15 Years After Learning About Mexico's Banking Sector, Many Mexicans Continue to Distrust Banks

As people who follow me on LinkedIn or Twitter know, I am a regular reader of The Economist newspaper. An article occasionally appears that allows me to reflect on a project that I worked in years past.

In 2005 Washington Mutual Inc., a savings bank holding company and the former owner of what was then known as Washington Mutual Bank (WaMu) before its collapse in 2008, retained the consulting services of Global Tactics to evaluate the opportunity to expand to Mexico. During the preceding ten years, WaMu had grown through a series of acquisitions. These acquisitions broadened the bank's presence in California and Texas where a large number of Mexican-American customers or Mexicans working in the United States, the latter of which were remitting millions of dollars to their families in Mexico. While WaMu was generating revenue from remittance fees, the bank's executive managers speculated there may be an opportunity to offer a broader range of financial services in Mexico.

Mexico's gross domestic product (GDP) per capita grew from US$7,718 in 1995 to US$9,161 in 2004, according to the World Bank. Taking advantage of the country's growing wealth, WaMu's executives saw an opportunity to provide services it could offer to customers in Mexico such as personal checking and savings accounts, mortgage loans, and credit to small and medium-size enterprises (SMEs).

As part of our consulting assignment, my colleagues and I made a few trips to Mexico to better understand the country's banking sector. We quickly found that the sector was dominated by a few, but large financial institutions that catered mainly to wealthy Mexicans. And while the country's GDP was growing, a large proportion of personal wealth was held by the few.

What is more, many Mexicans possessed a high level of distrust of banks. This distrust led to a large number of Mexicans to conduct most transactions in cash. Even a large majority of home purchases were transacted in cash. These factors, coupled with the bloated bureaucracy of a seemingly endless number of rules imposed by the Mexican government, led WaMu's executive team not to proceed with its plan to expand into America's southern neighbor.

Fifteen years later, The Economist published an article saying: "For most Mexicans online shopping goes like this: people order their goods on Amazon or Mercado Libre, an Argentine ecommerce site that is Latin America's biggest, but pay in cash at a convenience store. That is no surprise given only 37% of Mexicans over 15 years old have a bank account, according to the World Bank. Some 86% of all payments in Mexico are in cash."

The article further explains that "Mexico is an anomaly both in Latin America and among emerging-economy peers such as Kenya and India. In those places 54%, 82% and 80% of people are banked respectively, despite Mexico being richer. Its GDP per person is close to $20,400, around three to four times higher than in Kenya and India.

"This shortfall is not just inconvenient. Counting cash adds to business costs, and those without accounts have little access to credit, slowing consumption and investment. The good news is that the country is improving financial inclusion, says Pablo Saavedra, who heads the World Bank's Mexico program. Only 27% of Mexicans had an account in 2011, but the pandemic has made the issue 'even more urgent,' he says."

Based on my experience providing strategic consulting services to WaMu, which presented me with the opportunity to learn about Mexico's banking sector, I appreciate the article's findings:

There are several reasons why so few Mexicans have access to financial services. Banks are generally conservative. Condusef, the financial watchdog, says bank fees in Mexico are high, with 30% of banks' income coming from commissions. In rural areas, branches can be hard to reach. Furthermore, banks tend not to be interested in the less well-off: only a fifth of the poorest 20% of Mexicans have accounts. Surveys show many Mexicans do not trust banks. Meanwhile, almost 60% work in the informal sector, where they may receive an inconsistent income, in cash. The lack of access affects some more than others—the poor, rural, women and indigenous people.

Successive Mexican governments have tried to improve access to financial institutions. In 2018, a law was introduced to regulate the fintech industry, which is now booming. Under Andrés Manuel López Obrador (known as AMLO) CoDi, a digital payment system using QR codes and contactless payments was introduced in 2019 while financial literacy was included in the school curriculum in September 2020 (currently schooling is via television during the pandemic). Much still needs to be done to hit the government's goal of 65% of Mexicans having an account by 2024.

The article concludes by noting: "The current low level of financial inclusion is likely to hamper Mexico's economic recovery from covid-19, which has been muted by a failure to control the pandemic. For example, small and medium businesses provide 95% of Mexico's private-sector employment but only 13% have access to formal credit. Under such circumstances 'it is very hard to see how you have a strong recovery,' says Mr Saavedra."

