIGRANTS

DEVELOPMENT BANKSDEVELOPMENT BANKS

SLC = Savings and Loans Cooperative; PFP = Popular Financial Partnership (Joint-Stock Company)

BaseEntities

CentralEntities

and Subsidiaries

The role of BANSEFI: Banking the unbanked

In order to support and coordinate the development of the Microfinance Sector, in November, 2001, the National Savings Patronage (PAHNAL) was transformed into the National Savings and Financial Services Bank (BANSEFI) to achieve three objectives.

Promote Savings

Coordinating Government AidBecoming the Second Tier Bank of the Microfinance Sector

• Since the transformation of PANHAL into BANSEFI (January 2001), savings account has increased from 850,000 to more than 3 millions in December 2004 (253%).

• BANSEFI network includes 545 branches, half of it located in places that the presence of the Commercial Banks is minimum or inexistence.

• In order to promote saving behavior, an account can be open with $5 USD, no fees are charged and market interest rates are paid.

0

200

400

600

800

1000

1200

1400

1600

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

1800

2000

2004

Growth 253%

220024002600

28003000

Promoting a Savings Culture

• BANSEFI distributes through its branches and L@ Red de la Gente payments from the Federal Government programs (Oportunidades and Procampo), to the beneficiaries in order to guarantee the transparency in resource distribution of the programs and promote the bancarization of the population.

• The mechanics of the operation start with opening a savings account in BANSEFI.

• “Oportunidades” implemented by SEDESOL, has been a successful program that aims at providing health, nourishment and educational support for 5 million of the poorest families. In December, 2004, 1,180,000 saving accounts had been opened, and 1,189,211 families recieve cash payments through BANSEFI.

• “Jovenes con Oportunidades”: Students that finished high school through the support of “Oportunidades” received and additional government support up to 300 USD by opening a savings account that can be used to continue their studies or in other productive alternatives.

• A similar mechanism is used by “Procampo”, which is a program addressed to aid farmers. More than 230 thousand farmers received their payment through a bank account in 2004.

• As a result, recipients of Mexican social policy are introduced into the use of formal financial products, most of them for the first time.

Banking the population through government programs

Bansefi has established agreements with the principal Housing Institutes in the country to promote savings to obtain a mortage loan.

10

5

0

Minimum Wage (mw)

INFONAVITAffiliates

Income > 10 mw

10

5

0Formal and

InformalSector

Income

Access to Housing Savings

Income > 5 mw Income 2-5 mw Income 2-10 mw

Any Person FOVISSSTEAffiliates

• In all these products a savings account is used to trigger the access to a mortage loan.

The fact that Congress has approved laws to transform the sector and that the Government is actively supporting this transformation and promoting its development, has attracted the international community to participate in this endeavor.

1. FOMIN/BID Grant 3.5 Million USD.

This grant triggered the project when it was in the design stage.

2. World Bank Credit 140 Million USD Credit to support the transformation of the sector and to strength its institutional

capacity. The Government is responsible for the loan which represents a fiscal transfer to the sector.

3. Germany Government Grant 1 Million Euros Technical Assistance for the Federations.

International Cooperation

Second TierBank

L@Redde la

Gente

Pension Fund“Afore Popular”

IT Plataform“Integra-T”

Development of Central Entities

Government Financial Support trough fiscal transfer

Technical Assistance

Base Entities

Support and Promote the Sustentability and DevelopmentTransformation

Strategic Plan

BANSEFI is coordinating government aid in many areas

1. Technical assistance. Technical assistance is being offered to help on the transformation of the

Federations and their members. 2. Training. Different types of courses and training is being offered in order to build human

capital.

3. Economic and Social Impact Evaluation Project.

4. Communications campaign.

Technical Assistance

Prior to authorizing the transformation of an Entity under the law, there was the need to evaluate their financial condition and their capacity to comply with the regulation. This is being done by the Federation’s Supervisory Committee with the assistance of an external expert.

The evaluation standards and diagnose methodologies include financial, operations and governance indicators related to the legal framework and its regulation. Evaluation standards classify the financial intermediaries as follows:

A. Intermediaries that are ready to be authorized;

B. Intermediaries that require an improvement program to be authorized;

C. Intermediaries that will have to split, to merge or to reorganize their structures and internal control; and,

D. Intermediaries that will have to be liquidated in an orderly manner.

Technical Assistance to the Federations

Technical Assistance

28 Feb 200615 Sep 20051st Oct 2005

9 Jun 20051st Feb 2005

1st Feb 2005

CLOSING DATE

1st Mar 2004

15 Sep 20031st Oct 2003

9 Jun 20031st Feb 2003

1st Feb 2003

STARTING DATE

Planet Finance

DGRVWOCCUDIDSBFICSBFICCONSULTANT

2,12299213,6226,3547493,994ASSETS (MILLION PESOS)

235,559151,6751,007,225627,778180,217413,283TOTAL MEMBERS

42OccidenteFortaleza

SocialAlianza

Mex.AMACREP

Indep.

25FAP

Sistema CooperaIndep.

35AlianzaFMEACIndep.

60FINE

Victoria Popular

Centro SurFedRural

Indep.

