21 – 22 September 2006, Kuala Lumpur Globalisation and the experience of proximity banking Mr. Javier Gavito Mohar CEO Bansefi Bank Mexico “Savings banks: the retail gateway to a global market. Driving sustainable development”

2 Social Bank “Globalization and the experiences of proximity banking” WSBI World Congress Kuala Lumpur, Malaysia September, 2006

3 In Emerging Economies.... 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, which function with high interest rates and no regulations, making 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 had opted for two formal solutions. –1) Market Solution ⇒ cover market failures trough the traditional financial sector. –2) State Intervention ⇒ cover market failures by creating development banks or targeted funds. None of these options have been able to overcome these market failures and thus to complete and deepen the financial system, therefore the demand for financial services for the poor remains unsatisfied.

4 In Mexico… Historically, both, the market and the state intervention models have not been able to cope with the challenge to deepen the financial system. This situation generated the creation of an array of 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 Semi-informal Sector is comprised by more or less 600 privately or collectively owned financial intermediaries, strongly linked to their communities.

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

6 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 for deepening the financial system. This policy includes the following tasks that will converge in time: a) To support the transformation of the Sector into a framework that provides legal certainty and helps to strengthen their institutional capabilities. –Legislative action by Congress in order to approve an adequate Legal and Regulatory framework according to international standards: the Popular Credit and Savings Act was approved in April –Government Investment, through fiscal transfers, aimed at financing technical assistance and training programs to strengthen the institutional capacities of the sector. b) Temporary governmental investment in the creation of central entities that provide services such as Second Tier Bank for the Sector that will be transfer to the sector. –Creation of a Developing Bank (BANSEFI) as the State instrument to promote and coordinate the transformation of the semi-formal sector. –The creation of service entities to strengthen the Sector. Investment in: Institutional Bank - Caja de cajas-, Technological Platform, Red de la Gente, as well as Afore de la Gente.

7 Network´s Model and the Legal Framework The legal and conceptual model of the savings and credit sector is based in networking systems. These systems have proven their success in many social banking systems such as the German, the Canadian and the Savings and Credit Cooperatives in Mexico. The Network’s Model promotes a distribution of functions between the members of the Social Banking Sector, which increases the efficiency and the competitiveness of the members of the system Responsible for the main activities on the part of the net, are in direct contact with the market and provide main services (financial products). The small size of these entities is crucial to keep their competitive advantage. Provide those activities where economies of scale and scope can be used to strengthen and upscale the activities of the Base Entities. Base Entities Central Entities

8 Network´s Model and the Legal Framework SACCO = Savings and Credit Cooperative PFP = Popular Financial Partnership URBAN AND RURAL COMMUNITIES Integral financial services EMIGRANTSEMIGRANTS Branches Entities Levels I to IV Entities Levels I to IV Base Entities SACCO P F P de la Gente Central Entities FEDERATION CONFEDERATION DEVELOPMENT BANKS Subsidiaries

9 BANSEFI’s Objectives  In order to support and coordinate the development of the Popular Savings and Credit Sector, in November 2001, the National Savings Patronage (PAHNAL) was transformed into the National Savings and Financial Services Bank (BANSEFI) with the aim of achieving three objectives: 2)To Develop Central Entities Red de la Gente Technological Platform Savings and Credit Institutions Bank Pension Fund: “Afore de la Gente” 1)To Promote Savings – As of July 2006: BANSEFI’s branches = 521 Savings Accounts = 3’345,084 Deposits = 6,805.9 million pesos 3)To Support the Sector Technical Assistance Training  BANSEFI’s Role: Contribute to strength the Popular Banking Sector In order to be able to Widen the financial services to the majority of the population