With a population of almost 130 million and the second largest economy in Latin America behind Brazil, I have long been an optimist about the investment and business opportunities in Mexico (a topic of which is the focus of my post, "Mexico's Growing Mobile Economy"). Political leadership, however, has not implemented necessary reforms to stimulate sustainable economic growth. Requiring financial institutions to promote transparency, which will help build public trust, is a start. And reducing red tape that prevents new entrants to challenge incumbents will lead to the deployment of innovative financial services benefiting individuals and SMEs alike.

What are your thoughts about doing business in Mexico? Do you have any recommendations on how Mexican authorities can strengthen its financial services sector?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

'Doing Business 2020' Indicates a Steady Convergence Between Developing and Developed Economies, Particularly in Business Incorporation

A post published on this blog presents a variety of risks when choosing to do international business. Such risks include government effectiveness (does political culture foster strong business environment?), stability (how stable are political institutions?), legal and regulatory (will the legal system safeguard investment?), and tax policy (are taxes low, predictable and transparent?). To help make informed decisions about effectively executing an international growth strategy, my colleagues and I find the World Bank's annual Doing Business report quite useful.

Published on Oct. 24, 2019 using data current as of May 1st, Doing Business 2020, "is the 17th in a series of annual studies measuring the regulations that enhance business activity and those that constrain it. Doing Business presents quantitative indicators on business regulations and the protection of property rights that can be compared across 190 economies—from Afghanistan to Zimbabwe—and over time.

"Doing Business covers 12 areas of business regulation. Ten of these areas—starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency—are included in the ease of doing business score and ease of doing business ranking. Doing Business also measures regulation on employing workers and contracting with the government, which are not included in the ease of doing business score and ranking.

"By documenting changes in regulation in 12 areas of business activity in 190 economies, Doing Business analyzes regulation that encourages efficiency and supports freedom to do business. The data collected by Doing Business address three questions about government. First, when do governments change regulation with a view to developing their private sector? Second, what are the characteristics of reformist governments? Third, what are the effects of regulatory change on different aspects of economic or investment activity? Answering these questions adds to our knowledge of development."

The report's opening paragraph correctly notes:

At its core, regulation is about freedom to do business. Regulation aims to prevent worker mistreatment by greedy employers (regulation of labor), to ensure that roads and bridges do not collapse (regulation of public procurement), and to protect one’s investments (minority shareholder protections). All too often, however, regulation misses its goal, and one inefficiency replaces another, especially in the form of government overreach in business activity. Governments in many economies adopt or maintain regulation that burdens entrepreneurs. Whether by intent or ignorance, such regulation limits entrepreneurs' ability to freely operate a private business. As a result, entrepreneurs resort to informal activity, away from the oversight of regulators and tax collectors, or seek opportunities abroad—or join the ranks of the unemployed. Foreign investors avoid economies that use regulation to manipulate the private sector.

The report's main findings include:

• Doing Business captures 294 regulatory reforms implemented between May 2018 and May 2019. Worldwide, 115 economies made it easier to do business.
• The economies with the most notable improvement in Doing Business 2020 are Saudi Arabia, Jordan, Togo, Bahrain, Tajikistan, Pakistan, Kuwait, China, India and Nigeria (see image below). In 2018/19, these countries implemented one-fifth of all the reforms recorded worldwide.
• Economies in Sub-Saharan Africa and Latin America and the Caribbean continue to lag in terms of reforms. Only two Sub-Saharan African economies rank in the top 50 on the ease of doing business; no Latin American economies rank in this group.
• Doing Business 2020 continues to show a steady convergence between developing and developed economies, especially in the area of business incorporation. Since 2003/04, 178 economies have implemented 722 reforms captured by the starting a business indicator set, either reducing or eliminating barriers to entry.
• Those economies that score well on Doing Business tend to benefit from higher levels of entrepreneurial activity and lower levels of corruption.
• While economic reasons are the main drivers of reform, the advancement of neighboring economies provides an additional impetus for regulatory change.
• Twenty-six economies became less business-friendly, introducing 31 regulatory changes that stifle efficiency and quality of regulation.

