The Demand for Banking Services     in Mulegé, Baja California Sur,                & Opportunities for          Community ...
Insufficent Funds:        The Demand for Banking Services in Mulegé,            Baja California Sur, & Opportunities for C...
Introduction & BackgroundAccess to funds and banking services is an often-overlooked convenience and benefit thatthe major...
approximately 3,500), live in the town of Mulegé. According to local estimates, at anytime there are likely 200-300 additi...
from about 14 million credit cards to                The Unbanked in the U.S.only about 8.7 million by 2002), andincreased...
Banking in Mexico:                                                                                          Today & Tomorr...
In fact, despite the crises that Mexico’s financial sector has             Do you have confidence inundergone through the ...
number of ATMs increasing during 1994-2000 at a 23% annual rate2. Despite this progress,Mexico is still developing its ATM...
Although through the mid-1990s, money transfers had still remained somewhat a nichemarket for U.S. financial institutions,...
!   According to the results of our    residential and business surveys, 72%    of local businesses and nearly 80% of     ...
Detours to Economic GrowthThe lack of effective access to banking services is not just an inconvenience; rather,serious an...
Trips to Santa RosalíaCurrently, residents of Mulegé that desire banking services must either drive to anothercommunity, o...
Mulegé’s ChallengesChallenges to Banking?The evolution of Mexico’s banking sector will take time, and there still may not ...
The issue of population dispersion can again be seen by comparing the number of       existing bank branches to the size o...
!   Jobs: “If there is cariño [care] or interest in the future prosperity of Mulegé, we    need a way to create sources of...
ConclusionWhile no bank currently exists in the town of Mulegé, Baja California Sur, it appears thatthe expansion of banki...
Appendices & Special ThanksAppendix 1: Selected Residential Survey ResultsIn late-November, 2003, CBA implemented a small ...
Table Res-4: Crosstab of Bank Acct Status & Resident Type                                                              Les...
Special ThanksAlthough the total number of people that contributed to this report are too numerous tomention by name, Cros...
About Crossborder Business AssociatesCrossborder Business Associates is a San Diego-based crossborder marketresearch, stra...
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2004 - Insufficient Funds: The Demand for Banking Services in Mulegé, Baja California Sur, & Opportunities for Community Development

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2004 study done by Crossborder Group (then, Crossborder Business Associates) for the International Community Foundation (www.icfdn.org), a community non-profit organization concerned about development opportunities in Mexico and along the US-Mexico border. The study was to assess the situation of the lack of banking services in the community of Mulegé, Baja California Sur, Mexico; the economic costs for the lack of banking services (and how that affected both residents and businesses); as well as provide some insights into the challenges facing the community and low-density regions like it in Mexico.

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2004 - Insufficient Funds: The Demand for Banking Services in Mulegé, Baja California Sur, & Opportunities for Community Development

  1. 1. The Demand for Banking Services in Mulegé, Baja California Sur, & Opportunities for Community DevelopmentDeveloped by Crossborder Business Associates for the International Community Foundation June 2004
  2. 2. Insufficent Funds: The Demand for Banking Services in Mulegé, Baja California Sur, & Opportunities for Community DevelopmentTable of Contents Introduction & Background p. 2 About Mulegé 2 Banking in Mexico: Crisis & Evolution 3 The Unbanked in the U.S. 4 Banking In Mexico: Today & Tomorrow p. 5 Bank Branches 5 Banco Azteca: An Option for Mulegé 6 ATM Access 6 Remittances 7 The Demand for Banking Services in Mulegé p. 8 Detours to Economic Growth p. 10 Missed Sales 10 Trips to Santa Rosalía 11 Missed Money Transfers 11 Mulegé’s Challenges p. 12 Challenges to Banking? 12 Mulegé’s Larger Challenges 13 Conclusion p. 15 Appendices & Special Thanks p. 16 This report was developed by Crossborder Business Associates (www.crossborderbusiness.com) under contract with the International Community Foundation (www.icfdn.org). While the findings presented in this report are based upon research made by CBA, and review of best- available information, neither Crossborder Business Associates, the International Community Foundation, nor any of their principals, are liable for any activities undertaken as a result of the information presented herein . Insufficient Funds: the Demand for Banking Services in Mulegé, BCS page 1