10 Provide those activities where economies of scale and scope can be used to strengthen and upscale the activities of the Base Entities. Provide financial products in direct contact with the market. The small size of these entities is crucial to keep their competitive advantage. Provide Government’s financial support through fiscal transfers; offered temporally to help on the transformation of the Savings and Credit Institutions according to the new law. Develop Central Entities BANSEFI’s business plan considers 4 units operating as Central Entities, one enabled to act as a Base Entity, and one Supporting Area (technical assistance): Savings and Credit Entities and BANSEFI’s Branches BANSEFI Red de la Gente Technological Platform Savings and Credit Institutions Bank Pension Fund: “Afore de la Gente” Technical Assistance Technical Assistance Base Entities Central Entities

11 Since the transformation of PANHAL into BANSEFI (January 2001), savings accounts have increased from 850,000 to more than 3.3 million in June BANSEFI’s network includes 521 branches, half of which are located in places that the presence of the Commercial Banks is minimum or inexistence. We are now opening an average of 25,000 new accounts per month. In order to promote saving behavior, an account can be open with less than $5 USD, no fees are charged and market interest rates are paid. 1) Base Entity: BANSEFI’s Branches Growth 268% Thousand Promoting a Savings Culture

12 1) Base Entity: BANSEFI’s Branches Distribution of Government Support Programs such as Oportunidades throughout savings accounts: Bansefi distributes, though its branches and de la Gente, payments to the beneficiaries of Federal Government programs, in order to attain transparency in the distribution, as well as to incorporate the population to the financial system. This is triggered by the opening of savings accounts in BANSEFI, which has increased the benefits of such programs. As of July, 2006, 1.2 million savings accounts had been opened for the families that are beneficiaries of Oportunidades* in which the financial aid is deposited. In addition, a total of 1.1 million families received cash payments through BANSEFI. We also attend 270 thousand students beneficiaries of the Jóvenes con Oportunidades program. As a result, all the beneficiaries are now part of the formal financial services for the first time in their lives. Housing Programs: Together with the main Government’s Housing Institutions (INFONAVIT, SHF, FONHAPO and FOVISTE), Bansefi has created a savings mechanism in which, prior to obtaining a loan, families or individuals open an account and save their money in order to obtain a mortgage loan. The array of products offered allow us to reach people from different income levels and working conditions. *Oportunidades is one of the most successful programs in alleviating poverty. It allows the children of the low income families to have access to education.

13 Savings Account Other financial products Commercial Loans Insurance Mortage Loans Pension Federal Housing Programs Governmental Programs Intangibles Effects: Self confidence Security Formalization Sense of belonging Tangible Effects on wealth accumulation Migrants Remittances Well Being of the Population Savings as a vehicle for the population’s well-being

14 2) Technical assistance BANSEFI in coordination with World Bank, Financial Authorities and Federations, has organized the Consolidation Program, for providing training and technical assistance to the microfinance sector. 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; D. Intermediaries that will have to be liquidated in an orderly manner.

15 Technical Assistance contracts Project 6: Guanajuato, Jalisco, Michoacán, other states 1 Federation 21 intermediaries SPARKASSEN (GERMANY) Project 2: “Cajas Solidarias” – National level 1 Federation, 156 intermediaries (QUEBEC, CA) Project 1: Jalisco and Monterrey 2 Federations -49 intermediaries (QUEBEC, CA) Project 3: Querétaro, D.F. and Morelos 4 Federations 81 intermediaries WOCCU USA Project 4: Michoacán and Guanajuato 2 Federations- 40 intermediaries 6 technical assistance contracts were originally awarded through competitive processes For 12 Federations & 380 intermediaries GERMANY Project 5: Oaxaca and Mérida 2 Federations 35 intermediaries

16 Classification# Entities% of TotalAssociates% of TotalAssets% of Total Authorized133.4%250, %2,690, % B %2,315, %28,534, % B %868, %10,529, % C6516.9%168, %2,248, % Total384100%3,603,441100%44,003,512100% 584 Total 449 Regular 13 Authorized 13 In evaluation CNBV 371 With prerrogative 59 Under Art. 4 Bis 135 Irregular 22 Without Prerrogative 113 Dissidents 2) Technical Assistance Current situation of the Savings and Credit Cooperative Societies On January 1 st, the LACP started taking effects with the following results: 12 Federations with its Supervision Committees were authorized. As of July 2006, the situation of the 449 societies that have been working to observe the Law is the following: Three soicieties with prerrogatives are also under the evaluation of the CNBV. Without taking into account the proyects of SOFIPO that are not still authoriezed, we have 384 societies. B+ is equivalent to A on the initial methodology CNBV: National Banking and Securities Commission