How does this report help you implement your business' international growth strategy?

Aaron Rose is an advisor to talented entrepreneurs and co-founder of great companies. He also serves as the editor of Solutions for a Sustainable World.

Vote Now for Your Favorite App in World Bank Competition

The World Bank announced on 31 January 2011 that it has opened public voting on the applications submitted to the Apps for Development Competition, a challenge issued to software developers by the World Bank to get new perspectives in identifying solutions to development problems. The Popular Choice Award will be determined by public vote and the winner will receive a cash award and a feature on the World Bank website. The competition is part of the Bank’s Open Data Initiative, which last year released for free and for the first time the Bank’s catalogue of development data.

Applications were submitted from 36 countries across every continent with more than half came from Africa, Asia, and Latin America. The apps use a wide variety of World Bank data, including information about health, the environment, children out of school, agricultural land data, gender statistics, population growth, and mortality rate, among other datasets. The 107 apps came in response to the World Bank’s global call for apps in October 2010 to help find solutions to today's development challenges and to raise awareness of the Millennium Development Goals.

The 107 eligible entries are now available for use, review and voting on the Apps for Development website through 28 February 2011. The apps created range from SMS services to apps for the Apple iPhone, and include games aimed at children, as well as educational and statistical modeling tools. The winners will be announced at the joint World Bank/International Monetary Fund Spring Meetings in April 2011.

Aside from the Popular Choice Award, an expert judging panel will select winners for the First, Second, and Third Prizes, five Honorable Mentions, and a Large Organization Recognition Award. A total of $45,000 is available in prizes. The expert judging panel includes such technology gurus as Craig Newmark of Craigslist, Kannan Pashupathy from Google, and Ory Okolloh, co-founder of Ushahidi. Apps were also submitted by large technology companies, although these cannot be considered for prizes.

So go ahead, vote for your favorite and share in the comment section below what which app you voted for and why.

Workshop Focuses on Mobile Innovations in Developing World

Via webcast, I attended a workshop, "Mobile Innovations for Social and Economic Transformation," organized by the World Bank e-Development Thematic Group (e-TG), whose mission is to "promote the efficient use of ICT in development and World Bank operations by facilitating knowledge sharing on good practices in e-development, and an ongoing dialogue amongst a large and diverse community of practitioners." e-TG said the aim of this event was "to raise awareness of the transformational role mobile technologies can play in improving service delivery, efficiency and transparency by show-casing mobile-enabled innovations in a number of sectors and identifying emerging lessons learned and ways to scale up for achieving operational efficiencies and development impact." (Photo courtesy of Mobiles for Malawi)

This workshop addressed essential topics such as the mobile innovations in financial services, health, education, and governance, and mobile applications in agriculture and rural development. A detailed summary of the presentations may be found on ICT4D.at's blog. (I understand that Florian Sturm of ICT4D.at was providing the summary remotely from an Internet cafe in Ghana. Thank you, Florian.)

While the workshop covered a variety of topics, there were a few common conclusions. Although the capacity to utilize mobile broadband may be cost prohibitive in certain markets, mobile technology is a sustainable solution to educating people, providing medical diagnosis and increasing access to medical treatments, and developing an e-commerce solution to access financial capital and facilitate private sector development. Many of the presentations suggested increased investments to teach people the skills necessary to use and capitalize on the benefits of mobile technology and build the technological capacity required for a vastly expanding marketplace. As human and system capacity grows, the cost of mobile content delivery and devices required to utilize the content will continue to drop. In my opinion, developing nations must continue to deregulate the telecom sector and encourage private sector development including fair and equitable private-public partnerships.

The presenters agreed that the technology currently exists for mobile solutions, but there must be a focus on developing applications and refining business models. Although several successful projects were presented, there were general complaints that often such projects do not bypass the "pilot" stage and accordingly, do not achieve sustainability. Project scalability is another challenge people are encountering in implementing mobile solutions. According to the presentations and subsequent audience questions, impact evaluations and information sharing on project failures can help overcome these problems. Lastly, there is a need to further develop private-public partnerships and identifying viable and committed partners for implementing mobile solutions.