  3. 3. Introduction & BackgroundAccess to funds and banking services is an often-overlooked convenience and benefit thatthe majority of citizens in more-developed economies take for granted. The majority ofglobal citizens, however, and those throughout Latin America (including Mexico), haverelatively little access to even basic financial services, creating a braking force on manyregional economic development efforts.This study, sponsored by contributions made to the International Community Foundation(ICF), was developed to assess one community’s situation: the town of Mulegé, BajaCalifornia Sur. While this initial assessment of Mulegé’s need for banking services isfocused on this one specific community, the issues and lessons that can be drawn apply tomuch of Baja California Sur (BCS), many other areas of Mexico, and even to rural areas ofparts of the United States. The fact is: despite many advances in the financial sector,many lower-income households in rural, and even some urban, settings still haveinsufficient access to banking services.In the case of Mulegé, the lack of banking services in the community increases local costsand reduces tourism spending within the community. However, it isn’t just the multipliereffect of missed tourist expenditures in the community that is absent as a result of thelack of banking services – there are also other gaps, many of which will be touched on inthe course of this report.About Mulegé The town of Mulegé is located along the Northeastern edge of Baja California Sur, and it makes up one of several towns that are part of the municipio (municipality) of Mulegé. The capital of the municipio is actually the city of Santa Rosalía, located approximately 40 miles to the north. Although the entire municipio has approximately 46,000 residents officially, lessMap courtesy of the State of Baja California Sur than 8% of these (or Insufficient Funds: the Demand for Banking Services in Mulegé, BCS page 2
  4. 4. approximately 3,500), live in the town of Mulegé. According to local estimates, at anytime there are likely 200-300 additional “locals” made up primarily of U.S. retirees orpart-time residents. Similar to other regions of Mexico, about one- third of the population is of children less than 15 years of age; and there are approximately 1,200 households (including those of part-time residents) in the broader Mulegé community. While income levels can generally be classified as lower- to middle-incomes in Mexico, there is little evidence of extreme poverty within the community – in part, it is likely, because of Mulegé’s relatively stronger economy (in comparison with other rural areas of Northern BCS).Despite the relative strength of the local economy, and the image of Mulegé as a touristdestination for travelers to Baja California Sur, there is neither a bank nor an AutomatedTeller Machine (ATM) in the community. Banking services must be accessed either in thecity of Santa Rosalía, or (further away) in the city of Loreto.Banking in Mexico: Crisis & EvolutionUnderstanding why no bank is located in Mulegé, and why banking access is limited in ruralareas of Mexico, requires an understanding of the historic disruptions that Mexico’s bankshave faced even in recent years. Much of Mexico’s regulatory framework for financialservices has been in place only since the mid-1980s, with significant reforms andimprovements happening less than 10 years ago. Historical CETES Interest RatesAfter a period of stability and growth, Mexico (28 day rate, annualized)experienced a major economic crisis in the early- 180 1601980s, resulting not only in the nationalization of 140banks in 1982, but also a spectacular increase in 120interest rates (see graph at right). Stability in 100 % RateMexico’s banking institutions returned somewhat by 80the early-1990s, as mergers and consolidations cut 60the number of banks to approximately 18. These 40banks were reprivatised by 1992. 20 0 Sep-82 Sep-84 Sep-86 Sep-88 Sep-90 Sep-92 Sep-94 Sep-96 Sep-98 Sep-00 Sep-02This stability was not long-lived, however, as asecond period of turbulence in Mexico’s financialsystem occurred as recently as 1994-1996, with the major devaluation of the peso andsubsequent collapse of some banks (and direct governmental intervention in others).This second crisis not only greatly affected the overall economy of Mexico, it also createda crisis within Mexico’s banking sector: hyper-inflation resulted in broad defaulting ofloans, cancellations of approximately one-half of all credit cards in the country (dropping Insufficient Funds: the Demand for Banking Services in Mulegé, BCS page 3
