National Savings and Financial Services Bank (BANSEFI) (BANSEFI) “Public Banks in latin America: Myths and Realities” Interamerican Development Bank Washington, D.C February, 2005

In Developing Countries... Formal financial systems are characterized by lack of depth, leaving the majority of the population without access to financial services. Consequently, low-income households use informal financial markets, that functions with high interest rates and no regulations, which makes transactions insecure. This situation has limited the growth of the productive activities, as well as the economic development at the regional level. Additionally, it becomes an obstacle to alleviate poverty. In order to address this problem developing countries have opted for two formal solutions. 1) Market Solution ⇒ trough the traditional financial sector. 2)State Intervention ⇒ by creating development banks or targeted funds None of these options have been able to overcome this market failure and thus complete and deepen the financial system, therefore the demand for financial services for the poor remains unsatisfied.

In México… Both, the market and the state intervention models have not been able to cope with the challenge to deepen the financial system. This situation generates the creation of multiple entities with different legal status aiming at serving the demand for financial services of the poor. Many of these have been in the market for more that 50 years and most of them have not been regulated and supervised by the financial authorities. Thus the semi-informal solution has had a life of its own and has marginally been able to attend the demand. The Sector is formed by more than 480 privately or collectively owned financial intermediaries, strongly linked to their communities.

Mainly large and medium sized companies, and individuals with high to medium income Small- and medium-sized enterprises and individuals with medium to low income Self-employed/ population and micro- enterprises Commercial Banking Development banking Other intermediaries TRADITIONAL BANKING Microbanking institutions Microfinance institutions SOCIAL BANKING Currently unattended Income pyramid of the Mexican population Currently unattended Implementation of Social Banking will cover for actual market failures

The Creation of the Social Bank President Fox Administration, with the help of Congress, design a Public Policy in order to transform the semi-informal financial sector into an opportunity the deepen the financial system. This policy includes the following: –Legislative action by Congress in order to approve an adequate Legal and Regulatory framework according to international standards. –Creation by a law approved by Congress of a Developing Bank (BANSEFI) as the state vehicle to promote and coordinate the transformation of the semi- formal sector. –Governmental temporary investment through fiscal transferences in order to strengthen and upscale the institutional capacity of the sector: Technical Assistance Training Technological Platform Network Creation: Red de la Gente Communications Campaign

This legal framework aids achieving a new model URBAN AND RURAL COMMUNITIES Branches Entities Integral Financial Services Savings and product distributio n SLC P F P FEDERATION CONFEDERATION de la Gente MIGRANTS DEVELOPMENT BANKS SLC = Savings and Loans Cooperative ; PFP = Popular Financial Partnership (Joint-Stock Company) Base Entities Central Entities and Subsidiaries

The role of BANSEFI: Banking the unbanked  In order to support and coordinate the development of the Microfinance Sector, in November, 2001, the National Savings Patronage (PAHNAL) was transformed into the National Savings and Financial Services Bank (BANSEFI) to achieve three objectives. Promote Savings Coordinating Government Aid Becoming the Second Tier Bank of the Microfinance Sector

Since the transformation of PANHAL into BANSEFI (January 2001), savings account has increased from 850,000 to more than 3 millions in December 2004 (253%). BANSEFI network includes 545 branches, half of it located in places that the presence of the Commercial Banks is minimum or inexistence. In order to promote saving behavior, an account can be open with $5 USD, no fees are charged and market interest rates are paid Growth 253% Promoting a Savings Culture

BANSEFI distributes through its branches and Red de la Gente payments from the Federal Government programs (Oportunidades and Procampo), to the beneficiaries in order to guarantee the transparency in resource distribution of the programs and promote the bancarization of the population. The mechanics of the operation start with opening a savings account in BANSEFI. “Oportunidades” implemented by SEDESOL, has been a successful program that aims at providing health, nourishment and educational support for 5 million of the poorest families. In December, 2004, 1,180,000 saving accounts had been opened, and 1,189,211 families recieve cash payments through BANSEFI. “Jovenes con Oportunidades”: Students that finished high school through the support of “Oportunidades” received and additional government support up to 300 USD by opening a savings account that can be used to continue their studies or in other productive alternatives. A similar mechanism is used by “Procampo”, which is a program addressed to aid farmers. More than 230 thousand farmers received their payment through a bank account in As a result, recipients of Mexican social policy are introduced into the use of formal financial products, most of them for the first time. Banking the population through government programs

