Mexico Financial Reform Signed into Law

By: Raymond A. Perez & Alexander P. Trueba

On the heels of his major telecommunications, education, tax and energy reforms, President Enrique Peña Nieto has signed into law a banking bill aimed at increasing lending and promoting economic growth in Latin America’s second largest economy. The reform, which contains amendments to thirty-four different statutes, was originally presented to Congress in May 2013 and was subsequently approved by the lower house in late September and the upper house in November. The bill’s main objective is to reinforce Mexico’s banking industry by increasing competition in the sector, boosting credit through development banks, and reinforcing the nation’s banking and securities regulators.

Historically, due to market factors such as the banking crisis of 1994, Mexican banks have exhibited conservative lending practices. Banks have extended much less credit to the private sector (26% of GDP) when compared to Latin America as a whole (greater than 50% of GDP). Under the existing legislation, Mexican banks have been deterred from lending to the private sector (specifically to the small and medium enterprises & the lower and middle classes) due to the obstacles they face when trying to recover collateral on non-performing loans. As an example, it takes a lender an average of three years, and up to ten, to repossess a home.

The new lending reform will make it simpler and speedier for banks to obtain collateral and collect on loan guarantees in cases of default. Furthermore, the reform will strengthen regulators such as CONDUSEF (Comisión Nacional para la Protección y Defensa de los Usuarios de Servicios Financieros) by instituting a financial arbitration system, which the agency will oversee. CONDUSEF will also be given powers to manage a new Bureau for Financial Institutions, which will publish sanctions enforced by authorities.

Additionally, government development banks will be handed more financing alternatives and a less stringent legal framework, affording them the opportunity to lend to SME’s. Development banks will also be provided the opportunity to expand the scope of their permitted investments (to areas such as small agribusiness and municipal public works) and bypass the Ministry of Finance and Public Credit when granting direct loans. President Peña Nieto has stated that the goal for development banks in the upcoming year is to increase lending by 15% to at least $1.15 billion pesos (US $88.5 million).

There is much promise associated with the new financial reform, which President Peña Nieto sees as a “true engine of growth” for the economy. According to Luis Videgaray, Mexico’s Finance Minister, the new legislation will add an additional 0.5 percentage points to economic growth in the next 2 to 3 years if credit as a percentage of GDP can be doubled to 52%. When the lending bill is coupled with the previously passed reforms, the current administration hopes to attain sustainable growth rates of 5% in Mexico by 2016 and throughout the second half of the Peña Nieto administration. Even if the reform’s effects are not felt immediately, it is a progressive step towards jumpstarting lending in Mexico and an asset for economic growth down the road.

Sources: Bloomberg, El Economista, El Financiero, Gonzalez Clavillo Abogados, Lexology, Reuters, The Wall Street Journal, Yahoo News.