As the Internet has become a regular component to the daily lives of people living in developed countries, a digital divide has grown wide for those living in developing nations. However, over the past few years, I have seen innovative solutions to bridging the digital divide in the world’s most undeveloped nations. While there continues to be challenges in scalability, mobile technologies have and will continue to provide sustainable solutions. I commend the World Bank e-Development Thematic Group for organizing this relevant and informative workshop.

Supporting Innovative Solutions on Climate Adaptation

The World Bank recently announced its Development Marketplace competitive grant program (DM09). "The Development Marketplace is a competitive grant program administered by the World Bank. The 2009 global competition is funded by the Global Environment Facility (GEF) and additional DM partners." An award pool of more than US$5 million will support 20-25 projects. DM09 aims to identify "innovative, early-stage projects addressing climate adaptation. The DM is a unique opportunity to turn your idea into reality; if selected your project could receive up to US$200,000 in grant funding for implementation over two years."

The grant competition on climate adaptation focuses on three sub-themes:

1. Resilience of Indigenous Peoples Communities to Climate Risks--promote Indigenous Peoples communities' and organizations' development of innovative ways to conserve agriculture, land, water and soil management practices; apply innovative adaptation plans and communication strategies based on Indigenous systems to accelerate learning and knowledge sharing on climate change adaptation;
2. Climate Risk Management with Multiple Benefits--empower poor communities to test innovative, low-cost strategies to spread climate risk and forge innovative partnerships that increase vulnerable communities' access to climate risk management knowledge, information, and services that produces multiple social and environmental benefits; use innovative means to help educate communities on climate risks that leads to empowerment for action.; and
3. Climate Adaptation and Disaster Risk Management--develop innovative arrangements that diffuse climate-related disaster risks faced by the poor and vulnerable; create innovative low-cost approaches for spatial planning for climate resilience and for construction of housing and local infrastructure resistant to climate-related disasters; improve the capacity of local communities to access and use multi-hazard risk information to enhance their early warning systems and other community-based responses to climatic extremes and climate change.

Who can apply? Special eligibility criteria apply to sub-theme one. For sub-themes two and three, non-governmental organizations, civil society organizations, foundations and development agencies based in the country of implementation may apply without additional partners. All other groups such as the private sector must partner with at least one organization; the type of partnership varies across types of applicants. Individuals cannot apply. Click here for more details on partnerships and eligibility criteria or check the guidelines. E-mail any questions not covered in the website to dminfo@worldbank.org.

All proposals must be submitted online. Proposals must be submitted through the DM online application form available on the DM website. Only proposals received before May 18, 2009 6 p.m. EST (20:00 GMT) will be considered.

The World Bank's official press release to launch DM09 explains that the "DM competitions attract nearly 3,000 applicants, from which about 100 finalists are selected. Finalists competing for grants will be invited to the Development Marketplace held November 3-5, 2009, in Washington, D.C."

I wish all the participants the best of luck and please feel free to share you innovative ideas on this blog.

Will Increased Financial Support Lead to Better Accountability?

The leaders of the Group of 20 (G-20) nations concluded their conference today in London with a financial commitment of $1.1 trillion in additional loans and guarantees to finance trade and bail out troubled countries. According to a United Nations article, "The G-20 nations today also 'reaffirmed previous commitments to increase aid and help countries achieve the Millennium Development Goals,' Mr. Ban said in a statement, referring to the ambitious anti-poverty targets with a 2015 deadline."

I am not questioning the actions the world's industrialized nations to increase financial support to developing nations, but will an increase of financial support lead to better accountability of spending? Does sending more money help alleviate the problem of corruption that plagues many developing nations? What measurable and definable results should G-20 nations expect? As the world economies have become globalized, the need to help the world's poorest population takes on a different precedence. I realize there is a global economic crisis that requires quick and decisive action, but each spending package should require built-in accountability measures.

Part of this money, as explained in The New York Times, will support the International Monetary Fund, "which has emerged as a 'first responder' in this global crisis, making emergency loans to dozens of countries." The G-20's pledge triples "the resources of the Fund to $750 billion — through a mix of $500 billion in loans from countries, and a one-time issuance of $250 billion in Special Drawing Rights, the synthetic currency of the Fund, which will be parceled out to all its 185 members."