  5. 5. from about 14 million credit cards to The Unbanked in the U.S.only about 8.7 million by 2002), andincreased consumer distrust with banksin general. The problem of “access to banking services” andSince these crises, Mexico has been those without such access (the “unbanked” or “underbanked”) is an issue limited not only toprogressing through an evolution in its rural areas of Mexico. A September 2002 studybanking system. Some key facets of this issued by the U.S. Government Accounting Officeevolution include the liberalization of (GAO) concluded that more than 55% of all U.Sbank investment and ownership adults, and more than 22% of all U.S. householdsregulations (resulting partly from were “unbanked”.Mexico’s implementation of NAFTA andWTO agreements), as well as the In fact, surveys in some major urban U.S.creation of a Federal deposit insurance communities have concluded that up to two-program, and other industry thirds of individuals in households of less thanimprovements. These have led to $15,000 of annual income are “unbanked”, and often rely on alternative, non-bank services tosignificant investment by multinational pay bills or convert income checks into cash.financial companies into Mexico’sbanking sector in recent years, The percentage of “unbanked” becomes moreespecially benefiting higher income pronounced when looking at specific ethnicconsumers and larger businesses. groups (e.g.: approximately 52% of African Americans and 50% of Hispanics are unbanked,Major revisions to the country’s laws compared with approximately 21% ofregulating credit unions and savings Anglo/Whites ), or lower educational levels (i.e.:cooperatives (which tend to serve lower- as educational levels increase, the proportion ofincome consumers – those earning 3,000 unbanked decreases).pesos/month or less) also occurred as Also, some analogy of Mexico’s rural bankingrecently as 2001, resulting in the system may be made to the situation of U.S.creation of the Banco del Ahorro Indian tribes. A banking survey conducted inNacional y Servicios Financieros 2000 and 2001 for the U.S. Department of(BANSEFI). BANSEFI is attempting to Treasury’s Community Development Financialsupplement the existing network of Institutions Fund (CDFI) found that more thansmaller financial institutions serving this one-third of U.S. Indian tribal lands were moremarket, focusing primarily on rural areas than 30 miles from an ATM or bank branch(note: although BANSEFI has over 500 (nearly 10%, in fact, reported that air travel wasbranches, and is present in major cities, required to access an ATM or bank branch). In addition, participants in the Native Americanas well, there is to-date only one branch Lending Study reported that serious barriers toin Baja California Sur). banking services included tribal members’ lack of credit history, their lack of collateral, and a gapTaking all of the above into account, it is between Native American culture and “bankingclear that – should no major economic culture” – issues that are also very evident indisruptions occur – Mexico’s banking rural areas of Mexico.sector is undergoing a profoundevolution that should ultimately result in What seems clear is that, while these issues areboth greater access for the general certainly relevant in areas such as Mulegé andpublic to financial services, and to Baja California Sur, the economic and social impacts of “lack of access to banking services” isincreased stability in the sector. still a continuing issue for the United States and other developed countries, as well. Insufficient Funds: the Demand for Banking Services in Mulegé, BCS page 4
  6. 6. Banking in Mexico: Today & TomorrowBank BranchesAccording to the most recent data fromCONDUSEF (Mexico’s National Commissionfor the Protection and Defense ofFinancial Services Users [or ComisiónNacional para la Protección y Defensa delos Usuarios de Servicios Financieros]),there are approximately 7,700 bankbranches throughout Mexico, 42% of whichare located in the four states of theFederal District (D.F.), Jalisco, Mexico,and Nuevo León.As can be seen in the map at right, BajaCalifornia Sur ranks low in the density ofbank branches – with the third fewest number of branches, beating only the states ofTlaxcala and Campeche. BCS (with approximately 0.45% of the country’s population)accounts for only 0.71% of all branch locations in Mexico and has only 0.31% of all creditcard accounts. % Bank Branches in Mexico (2003) The largest bank (in terms of total branches) is BBVA Bancomer, followed by BBVA Bancomer Banamex, BITAL(now part of HSBC), Banamex Banorte, and Banco Azteca (a unique Bital entity, which is discussed in more detail Banorte later). It should be noted that Banco Banco Azteca Serfin and Santander merged operations Serfin in 2002, but are listed separately at left.Scotiabank Inverlat In the State of Baja California Sur, the Santander largest number of branches are 0% 5% 10% 15% 20% 25% represented by BBVA Bancomer (11), Banamex (10), Banorte (9), Banco Azteca (8), and BITAL/HSBC (7).With Citibank’s purchase of Banamex in 2001, multinational institutions now ownapproximately 90% of Mexico’s banking system. While this may be leading to what onebanking representative termed, “…a change in the moral vision of Mexico’s banks”1, byforcing banks to reduce any additional costs (including “social” expenditures), it also isresulting in significant investments in technology and increases in customer service. Insufficient Funds: the Demand for Banking Services in Mulegé, BCS page 5
