Review of DCA Credit Guarantee for MFI Access to Commercial Credit in Mexico: The Unin Progreso Case

As a middle-income country, Mexico is not a traditional recipient of USAID assistance. However, because it is the world's 11th largest economy and the United States' second-largest trading partner, Mexico holds great significance for U.S. interests. Despite its economic, cultural, and geographic ties to the United States, not all Mexicans are reaping the benefits of extensive trade and international visibility. The growing inequality in the distribution of benefits has prompted USAID support for pro-poor economic interventions, including support to Mexico's microfinance industry. The evolution of microfinance in Mexico has been shaped by USAID institutional and industry-wide technical programming, including two Development Credit Authority (DCA) partial credit guarantees to catalyze wholesale lending to microfinance institutions (MFIs) structured in 2001. One USAID DCA deal was made directly with an MFI, FinComn, to partially guarantee loans to microentrepreneurs. The other, and the subject of this review, was a portable credit guarantee enabling the union de crdito (credit union) arm of the Unin Progreso (UP) to access wholesale finance from commercial sources for on-lending. Such access to commercial finance was intended to create a source of funding enabling UP to grow sustainably.

Simultaneously with both DCA deals, the Government of Mexico initiated efforts to regulate an extremely fractured and unsupervised network of over 680 institutions providing credit, and often savings services as well, to microentrepreneurs. This move was oriented towards regulating deposit-taking activities of the various MFIs and credit unions in the country. In this context, microfinance in Mexico is slowly formalizing. However, it is unclear to what extent USAID DCA guarantees helped contribute to overall microfinance development.

This review finds that while the UP guarantee facilitated access to limited formal finance, the effects of the guarantee on the credit union's sustained transition to private funding are indiscernible. However, the experience provides lessons to USAID missions considering similar DCA guarantees. One primary take-away is that DCA works best when the goals of the guarantee complement the goals of the partner financial institutions. Conclusions and recommendations for improving similar DCA guarantees in support of MFIs are presented at the end of this report.