17 3) Central Entities: Second Tier Bank BANSEFI is being transformed into a Second Tier Bank for savings and credit entities. Therefore, 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 and the entities will choose freely to demand these products and services. As the Popular Banking sector is capitalized, the participation of the Federations in the capital of BANSEFI will be promoted Becoming the bank for the Credit and Savings Entities

18  de la Gente” is a commercial alliance between BANSEFI and the regulated intermediaries of the Social Banking Sector that join voluntarily. This alliance will facilitate the sale and promotion of financial products and services in a sector of the population that does not have access to them, as well as promoting the distribution of aid from government programs.  Today there are 93 members with 1,270 branches (including BANSEFI). Most of them located in semi-urban and rural areas, where commercial banks usually have no presence. Creating a Commercialization Network 3) Central Entities: La Red de la Gente COMMUNITIES REMITTANCES GOVERNMENT PROGRAMS HOUSING Savings and Credit Institutions Programs and Products distributed through Red de la Gente”

19 3) Central Entities: de la Gente Distribution of governmental programs : A total of 146 thousand families had been paid throughout 4 members of de la Gente since the first semester of the year. Housing : An important achievement of the present administration consists in the establishment for the first time of a relation between the SACCO and the main Housing Institutions. Remittances : The number of transactions has increased in an important way. In August 2006 we paid approximately 89,000 remittances, in comparison with the 11,000 transactions paid in January We have no 2% of the market Remittances paid by de la Gente (transactions) Bansefi receives account to account transfers through “Directo a Mexico”, a service offered by the Federal Reserve and the Central Bank of Mexico. This mechanism allows Community Banks and Credit Unions to enter the remittance market, providing: reliable cross-border ACH service to Mexico; access to de la Gente at the lowest price in the market. Furthermore, it allows for the bancarization of migrants and their families in both sides of the border.

20 Technological Platform Design and development of the technological infrastructure and the adequate systems according to the needs of the Microfinance Sector and BANSEFI, 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, minimize costs of operation and supervision, as well as improve the decision making processes. –The parametrizable core banking system will allow the Entities to grow their portfolio of products in a simple way. –The technological design is based in the autonomy of the institutions. –It is scalable according to the Institutions’ needs. –The technology services will be provided mostly through outsourcers. Currently, four savings and credit institutions are already in operation; there are 83 more entities that have singed letters of intention to enter the platform.

21 Technological Platform The Technological Platform that BANSEFI offers to the Sector is integrated by: Shared with the necessary functionality to manage its products, clients, branches, internal operations, planning and compliance with the regulation. (IBM and Temenos Core Banking) Shared to store the systems and the data of each intermediary securely and independently. (ATOS Origin) Network that interconnects all intermediaries with their branches and to external institutions with which they will collaborate for commercial or regulatory issues. (Global SAT) Applicative System Data Center Communication Network

22 Savings and Credit Entities Working Plan ABCD Merge or Acquisition Liquidation Savings recovery FEDERATION Technical Assistance and Training Supervision Committees DE LA GENTE Network creation Generating additional income Increasing number of product and services Market access IT PLATFORM: “Integra T” Reducing costs Improving efficiency Improving supervision Increasing services Trust for protecting depositors Legal Consultancy,

23 Final Remarks The Social Banking System is destined to play an strategic role in the future Mexican Financial System. The new legal framework is the first step to give certainty to depositors and investors participating in the Sector. 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. The incorporation of technology, technical assistance, regulatory compliance and best governance practices will be key drivers in the Sector. 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.