EASIER AND FASTER CREDIT

Mexico 2017 | FINANCE | FOCUS: SOFOMS

SOFOMs offer more accessible credit lines, challenging traditional banks and providing opportunities for more people and businesses.

As an alternative for people that cannot access traditional financial services, multiple purpose financial societies (SOFOMs) are taking over the Mexican credit market. According to the National Banking and Securities Commission (CNBV), there are 46 registered multipurpose commercial banks. On the other hand, it is reported that more than 2,800 SOFOMs exist in the country.

SOFOMs have undoubtedly become part of the competition of financial services in the country. Since the crisis of 2008, traditional banks have set up more strict filters to grant credit. Entrepreneurs and cooperatives have seen this as an opportunity to cater to portions of the population that cannot request credit in commercial banks because they do not meet the minimal requirements.

SOFOMs usually target sectors of the population who may have greater difficulties accessing traditional forms of credit, such as rural communities, the elderly living on pensions, people without credit history, those with bad credit records, or SMEs. SOFOMs grant credit to these groups using easy, flexible and quick filters through financial products and services. In contrast to traditional banking institutions, SOFOMs do not get their credit resources from the general public unless they are authorized to do so. This means that people cannot open saving accounts with such institutions.

According to CNBV's latest report on financial inclusion, only 39% of Mexican adults have a savings account. It also reported that only 68.9% of the country's municipalities have access points to make banking transactions. Additionally, about 80% of Mexicans have a negative credit record.

“Due to banking regulations, banks cannot lend any money to someone who is overdue on a loan, even if it is only by one peso. There are millions of people who are in this situation in Mexico who need credit but cannot access bank funds,” said Elias Rahmane, Director General of Exitus Credit, to TBY. He added that traditional institutions have long and complex processes before bestowing credit.

In addition to the segments of the population that have seen SOFOMs as an alternative to credit, SMEs have taken advantage of these institutions to start or grow their operations. According to the Bank of Mexico, 26% of the country's micro and small companies get credits from SOFOMs, as well as 14% of the nation's medium-sized enterprises.

Nonetheless, there is uncertainty about the trustworthiness of these institutions among the general population. Normally SOFOMs are small companies funded by their own capital who then look for private and public financing sources. Most SOFOMs have a capital smaller than MXN1 million and have interest rates of 50% on average.

The National Commission for the Protection and Defense of Financial Service Users (Condusef) regulates SOFOMs and other financial institutions, along with the Bank of Mexico and the CNBV. Condusef is in charge of sanctioning those financial institutions that fail to protect the interest of their users. This commission also orients users on the financial services they need and the trustworthiness of any kind of financial institution. Even though Condusef has advised against accepting credit from certain institutions, many of the sanctions it applies to SOFOMs are due to errors committed during their incorporation process.

SOFOMs need to be registered in Condusef's catalog of financial service providers. Moreover they have to report their activities and follow CNBV's regulations on money laundry prevention, contracts, and operations registry.

Although SOFOMs are a somewhat new solution for credit, there are more and more companies offering products and services to segments not catered to by traditional institutions. There is still a continuous process of regulation of SOFOMs, though the market for this kind of institution is growing, and banks are facing new challenges to keep up with this transformation.