A recent World Bank article said "that economic growth in developing countries would slow sharply to 2.1 percent in 2009, a more than three percentage point decline from last year. Growth would actually decline in Central and Eastern Europe, Central Asia, and Latin America and the Caribbean. An estimated 53 million more people would be trapped in poverty this year, subsisting on less than $1.25 a day, because of the crisis. The world economy would contract by 1.7 percent this year compared to growth of 1.9 percent in 2008 – the first global decline since World War II. Global trade in goods and services would fall six percent this year, the largest decline in 80 years."

The New York Times article mentioned above addresses how some countries are seeking tightened regulations of hedge funds and other global financial institutions including those located in tax havens such as Liechtenstein and Switzerland. Tighter regulations, however, is only part of the solution and the world’s industrialized nations should expect increased transparency and accountability in how the funds are appropriated.

UN Continues its Support for Afghanistan

United Nations Secretary-General Ban Ki-moon made a surprise visit to Afghanistan today, February 4th (see "On surprise visit, Ban reaffirms UN support for Afghanistan"). During Mr. Ban's meeting with Afghanistan President Hamid Karzai, the Secretary-General reiterated the UN's support for "Afghanistan remains a key priority in 2009. The United Nations Assistance Mission in Afghanistan (UNAMA) will have strong support and strong engagement with increased support from the United Nations General Assembly and general membership." Mr. Ban continued, "[The United Nations] strategy is simple: to implement the plan agreed to by the Afghan Government and 88 donors in Paris in June last year. This plan is clear and what we need is to get on with it to bring tangible changes on the ground while continuing to assess the situation." (Photo courtesy of the UN News Centre)

According to the UN News Centre press release launching the Humanitarian Action Plan for Afghanistan for 2009 in Geneva on February 3rd, "The United Nations and its partners appealed for $604 million to help meet the needs of Afghans made vulnerable by natural disasters, lack of access to basic social services, increasing food insecurity and the worsening security situation. Some $354 million of the appeal will go towards food aid, while almost $100 million will be used to rid the strife-torn nation of landmines, Under-Secretary-General for Humanitarian Affairs John Holmes told reporters...."

I recognize there are significant challenges in Afghanistan, but where does economic development and support of Afghan entrepreneurs fit in the United Nations' strategy? The appeal states, "Extreme poverty--42 per cent of the population live on less than $1 per day--and lack of development increase the suffering of the population during times of crisis and limit their coping strategies." Security is a significant problem, but the definition of "security" should also include economic security.

Afghans have a great entrepreneurial spirit and they recognize their role to be the primary driver in stabilizing the current crises and positioning the country to better compete in a vastly competitive global economy. Afghanistan hosts numerous economic opportunities such as mining (marble, gold, copper, precious and semiprecious stones), agriculture (pomegranates, wheat and beekeeping), and renewable energy (micro-hydro generators, wind, and solar energy). Trade and commerce should have a larger role in Afghanistan's development strategy and I recommend that the United Nations, The World Bank, and nongovernmental organizations increase their efforts in promoting economic development.

The Financial Crisis: Implications for Developing Countries

On November 15, 2008, leaders from 20 of the world's largest economic powers (G20), which account for 85 percent of the world economy and approximately two-thirds of its population, will be meeting in Washington, D.C. to discuss the current economic crisis and possible solutions. We are in the early stages of realizing the consequences of the global financial crisis in industrialized nations, which include a rise in unemployment, increased costs of energy and food, and looming inflation problem. However, we are still quantifying the effects of the economic crisis has on emerging or developing economies. According to The World Bank Group's website, The Financial Crisis: Implications for Developing Countries, "Developing countries are now much more vulnerable, with dwindling capital flows, huge withdrawals of capital leading to losses in equity markets, and skyrocketing interest rates. GDP growth in developing countries—only recently expected to increase by 6.4 percent in 2009—is now likely to be only 4.5 percent, according to economists at the World Bank. And rich countries are now expected to contract by 0.1 percent next year." (Graphic courtesy of AFP)

Although people in developing and emerging economies are spending less, the frozen credit market is having a toll on small and mediums-sized enterprises. Having access to credit markets or additional sources of liquidity is essential to business growth. In addition, the global economic crisis is having an adverse affect on remittances to developing countries, which according to the Bank, "were larger than revenues from the most important commodity export, and in 36 countries they were larger than private and public capital inflows."