  7. 7. In fact, despite the crises that Mexico’s financial sector has Do you have confidence inundergone through the years, it is clear that there is still a Mexicos banking system?high-degree of confidence in banks. 81% of residents inMulegé that were surveyed for this project stated that they Nohad confidence in Mexico’s banking system, with only 16% 16%stating “no confidence”. Similar results were also seen by YesMulegé business owners that were surveyed: 74% had 81%confidence, 16% had no confidence. Based on the frequent Some-remarks made by those surveyed or interviewed, some of whatthat confidence came directly from the fact that most of 3%Mexico’s banks now have multinational or internationalpartners that are improving bank operations. Banco Azteca: An Option for Mulegé? In discussions with several community leaders from Mulegé, one line of action that had been taken was, in fact, a request sent to Banco Azteca to open a branch within the town. Banco Azteca is one of the newest banking institutions in the country, formed only in 2001, and offering a variety of financial and insurance services geared toward lower- and middle-income consumers. Banco Azteca actually now has more than 10.7% of the total number of bank branches in Mexico, due to its unique nature as an affiliate of the Grupo Elektra companies and their strategic placement in Elektra retail stores throughout the country. This integrated relationship between a retail chain and a bank not only facilitates the purchasing of products on credit for the retailer, but also provides convenience for consumers and an opportunity to open accounts with as little as 50 pesos. Banco Azteca does indeed have a presence in Baja California Sur, including four locations in the Cabo San Lucas region, three in La Paz, and one in Ciudad Constitución. The very nature of Banco Azteca as an integrated part of Grupo Elektra stores, however, also limits (and perhaps excludes) the possibility of its entry into the Mulegé market. Since none of the Grupo Elektra retail stores are located in the municipio of Mulegé, it is unlikely that Banco Azteca will open any services there. What is certain is that the growth of Banco Azteca underscores just how underserved most consumers are – not just in Baja California Sur (where Banco Azteca – currently – has the second-largest number of account holders, after BBVA-Bancomer), but also in other areas of Mexico, as well.ATM AccessAnother option discussed that could provide at least some level of service for Mulegé’sbanking needs is the possibility of installing Automated Teller Machines (ATMs) in place ofa physical branch. According to an analysis by the Bank of Mexico (Banco de Mexico), theexpansion of ATM networks in Mexico has been similar to that of other countries, with the Insufficient Funds: the Demand for Banking Services in Mulegé, BCS page 6
  8. 8. number of ATMs increasing during 1994-2000 at a 23% annual rate2. Despite this progress,Mexico is still developing its ATM infrastructure. When comparing ATM access with othercountries, it appears that Mexico’s banks still underserve the general population. Forevery one million persons… ! … in Mexico, there are approximately 170 ATMs; ! … in the United Kingdom, there are approximately 612 ATMs; ! … in the United States, there are approximately 1,137 ATMs.A more detailed table with international comparisons is below: Table 1: Country Comparison of Access to Banking Locations Population # Bank Branches # Bank Branches # ATMs ATMs per Country (2001, in millions) (2001) per million people (2001) million people Mexico 98.8 7,311 74.0 16,700 169.0 United States 285.0 77,806 273.0 324,000 1,136.8 Canada 31.2 14,309 458.6 35,632 1,142.1 Spain 40.3 38,729 961.0 46,990 1,166.0 United Kingdom 59.9 32,183 537.3 36,666 612.1 Japan 127.3 38,662 303.7 116,905 918.3 Venezuela 24.6 2,958 120.2 4,242 172.4 Russia 144.0 12,058 83.7 5,887 40.9Note: For comparison purposes, it should be noted that the number of bank branches shown includes postoffice-based bank branches that are used in some countries.Given the low density of ATMs in Mexico (particularly in rural regions with little bankingaccess), it is important to note that some effort is being made by multilateralorganizations like the InterAmerican Development Bank to stimulate expansion of ATMaccess. Much broader efforts will be necessary, however, in order to improve Mexico’saccess to banking services – perhaps in conjunction with the US-Mexico Partnership forProsperity or other crossborder collaborative activities. These crossborder activitiesmight, in fact, be of great importance to U.S. banks, as is discussed later.In the medium term, as both Mexico’s banking culture evolves, the economy and