Crédito Real: helping lesser earners and SMEs in Mexico

Companies such as Crédito Real are laying the groundwork for an economic boom in Mexico, by recognising the country’s underserved low and middle-income segments

Crédito Real has focused on serving Mexico’s lower paid workers and SMEs in order to boost economic growth
Crédito Real has focused on serving Mexico’s lower paid workers and SMEs in order to boost economic growth 

Although a fair few of Mexico’s macroeconomic indicators have fallen short of neighbouring nations such as Brazil and Peru of late, this is not to say that the nation is any worse equipped to embark upon an impressive spell of growth in the near future. On the contrary, recent government reforms have improved the prospects of low and middle-income sectors as well as SMEs as they find themselves subject to far more favourable conditions than before.

Far from confined to government intervention, however, a number of alternative financial institutions have taken steps to bolster the prospects of what were previously underserved – though no less crucial – components of the Mexican economy. After a string of positive reforms and a newfound focus on SMEs, Mexico now boasts a promising business climate.

Whereas Mexico’s conventional banking institutions have failed to reach many of Mexico’s lesser earners and SMEs with their inadequate branch networks, alternative institutions such as Crédito Real have put in the infrastructure to advance economic growth ahead of their conventional banking counterparts.

“Our loans are offered to these underserved segments of the population through key relationships with our distributors, established strategic alliances, and through the group loan promoters and financial advisors who service our small business loans,” says Jonathan Rangel, the company’s Investor Relations Officer. By providing an alternative means of financial service reinforced by ethics and reputation, Crédito Real strives in all it does to improve the quality of life across its target demographic and incorporate innovation into its products wherever possible.

“The purpose of Crédito Real is really to serve the underserved segments of Mexico, which here account for a large percentage of the overall population, primarily in the low and middle-income segments”, says the company’s CFO, Lorena Cardenas. “For the past 20 years, our unique products and distribution have really served to distinguish us in the financial sector here in Mexico and have opened up new opportunities to the country’s underserved individuals.”

[R]ecent government reforms have improved the prospects of low and middle-income sectors as well as SMEs

“Overall, Crédito Real offers a diversified platform of credit products with a unique distribution strategy, which is hard to replicate and represents a competitive advantage,” says Rangel.

Credit where it’s due
The company was first founded in 1993, at which time it introduced durable goods loans, which were loans made to individual consumers to finance the acquisition of “white line goods”, such as home and kitchen appliances, electronics, furniture, flooring and tiles.

“Granting loans to the low and middle-income sectors is really our core business and we are totally devoted to these customers. Whereas most of the large Mexican banks have been unable to establish a distribution framework capable of reaching the low and middle-income segments of the population, we have developed close ties with numerous third parties in reaching this demographic.

“The first product we introduced was durable goods loans in 1993, which are made through select third-party retailers for whom we provide financing programmes, to date this product represents nearly 11 percent of our current loan portfolio. In 2004 and 2007 respectively we successfully introduced payroll loans and group loans which today represent 82 percent of our loan book. Finally, in 2012 we launched small business loans and used car loans which now represent seven percent of our loan portfolio.

It is important to clarify that we are not a bank and we do not receive deposits, most of our funding comes from the debt capital markets where we are very active,” says Rangel. In 1995 the company issued debt for the first time in the Mexican market, and in 2010 went on to the international markets, issuing $210m of international notes, with a maturity of five years. Rangel continues: “Currently, our sources of funding are ample and diversified, consisting of credit lines and notes in the local and international markets. Our debt profile during the third quarter of 2013 was composed 35 percent of an international bond, 33 percent of local debt and 32 percent of bank credit lines.”

The clarity and specificity of the company’s business model has seen Crédito Real really maximise its growth and returns over the past five years in particular. The company’s loan portfolio over this period has increased at a compound annual growth rate of 30 percent, and the company’s return-on-equity has exhibited gains of over 20 percent through the same period.

The clarity and specificity of the company’s business model has seen Crédito Real really maximise its growth and returns over the past five years

“This growth has been sustained by a strict monitoring of our loans, allowing the non-performing loan ratio to be at two percent and below, highlighting the solid quality of assets. Also, the strategic alliances and the networks established with our distributors and promoters have contributed to our sustained growth,” says Rangel.

Becoming a public company
Although the company’s strategy and product portfolio has proved to be a resounding success, this is not to say that Crédito Real is an institution which rests on its laurels. “In fact, in 2012 we introduced two new products: small business loans and used car loans. We already have a diversified business platform, but we are open to new products that can help us to better serve our customers. We are also open to opportunities for inorganic growth in Mexico and other countries in Latin America,” says Rangel.

Another of Crédito Real’s recent improvements came in 2012 when the firm decided to issue an IPO and become a public company.  Despite the inevitable challenges that come with more stakeholders and the resulting transformation of the firm’s internal dynamics, Crédito Real has gone on to exhibit impressive growth since. “Becoming a public company was something very positive for us; we had strict internal controls and good corporate governance practices in place; however, with our IPO we further enhanced internal controls and enriched our corporate governance practices with independent board members. The whole process brought positive lessons for the management team.

“As far as the original founding members are concerned, they continue to commit to Crédito Real’s long-term success by accepting new partners that strengthen Crédito Real’s capitalisation in order to foster sustainable growth,” says Rangel.

Underserved market
“Despite the progress achieved by Mexico through the years on all fronts, easy access to credit and the financial system still remains open only to a highly sophisticated segment of the population and it has been one of the most challenging goals when aiming to bring wealth and quality services to the vast majority of Mexicans,” says Rangel.

“Traditional banking institutions have managed to evolve and create a very robust financial system with best-in-class rules and regulations, however, its access has been selective and has been kept at arm’s length. We still perceive a strong market potential in Mexico; according to figures from Banco de Mexico, the level of credit penetration is close to 3.5 percent in our country and is still low compared to other countries in Latin America.”

The middle and low-income segments of the population are believed to represent as much as 79 percent of Mexico’s total population

The middle and low-income segments of the population are believed to represent as much as 79 percent of Mexico’s total population, so there clearly exists a huge opportunity for companies such as Crédito Real to capitalise on. Although it will take quite some time and investment to tap into the country’s vast potential, the company remains open to opportunities in countries further afield, although for the time being Mexico remains the firm’s principal focus.

Mexico has recently been made subject of a few changes with respect to its financial system, which together place a far greater emphasis on benefiting SMEs and low and middle-income individuals. “In general, we perceive the financial reform in Mexico as something positive for the sector and for the country’s economy. The main elements of the reform are improvement in the repossession process, increase of credit availability, and higher incentives for lending to small and medium businesses,” says Rangel. The reforms, especially those with regards to SMEs, are in keeping with Crédito Real’s strategy in that both recognise SMEs to be integral in spurring national GDP growth and broader economic development. “Crédito Real represents a success story that has spanned the last 20 years, and we expect a very successful future given that we’re well positioned to take advantage of Mexico’s momentum and profitable growth pattern,” says Cardenas.

Provided that more companies such as Crédito Real recognise the opportunities to be had amid Mexico’s burgeoning low and middle-income segments, the economy will be afforded a stronger footing from which to thrive in the near future. As credit is made more readily available to the nation’s lesser paid, and incentives for SMEs are improved upon, Mexico’s macroeconomic figures are likely to see an upturn in the coming months and years ahead.