During the past few years, we have seen a spike in food and energy prices. While these prices have dropped in recent weeks, they are still significant higher compared to 2007. Furthermore, developing economies are commodity-price driven and higher prices have benefited these markets. Despite the falling prices on commodities, inflation risk remains a great problem rising to as high as five percentage points. Developing markets may soon be seeing stagflation, the economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a period of time.

According to its press release, "World Bank Group Boosts Support for Developing Countries," the Bank's International Bank for Reconstruction and Development could make new commitments of up to US$100 billion over the next three years. In 2008, the Bank's lending could almost triple to more than US$35 billion compared to US$13.5 billion in 2007. The increase in financial support would support countries facing significant budget short-falls and help sustain long-term investments. To maximize success and reduce the amount of money wasted by multiple layers of bureaucracy, corruption, and a general lack of oversight and inefficient strategic planning, donor countries should be required to create a transparent, definable, and measured growth strategy with clear accountable results.

Part of the historical challenge for the Bank is defining its purpose beyond providing financial and technical assistance to developing countries around the world. The global financial crisis is an opportunity for the Bank to serve as a negotiator between donor countries and countries receiving financial assistance. As a mediator, the Bank can strengthen is role in gathering information, forming ideas, and implementing solutions to eradicate poverty and raise the standard of living for the world's poorest people.

Equally important, however, is the need to strengthen the trade and economic relationship and close the gap between industrialized and developing nations. Whether you live in Haiti, South Africa, Spain or Canada, we live in a global society and we need global solutions. Meetings of world leaders are often more about discussions and not enough decision making, but I hope the G20 summit will facilitate turning ideas into sustainable solutions.

Solutions for a Sustainable Sudan

On June 25, 2008, I attended a conference in Washington, DC titled "Darfur and its Impact on the Region," which was hosted by Manchester Trade, Ltd. and Executive Research Associates. This conference brought together Sudanese government officials from Khartoum and those serving at the embassy in the United States, academics, and representatives from non-governmental organizations, United States government agencies, and the private sector. As the title suggests, the mission of the conference was to outline the issues surrounding the Darfur conflict and conclude with a dialogue of viable solutions.

The first session, "What are the origins of the Darfur conflict," presented an ongoing display of finger pointing among the speakers and attendees. The rhetoric demonstrated the clear divisions among those who feel the other is to blame. Unfortunately, this was the common theme throughout the next two sessions "Is Darfur a 'Proxy-War'" and "Does the Darfur Crisis Threaten the Comprehensive Peace Agreement?"

The fourth and final session, "In Search of Solutions: Prospects for Peace and Economic Development in Darfur" allowed for the conference to conclude with a much needed dialogue on sustainable social and economic development as a solution to the Darfur conflict. The conference was well organized and Tony Carroll and Nel Marais did an excellent job as moderators. Here are a few thoughts on creating a stable Sudan, which will, hopefully, end the deaths of thousands of innocent lives and lay a foundation for a strong and sustainable future:

1. Sudanese authorities need to have a vision--a vision that is transparent to its citizens and the outside world;
2. Sudan's government must develop public infrastructure and donor agencies such as The World Bank and USAID should place conditions on funds pledged for development;
3. Developing an educated and skilled labor force should be made an immediate priority;
4. Sudanese living abroad should engage in Sudan's public infrastructure and private sector development;
5. Sudan's governmental authorities, civil society, and representatives from the private sector should collaborate on creating a sustainable strategic plan with achievable benchmarks, defined deliverables and measurements for success;
6. Sudan, in collaboration with developed nations, should promote privatization and trade liberalization, which will create comparative national advantages to promote and increase foreign direct investment;
7. Create public/private partnerships in facilitating entrepreneurs of small and medium-sized enterprises; and
8. Utilize technology to allow Sudan's private sector to compete not just regionally, but in a global economy.

I know this may sound overly idealistic, but we should immediately end the finger pointing and begin implementing small solutions to achieve a stable Sudan.

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.