incomesstrengthen, and workers’ remittances continue to increase from the U.S. to Mexico, thepotential demand for increasing the number of ATMs likely supports at least doubling thenumber of machines from current levels.RemittancesRemittances (or money transfers) into Mexico now make up the second largest source offoreign income into Mexico – after petroleum, and before tourism. Approximately US$14.5billion dollars was sent by Mexican expatriates or family members living in the UnitedStates to communities in Mexico. For the more than one million households in Mexico thatreceive these money transfers, they can make up a substantial portion of overall householdincome – between 30-50% in many cases. Insufficient Funds: the Demand for Banking Services in Mulegé, BCS page 7
  9. 9. Although through the mid-1990s, money transfers had still remained somewhat a nichemarket for U.S. financial institutions, well-known national banks such as Well Fargo,Citibank, and Bank of America have now begun to develop financial products specificallygeared toward this activity. This includes accommodating access to U.S.-sourcedremittances via ATM access in Mexico. The trend is extending even to regional banks, suchas US Bank and Commercial Federal Bank (in Omaha), that are offering internationalmoney transfer services for clients. Also, Mexican banks and savings institutions (such asSantander) are beginning to recognize these funds as a potential source of future servicesgrowth. This revolution in U.S.-Mexico banking relationships and new financial products –including not just money transfers, but also prepaid credit card-like products and evenmortgage accounts – has been steadily growing since 2000.Given the increasing interdependence and familial relationships across the U.S.-Mexicoborder, such remittances and financial transfers (whether using debit cards, crossbordermortgages, commercial lending, etc.) will likely continue its growth during the nextdecade. Such banking relationships will not only facilitate money transfers to the 1-2% ofhomes in Mulegé that currently receive such funds, but also funds related to the growingnumber of U.S. retirees that are relocating to Baja California Sur.The Demand forBanking Services in MulegéDespite the challenges facing the community of Mulegé, surveys conducted of bothresidents and businesses in November of 2003 clearly demonstrate a demand for bankingservices – perhaps enough to accommodate a bank mini-branch, ATMs, or other forms ofserving the community. Selected survey results are below:Not surprisingly, the vastmajority of residents in Mulegé Table 2: Type of Residents Surveyedare full-time residents (living I live in Mulege Full Time (10-12 months/yr) 80.3%there 10-12 months per year). A I live in Mulege Most of the Year (6-9 months/yr) 13.1%substantial number (13%)reported living there only 6-9 I live in Mulege Part time (1-5 months/yr) 5.7%months, while another 50-65 I am a Frequent Visitor to Mulege (1-3 weeks/yr) 0.0%households are “part-time” Short Term Tourist/Other/Dont Know 0.8%residents – living in Mulegé 1-5months/year. Insufficient Funds: the Demand for Banking Services in Mulegé, BCS page 8
  10. 10. ! According to the results of our residential and business surveys, 72% of local businesses and nearly 80% of City in Which You Bank? households claimed to have a bank 0% 20% 40% 60% 80% 100% 120% account in Baja California Sur. Santa Rosalia! The vast majority of bank users (over 93%) had accounts in the city of Santa Rosalía – approximately 38 Loreto miles to the north. Another 4% had accounts in Loreto, with some of these respondents also holding Other accounts in Santa Rosalía, as well (i.e.: accounts in both cities).! English-speaking residents reported a slightly higher tendency of having a bank account in BCS (92%, versus 77% for Spanish speakers). Interestingly, although the majority of English-speaking residents also access services in Santa Rosalía, they also tend to use Loreto’s banks much more frequently than Mulegé’s Spanish- speaking residents.! When asked: “If banking services were available in Mulegé, would you either visit your bank more frequently or open an account?” – the results (not unexpectedly) from community members was an overwhelming “yes”: o 100% of residential responses were “yes” (n=118) o 93% of business responses were “yes” (n=43)! Residents were also asked to estimate the frequency with Table 3: Frequency of Total Bank Trips which they currently visiting Households Businesses non-local banks (see table at Less than 1/month 16.5% 6.9% right). It is clear that 1-3 times/month 39.2% 20.7% businesses play an important Weekly 33.0% 41.4% source of demand for banking More than 1/week 8.2% 31.0% services, although the overall Not Applicable 3.1% 0.0% number of residents demanding such services is also noteworthy.! What is perhaps more significant than the percentile responses are estimates based on the trip frequency results. According to the survey results, community members make this 75+ mile trip at least 2,500-3,600 trips each month just for banking. 93% of all trips would go to the city of Santa Rosalía. This would imply approximately 75-110 trips each day made to Santa Rosalía from the greater Mulegé region (including from adjacent smaller communities). In addition to indicating the probable extent of demand for local services within Mulegé, these trips also have a significant economic cost (discussed in the next section). Insufficient Funds: the Demand for Banking Services in Mulegé, BCS page 9
