Financing Rural Finance Institutions in Mexico

This paper examines the financing of rural financial institutions (RFIs) in Mexico. It states that:

• Financing rural enterprise remains a significant development challenge, because of high transaction costs, volatile agricultural commodity markets and poor infrastructure;
• Mexico has deep and sophisticated financial markets, strong savings instincts, and a plethora of financial institutions operating in rural and semi-rural areas;
• Despite the presence of financial institutions in rural Mexico, the demand for financial products and services remains largely unmet;
• This has resulted in limited sustainable access to appropriate financing for small and micro rural enterprises;
• However, medium term, non-working capital loans to low income farmers or entrepreneurs in rural areas still remain the frontier of rural finance as do long-term production loans.

The paper also states that:

• Perception of high risk and low profitability has led to there being only a few commercial capital suppliers or depositors willing to fund RFIs;
• There are three primary strategic management financing considerations that drive finance strategies:
  • Liquidity;
  • Operating costs to seeking and managing finance;
  • Financial costs.

The paper concludes that in Mexico:

• Main challenge is to overcome the deposit and capital market bias towards short-term funding;
• Barriers are considerable, but sentiment and opportunities are changing for low income financial services, due both to the success of microfinance and to increased macro-economic stability and financial system reform.