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A New Rural

Finance Model

CONTENTS

Introduction

 Theoretical Framework

 Background

A New Rural Development Model

 Banrural: What Went Wrong?

 Strategic Alternatives

 The New Model

Financiera Rural

 What is Financiera Rural?

 Results After Two Years of Operations

Lessons Learned and Challenges Ahead

I NTRODUCTION

The History of Mexico’s

Rural Credit Banks

First public bank focused on

agricultural development,

Banco Nacional de Crédito

Agrícola, S.A.

Rural Credit Bank ( Banrural )

to unify existing agricultural

and rural state banks. Ceased

operations in 2002.

On December 26, 2002,

Congress passed a law

authorizing the creation of a new

development agency:

FINANCIERA RURAL (FR).

July 1st 

FINANCIERA

RURAL started

operations.

A New Rural Finance Model

THE CONTEXT

“Rural” refers to localities of 50,000 or less inhabitants.

61% of extremely poor families live in rural areas.*

*Data as of 2004. World Bank estimates, using the ENIGH 2002.

Spacial Dispersion Covariance Risk

Ethnicity Issues Seasonality

No Integrated Prod. Chains

No Access to Financial Svcs.

Poverty

Migration

RURAL SECTOR

CHARACTERISTICS

Mexico’s Rural

Sector

GOVT. BUDGET CONSTRAINTS

PRESENCE OF SUSTAINABLE FINANCIAL INSTITUTIONS

MARKET DEVELOPMENT

POLITICAL CONTEXT

New Development Agency

Corporate Governance

MARKET FORCES ALONE WERE NOT ENOUGH TO ACHIEVE THE PUBLIC POLICY OBJECTIVE OF RURAL DEVELOPMENT

Strategic

Alternatives

Restructuring / Recapitalization

What is Financiera Rural?

Development bank focused on agricultural activities

Funding through “unlimited” access to loans from the Federal Government

Operated as a subsity manager, with a high ratio of non- performing loans

Inefficient cost structure; operating costs over 100% of operating income

Defficient risk management

New Development Agency focused on rural productive projects

Legally banned from taking deposits, loans or market funding. Must maintain endowment value over time to sustain operations

Operates with credit processes that apply international best practices. Has spread payment culture among clients

Efficient cost structure

Best risk management practices

Banrural (^) Financiera Rural

C OMPARATIVE A NALYSIS

Financiera Rural vs. Banrural

• The Mexican Government received a USD 505 million IBRD loan for the creation of Financiera Rural.

Grant credit to rural producers, directly[1] or organized in informal

credit organizations, as well as rural financial intermediaries,

through:

Products, programs and services designed to suit the specific

needs of the rural sector

The use of commercial bank branches for the dispersion of

funds and the reception of payments

Promote the creation, development, strenthening and organization of

Rural Financial Intermediaries (RFIs), providing training, advisory

and technical assistance services

Provide training, advisory services and technical assistance to

producers for the better use of credit

[1] Even thouth currently Financiera Rural operates in the first tier, as well as the second, in the long term it expects to serve only as a second-tier lending institution.

FINANCIERA RURAL

Objectives

• Six Regional Coordinating Areas
• 96 Local Agencies (Branches)
• Corporate Offices in Mexico City

FINANCIERA RURAL

Geographical

Distribution

RURAL DEVELOPMENT AGENCY

Initial Endowment of USD 1.72 billion** USD 1,534 Mill. Credit*

USD 79 Mill. pre-operating expenses

USD 49 Mill. Technical Assistance

Supervised Rural Financial Intermediaries

Informal Rural Credit Institutions

Individual Rural Producers

Technical assistance for credit enhancement and the creation of RFIs

Credit

*Of the initial USD 1.6 billion, USD 46 million could be used for the acquisition of Banrural assets (other than loans). ** Provided by Congress.

FINANCIERA RURAL

An Integral Model

Rural Financial Intermediaries

• Credit Unions (Uniones de Crédito)
• Financial Cooperative Associations (Sociedades Financieras Populares*).
• Thrift Cooperatives (Sociedades Cooperativas de Ahorro y Préstamo*).
• Depository Warehouses (Almacenes Generales de Depósito).

*Governed by the new law for popular savings and loans ( Ley de Ahorro y Crédito Popular )

Other Organizations

• Agribusinesses
• Non-regulated financial intermediaries
• Microfinance organizations
• Local producer organizations

FINANCIERA RURAL

Second-Tier

Customer Base

Conception of the Project

Commercialization Of the Product

Before Granting Credit

1. Business and Market Plans

FR C R E D I T

Specialized Technical Assistance and Training

CREDIT ACCOMPANIMENT

• Payment of 70% of the service cost, with an upper limit of USD 3,300 per item. Total support up to USD 19,600.

FINANCIERA RURAL

Credit Enhancement

Establishment

Sustainable Development

Individual Producers

Unsupervised Credit Organizations

Supervised Rural Financial A (^) Intermediaries Z

FR’s Credit and Technical Assistance to Develop Institutional Capabilities

FINANCIERA RURAL

The Road to

Intermediation