Thursday, September 13, 2007
Now 47, Jos? Antonio Reyes has worked for years as a builder in his native El Salvador and has never once thought about opening a bank account.
On the face of it, he and his wife Edith Portales seem like some of the most unlikely people to have their lives transformed by innovations in trans-national finance. The couple live in a cramped and airless house in Soyapango, near the country’s capital, San Salvador, which they share with their son Fernando and their nephew Gerardo Alfaro’s three children. They are dependent on the $600 (?299, ?440) or so that Mr Alfaro sends them each month from the US.
Mr Reyes says he has long wished to add a floor to his home, but getting a mortgage to finance the work was never an option. In El Salvador, as throughout Latin America, commercial banking services have traditionally been available only to the better off.
This year, though, Mr Alfaro was offered an innovative $20,000 mortgage loan in the US that will allow his relatives at home to build the extra floor, providing his kids with a room of their own and somewhere to study. The deal was organised by a US money transfer company called Alante and Integral, a Salvadorian micro-finance bank.
Until recently, handling a mortgage for such a small amount, especially a cross-border mortgage, would have been too expensive for banks to make a decent return. But helped by greater economic stability in the region and lower interest rates, micro-finance banks and some other innovative financial institutions have begun to see potential in this market.
The deal highlights the way migrant workers and their families are slowly being brought into the world’s banking and credit markets, which experts say is crucial to giving remittances a wider impact on economic development. Money transfer companies such as Western Union have traditionally handled the vast bulk of transactions (see below left). They transmit cash electronically, convert it into local currency and arrange payment in cash for local family members in exchange for a percentage commission.
Such a cash-to-cash system means that only a small proportion of remittances – which make up more than 15 per cent of El Salvador’s gross domestic product – stays in the banking system, where it could be used to finance local investment.
Yet, given the right opportunities, families that regularly receive remittances could use them to open bank accounts and would then find it easier to buy insurance and other financial products, borrow money to buy a house or start a small business. All that could dramatically increase the economic impact of the money. In the words of Don Terry, the head of the Multilateral Investment Fund at the Inter-American Development Bank: “Creditworthiness simply produces greater multiplier effects.”
Mainstream banks have begun to wake up to the potential of migrant business. Spanish banks have been particularly active in offering accounts to Ecuadorians, Peruvians and other Latin American migrants who have flocked to their country in recent years. US banks – including Citicorp, Bank of America and Wells Fargo – have also been eyeing the potential of migrant families.
“The immigrant segment is younger than the mainstream and in many ways in the early stages of the financial life cycle,” says Daniel Ayala, head of Wells Fargo’s global remittance services. “They are buying their first car, their first home and they are beginning to accumulate credit card debt. Getting them on board now is an opportunity to put our foot in the door.”
Some mainstream institutions are also moving into the trans-border mortgage market, where customers such as Mr Alfaro can secure a mortgage at home but pay for it from money earned abroad. They have been encouraged by the steady decline in interest rates and growth of domestic mortgage markets in Mexico and some other Latin American countries.
In recent years, hundreds of Ecuadorian migrants based in Spain and Italy have been able to obtain mortgages from Quito-based Banco Solidario – now part of the Mutualista Pichincha group – and a similar programme involving a number of local banks has enjoyed some success in Peru.
Last year the trend extended to Mexico, the Latin American country where the remittance market has grown fastest, with lenders such as Su Casita extending between 2,000 and 3,000 mortgage loans to immigrants to spend in their home country.
From his simple basement office in a bohemian corner of Denver, Colorado, Francisco Arana, the local manager of Su Casita, says he completes about 40 mortgages a month, with Mexican migrants typically looking for loans of about $45,000-$50,000 to buy homes in new, privately developed housing estates. “It is definitely growing. We are definitely seeing more people who want to build up some assets back in Mexico,” he says.
At a time when a housing market downturn has exposed providers of so-called subprime mortgages in the US, optimism about the prospects of a new market oriented to similar low-income groups might seem misplaced. But trans-border mortgage lenders insist this is a very different kind of business. “A Salvadorian earning $25,000 is low-income in the US but in El Salvador he is well-off,” says Kai Schmidt, executive vice-president of Alante, which is part of the Washington-based Microfinance International Corporation. “What is a subprime customer in the US could well be a prime customer at home.”
In addition, players in this new market are insisting on tough credit checks for customers, something that often went by the board in the subprime sector. “You are giving loans to people in line with their actual income. That’s not like in subprime where lenders were just betting house prices would keep rising,” says Mr Schmidt.
However, there remain many obstacles to incorporating remittances into mainstream financial services. First and foremost, relatively few migrant families in the rich north and even fewer in the poorer south have bank accounts, let alone access to financial products such as mortgages, insurance or consumer and small-business loans.
“Banks give a chequebook but the migrant just doesn’t know how to use it. He has never seen one before in his life,” says Luis Pe?a Kegel, general director of Banorte, a Mexican bank. In the US, language difficulties can add to the problems. Bankers say many illegal migrants fear that their details may be passed on to US immigration authorities.
Even migrants who have had bank accounts at home may have had bad experiences, remembering how accounts were frozen or confiscated during Latin America’s turbulent recent past. “Migrants believe that banks are distant, expensive and not accessible,” says Mr Pe?a Kegel.
Second, despite the growth of remittances in recent years, most payments come in tiny amounts and pay directly for food and medicines. Most recipients are so poor that for banks the costs of administering their business would outweigh potential gains. “If banks could bank them they would do,” says Gwenn B?zard at Aite, a Boston-based financial consultancy. “But it is just not feasible, at least not overnight.”
Third, most Latin American banks that have entered the remittance market have mainly adopted a limited role as agents. In other words, they disburse remittance payments to the families of migrant families in return for a one-off fee rather than offering a broader range of banking services.
Manuel Orozco, a remittance specialist at Inter-American Dialogue in Washington, says the profitability of the agency fees serves as a disincentive to offer accounts or loans. He says that Central American banks, for example, are making a quarter of their profits from agency business. Some banks – such as Banorte – are trying to convert remittance clients into fully fledged bank customers but advances have been slow.
Fourth, many US banks have been put off from entering the market. The institutions that have pushed hard to develop business among migrant groups are exceptions. Some banks have made unsuccessful and costly forays into the market, for example misjudging the extent to which Mexican customers would be prepared to use debit cards. Others have been put off by regulatory pressures linked to the clampdown on money-laundering or the rising political controversy associated with illegal immigration.
Mr Terry of the IADB has been pressing US banks to open their doors to migrant and remittance business but says he has been disappointed with the results. “I thought we would have been more advanced. But under regulatory pressure banks have really backed off.”
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