Bansefi has established agreements with the principal Housing Institutes in the country to promote savings to obtain a mortage loan Minimum Wage (mw) INFONAVIT Affiliates Income > 10 mw Formal and Informal Sector Income Access to Housing Savings Income > 5 mwIncome 2-5 mwIncome 2-10 mw Any PersonFOVISSSTE Affiliates In all these products a savings account is used to trigger the access to a mortage loan.

The fact that Congress has approved laws to transform the sector and that the Government is actively supporting this transformation and promoting its development, has attracted the international community to participate in this endeavor. 1.FOMIN/BID Grant 3.5 Million USD. This grant triggered the project when it was in the design stage. 2. World Bank Credit 140 Million USD Credit to support the transformation of the sector and to strength its institutional capacity. The Government is responsible for the loan which represents a fiscal transfer to the sector. 3. Germany Government Grant 1 Million Euros Technical Assistance for the Federations. International Cooperation

Second Tier Bank de la Gente Pension Fund “Afore Popular” IT Plataform “Integra-T” Development of Central Entities Government Financial Support trough fiscal transfer Technical Assistance Base Entities Support and Promote the Sustentability and DevelopmentTransformation Strategic Plan

BANSEFI is coordinating government aid in many areas 1. Technical assistance. Technical assistance is being offered to help on the transformation of the Federations and their members. 2. Training. Different types of courses and training is being offered in order to build human capital. 3. Economic and Social Impact Evaluation Project. 4. Communications campaign. Technical Assistance

 Prior to authorizing the transformation of an Entity under the law, there was the need to evaluate their financial condition and their capacity to comply with the regulation. This is being done by the Federation’s Supervisory Committee with the assistance of an external expert.  The evaluation standards and diagnose methodologies include financial, operations and governance indicators related to the legal framework and its regulation. Evaluation standards classify the financial intermediaries as follows: A. Intermediaries that are ready to be authorized; B. Intermediaries that require an improvement program to be authorized; C. Intermediaries that will have to split, to merge or to reorganize their structures and internal control; and, D. Intermediaries that will have to be liquidated in an orderly manner. Technical Assistance to the Federations Technical Assistance

28 Feb Sep 20051st Oct Jun 20051st Feb 2005 CLOSING DATE 1st Mar Sep 20031st Oct Jun 20031st Feb 2003 STARTING DATE Planet Finance DGRVWOCCUDIDSBFIC CONSULTANT 2, ,6226, ,994ASSETS (MILLION PESOS) 235,559151,6751,007,225627,778180,217413,283TOTAL MEMBERS 42 Occidente Fortaleza Social Alianza Mex. AMACREP Indep. 25 FAP Sistema Coopera Indep. 35 Alianza FMEAC Indep. 60 FINE Victoria Popular Centro Sur FedRural Indep. 157 Cajas Solidarias 61 Unisap Noreste Microbanks / FEDERATIONS 6 Jalisco, Michoacán and Guanajuato 5 Oaxaca and Yucatán 4 Guanajuato and Michoacán 3 Querétaro and D.F. 2 Cajas Solidarias (national) 1 Jalisco and Nuevo León Project No. Institutions 391 No. Federations14 No. Members2,615,737 Total Assets (Mill Pesos)27,833 Technical Assistance

 de la Gente” is a commercial alliance between BANSEFI and the regulated intermediaries of the Microfinance Sector that join voluntarily. Today there are 61 members with 1,063 branches.  The location of these branches is in urban and rural areas, where commercial banks usually have no presence. Red de la Gente Creating a Commercialization Network

