Micro, Small and Medium Enterprises (MSMEs) represent 99.8% of the total number of business entities that operate in Mexico, nonetheless their profile historically has not been attractive to commercial banks, arguing lack of proper collateral, impossibility to scale and transactional cost. According to Banxico (Mexico’s Central Bank) by the year 2000 only 17% of small enterprise financing came from commercial banks, 5 years later it dropped to 15%. For medium enterprises during the same period of time it went from 26% to 17%. The trend was clearly on the wrong direction.
To further impulse these programs the Ministry of Economy issued “Fondo Pyme” in 2004 covering five areas: training, management, financing, technology, sales and marketing. Another strong effort, and a very successful one, was the “Cadenas Productivas” (Productive Chains, a factoring solution for SME’s liquidity acting as suppliers of big corporations, local and federal governmental entities), instrumented by NAFIN (a leading development bank).
Regardless of many Government efforts, the credit supply by the commercial banks to MSMEs was not nearly enough. Suppliers and non-traditional sources of financing continued to be the most common sources to fund working capital and asset acquisition. Credit allocated to big corporations, local and federal government largely remained the biggest percentage of the commercial banks loan portfolio.
The market need was clear, and the opportunity to create an ecosystem for funding MSMEs was in the making. It was 2006 when the Ministry of Finance working with Congress and lobby groups, successfully approved the formation of a new financial entity, a non-regulated Non-bank Bank (the Sofom). The newly created Sofom was authorized to offer credit, leasing and factoring services, all financed entirely by its own equity, development loans or privately issued debt; with the main restriction of not receiving deposits from the general public or issuing bonds or any other publicly traded instruments. And so a new an ambitious program in the form of an industry with organic potential for growth was born.
The Sofom creation brought challenges that if unresolved, the radiant new law would have been jeopardized. The following 5 challenges grew in magnitude to become national initiatives and represent, in the perspective of the author, the most significant obstacles on the implementation of a new ecosystem. On each one, a brief summary of the business strategy employed to endure.
Challenge #1 First Steps. The first problems originated from incorporating the new Sofoms. Confronting a culture where barely anything changes, a new legal entity was a big step for lawyers, notaries, and tax authorities and even for opening bank accounts; moreover the media misinterpreted that non-regulated meant immediate risks and informality.
Strategy: As a new industry was created, an organization capable of funneling resources, lobby with stakeholders, accelerate the incorporation of new players and represent their interest was needed, and so ASOFOM (Sofom’s Association) was designed and launched.
#2 Responsibility. Other authorities tried to regulate a non-regulated entity and competitors charged. The general perception of having a non-regulated financial institution plus the unwillingness to accept a new entrepreneurial player in the over-traditional financial industry opened a confrontation with many industry participants, threatening that if even one entity fails, the newly formed industry would collapse.
S: Joining forces, following the formation of ASOFOM, originally perceived as “nice to belong to” rapidly changed to “need to belong to” setting clear standards for the industry. At this time the decision was made to operate ASOFOM as an incubator, preparing a comprehensive program for Sofoms to incorporate, set accounting and legal standards and developed “compliance” manuals. So instead of a typical professional servicer, ASOFOM became a one-stop shop, a counselor and the incubator of the new financial institutions.
#3 Ecosystem. Beyond incorporation, the next step was to guide, mentor and professionalize each founder of every Sofom, launch a formalization campaign and build an ecosystem that provided resources, participants and credibility to rapidly institutionalize the sector; moving as startups, although with the formality of financial institutions.
S: Champions and ambassadors were promoted from within each Sofom; under-secretaries of state and academics were called upon to support. Founders were graduating from Corporate Governance courses, and Big 4 Accounting Firms wanted to participate, momentum was being created.
#4 Growth. Restrictions on funding rapidly became huge constraints for growth; formal funding required demonstrated maturity and potential in order to access private equity, project financing, securitization, and trust funds. Moreover, credit knowledge recognizes for industry credibility and player’s business model potential, even before financials.
S: Legitimize the industry, become frenemies with bankers, demonstrate social impact. Standardize everything that will not be a differentiator, audit results and embrace transparency and accountability. The turn-around came when the Federal Government backed the Sofom sector through a large Guaranty Trust with first-loss benefits created through Fondo Pyme.
#5 Market Penetration. In an under-banked Country, formal credit culture was a pillar to migrate the micro and small enterprises to financial formality, in a time when demand was increasing, financial ratios where healthy and Sofoms were supporting community development. In parallel the supply for trained credit officers and analysts was very scarce.
S: Judo Strategy, using the strengths of the system to prepare and design a massive Financial Culture National Campaign, convincing a financial authority to champion the endeavor and involving everybody (financial intermediaries, consultants, academics, the media and even commercial banks). Additionally with the support of the Education Ministry, ASOFOM developed a nationally implemented standard and training program for credit officers.
The result was that by May 2012, the new ecosystem included 3397 Sofoms with a strong portfolio of financial products and services for MSMEs to serve their industries and communities. Just 6 years after signing the law that created the Sofom, they had already 12% market share of the total business credit industry.
After such a success, there is further room for development, today MSMEs generate 72% of formal employment and 52% of GDP, however credit to the private sector in Mexico represents only 26% of GDP (Brazil 50% and Chile 100%), so the good wok in access to credit for MSMEs has just started. @