157Cajas

Solidarias

61Unisap Noreste

Microbanks / FEDERATIONS

6Jalisco,

Michoacán and

Guanajuato

5Oaxaca and

Yucatán

4Guanajuato

and Michoacán

3Querétaro and D.F.

2Cajas

Solidarias(national)

1Jalisco and Nuevo LeónProject

No. Institutions 391No. Federations 14

No. Members 2,615,737Total Assets (Mill Pesos) 27,833

Technical Assistance

Technical Assistance

“L@Red de la Gente” is a commercial alliance between BANSEFI and the regulated intermediaries of the Microfinance Sector that join voluntarily. Today there are 61 members with 1,063 branches.

The location of these branches is in urban and rural areas, where commercial banks usually have no presence.

L@ Red de la Gente

Creating a Commercialization Network

CO

MM

UN

ITIE

SC

OM

MU

NIT

IES

REMITTANCES

GOVERNMENT PROGRAMS

Oportunidades, Procampo

Social Security

HOUSING

OTHER PROGRAMSEducation

Savings Banks

Programs and products distributed throughPrograms and products distributed throughL@Red de la GenteL@Red de la Gente

L@ Red de la Gente

OBJECTIVE: Design and development of the technological infrastructure and the adequate systems according to the needs of the Microfinance Sector and BANSEFI, in order to be able to offer financial products and services in an efficient way.

• The design of the technological platform will allow the Microfinance Sector to operate in network and hence to minimize costs of operation and supervision improve the decision making processes .

• The parametrizable core banking system will allow to the Entities to grow their portfolio of products in a very simple way.

• The technological design is based in the autonomy of the institutions and is scalable according to their needs.

• The technology services will be provided mostly through outsourcers.

Right now we are in the implementation stage in BANSEFI and two entities and there are 60 more ready to start the roll out.

Integra T – Technological Platform

COMPONENTS: The Technological Platform that BANSEFI offers to the Microfinance Sector is integrated by:

Shared with the necessary functionality to manage its products, clients, branches, internal operations, planning and compliance with the regulation. (Temenos Core Banking)

These services include personal computers or terminals, printing and additional devices for security, image capture, cash dispensers, etc. according to the needs of each intermediary. (Dell Computer)

Shared to contain the systems and the data of each intermediary securely and independently. (ATOS Origin)

Network that interconnects all the intermediaries with their branches and external institutions with which they will collaborate for commercial or regulatory issues. (Global SAT)

Integra T – Technological Platform

Applicative System

Operation & Technological

Support

Data Center

Communication Network

Saving and Loans Entities

Working Plan

A B C D

Merge or Acquisition

Liquidation

Savings recovery

FEDERATIONTechnical assistance

and TrainingSupervision Committes

LA RED DE LA GENTE

• Netwok creation

• Generating additional income

• Increasing number of product and services

• Penetración de mercadoIT PLATFORM: “Integra T”

• Reducing costs

• Improving efficiency

• Improving supervision

• Increasing services

General Scheme to Assist the Transformation

BANSEFI is being transformed into a Second Tier Bank for microfinance institutions. In this regard Bansefi should be offering financial services to this institutions in order to promote the following:

– Increasing their income by expanding the range of products available to their customers and members;

– Reducing their costs of regulation and operation; and

– Improving management efficiency and the quality of their services.

The cost of the products and services offered by BANSEFI must be competitive since the institutions will be free to choose their providers.

The products that the Bank will offer are link to the new technological platform such as: Debit Cards, Credit Cards, Checks, Electronic Transfers, Clearing House Services, F/X, Derivatives. As well as, liquidity management, consulting in ALM, risk management and private banking.

Second Tier Bank

Wide coverageIncluding theInformal sector

– L@Red de la Gente” has a coverage of almost 600 cities, with more than 1.000 branches, anticipating to reach the 1.500 branches in the near future.

First gradeInformationand betterservice

– Given the proximity of the final customer with “L@Red de la Gente”, this “Afore” will be able to supply customized attention, service and better information on the Pension Retirement System, giving the market a new alternative to save for their retirement.

Pension Fund “Afore Popular”

Objective: To offer a pension plan for our clients and the informal sectors that have not had acces to them, including emigrants abroad, through their remittances.

Next Steps

• The institucionalization of BANSEFI is a key factor for the development of the sector.

• To achieve this, it is necessary:

• To assure financial self-sustainability of the Institution.

• To strengthen the transformation process of the entities in the sector.

• As the Microfinance Sector is transform according to the law, the participation of the Savings and Loans Entities in the capital of BANSEFI will be promoted, as well as of the successful Savings Banks in other countries and of the multinational organizations.

Final Remarks

1. The Social Banking System is destined to play an strategic role in the future Mexican Financial System.

2. The new legal framework is the first step to give certainty to depositors and investors participating in the Sector.

3. The Sector has a distribution network well positioned to cover the areas where commercial banks have no presence or knowledge of the local markets. This will be a powerful tool to bank the unbanked.

4. The incorporation of technology, technichal assistance, regulatory compliance and best governance practices will be key drivers in the Sector.

5. The transformation and formalization of the Sector will contribute to deepen and complete the Mexican Financial System, allowing more people –particularly those with low levels of income– to have access to financial products and services and hence to new opportunities to promote their development.