COMMUNITIES REMITTANCES GOVERNMENT PROGRAMS Oportunidades, Procampo Social Security HOUSING OTHER PROGRAMS Education Savings Banks Programs and products distributed through de la Gente Red de la Gente

OBJECTIVE: Design and development of the technological infrastructure and the adequate systems according to the needs of the Microfinance Sector and BANSEFI, in order to be able to offer financial products and services in an efficient way. The design of the technological platform will allow the Microfinance Sector to operate in network and hence to minimize costs of operation and supervision improve the decision making processes. The parametrizable core banking system will allow to the Entities to grow their portfolio of products in a very simple way. The technological design is based in the autonomy of the institutions and is scalable according to their needs. The technology services will be provided mostly through outsourcers. Right now we are in the implementation stage in BANSEFI and two entities and there are 60 more ready to start the roll out. Integra T – Technological Platform

COMPONENTS: The Technological Platform that BANSEFI offers to the Microfinance Sector is integrated by:  Shared with the necessary functionality to manage its products, clients, branches, internal operations, planning and compliance with the regulation. (Temenos Core Banking)  These services include personal computers or terminals, printing and additional devices for security, image capture, cash dispensers, etc. according to the needs of each intermediary. (Dell Computer)  Shared to contain the systems and the data of each intermediary securely and independently. (ATOS Origin)  Network that interconnects all the intermediaries with their branches and external institutions with which they will collaborate for commercial or regulatory issues. (Global SAT) Integra T – Technological Platform Applicative System Operation & Technological Support Data Center Communication Network

Saving and Loans Entities Working Plan AB CD Merge or Acquisition Liquidation Savings recovery FEDERATION Technical assistance and Training Supervision Committes LA RED DE LA GENTE Netwok creation Generating additional income Increasing number of product and services Penetración de mercado IT PLATFORM: “Integra T” Reducing costs Improving efficiency Improving supervision Increasing services General Scheme to Assist the Transformation

 BANSEFI is being transformed into a Second Tier Bank for microfinance institutions. In this regard Bansefi should be offering financial services to this institutions in order to promote the following: –Increasing their income by expanding the range of products available to their customers and members; –Reducing their costs of regulation and operation; and –Improving management efficiency and the quality of their services.  The cost of the products and services offered by BANSEFI must be competitive since the institutions will be free to choose their providers.  The products that the Bank will offer are link to the new technological platform such as: Debit Cards, Credit Cards, Checks, Electronic Transfers, Clearing House Services, F/X, Derivatives. As well as, liquidity management, consulting in ALM, risk management and private banking. Second Tier Bank

Wide coverage Including the Informal sector de la Gente” has a coverage of almost 600 cities, with more than branches, anticipating to reach the branches in the near de la Gente First grade Information and better service –Given the proximity of the final customer with de la Gente”, this “Afore” will be able to supply customized attention, service and better information on the Pension Retirement System, giving the market a new alternative to save for their retirement. Pension Fund “Afore Popular” Objective: To offer a pension plan for our clients and the informal sectors that have not had acces to them, including emigrants abroad, through their remittances.

Next Steps The institucionalization of BANSEFI is a key factor for the development of the sector. To achieve this, it is necessary: To assure financial self-sustainability of the Institution. To strengthen the transformation process of the entities in the sector. As the Microfinance Sector is transform according to the law, the participation of the Savings and Loans Entities in the capital of BANSEFI will be promoted, as well as of the successful Savings Banks in other countries and of the multinational organizations.

Final Remarks 1.The Social Banking System is destined to play an strategic role in the future Mexican Financial System. 2.The new legal framework is the first step to give certainty to depositors and investors participating in the Sector. 3.The Sector has a distribution network well positioned to cover the areas where commercial banks have no presence or knowledge of the local markets. This will be a powerful tool to bank the unbanked. 4.The incorporation of technology, technichal assistance, regulatory compliance and best governance practices will be key drivers in the Sector. 5.The transformation and formalization of the Sector will contribute to deepen and complete the Mexican Financial System, allowing more people – particularly those with low levels of income– to have access to financial products and services and hence to new opportunities to promote their development.