  11. 11. Detours to Economic GrowthThe lack of effective access to banking services is not just an inconvenience; rather,serious and significant economic and social impacts that can affect the growth of acommunity can result. As noted by a recent report from the Inter-American DevelopmentBank, “[r]elatively underdeveloped financial markets in Latin America and the Caribbeancreate bottlenecks that impede economic growth as well as the reduction of poverty in theregion.”3This impediment to economic growth is strongly felt by the Do you believe that a lack of banking services hurtsMulegé community: 87% of residents and 93% of businesses Mulegés economy?surveyed stated that they believe a lack of banking serviceshurts Mulegé’s economy. In more specific terms, some of thepossible impediments to local economic growth caused by a No 12%lack of banking services include: Yes 86% Missed sales from local residents and tourists due to Dont ! Know/No lack of effective payments (cash, credit or debit cards, Opinion traveler’s checks, etc.); 2% ! Transportation costs and lost time from traveling to non-local banks (particularly to Santa Rosalía); and ! Missed money transfers from expatriated family members from Mulegé that may be working in other countries, or from part-time residents.Missed Sales79% of the businesses in Mulegé reported having lost sales because a customer was notcarrying sufficient cash to complete a transaction. This is largely because businesses inMulegé run almost entirely on cash transactions, with only a handful of locations identifiedas accepting credit cards, and relatively low acceptance of travelers checks (for fear offraud). This survey of businesses also indicated that the average amount of sales missedannually by these companies was approximately US$750-US$2,000 per location – in somecases, up to 50% of sales.These “missed transactions” have a real effect on the community of Mulegé: based on thesmall sample of businesses surveyed, the value of missed sales due to insufficient accessto cash likely ranges between US$170,000-US$300,000 annually. Given standardmultiplier effects, the impact may be as much as US$270,000-US$480,000 in economiclosses4. Insufficient Funds: the Demand for Banking Services in Mulegé, BCS page 10
  12. 12. Trips to Santa RosalíaCurrently, residents of Mulegé that desire banking services must either drive to anothercommunity, or rely on more informal semi-banking services offered by other communitymembers (such as loans, check cashing, etc.). As mentioned earlier, nearly all communitymembers that visit their bank travel to either Banamex or Bancomer branches in SantaRosalía.These trips usually also involve shopping in Santa Rosalía – so some of these trips may havebeen necessary anyway. However, conservative estimates based on the survey results andbasic transportation costs imply that banking trips to Santa Rosalía or for Loreto (whichis farther) cost the community of Mulegé at least $175,000-250,000 annually (just forgas). There are additional trip costs, as well, some of which are more difficult to quantify.Although the cost in terms of impact on infrastructure will not be discussed here, it isnotable that the physical amount of time necessary to both travel to Santa Rosalía (orLoreto) likely amounts to at least 90,000-170,000 hours of productive time lost annuallydue to traveling for banking services.Missed Money TransfersAlthough much more difficult to quantify, the effect of remittances (money transfers) onMexico in terms of economic impact has been briefly discussed. In the case ofcommunities in Baja California Sur, it is estimated that only about 1.7%-2.0% of thehouseholds in the State actually received remittances in 2000 (based on Census data).However, given the difficulty with actually transferring money into rural locations such asMulegé, it might be expected that remittances to such communities would actuallyincrease should effective banking services be offered.In addition, U.S. expatriates that are living in the Mulegé community full- or part-time mayalso be more likely to increase their annual expenditures into the community, given moreconvenient access to U.S.-sourced funds.In both cases, it is difficult to estimate what economicimpact these increased money transfers might have onthe community of Mulegé. Such transfers, however,were specifically mentioned by several residentsduring interviews, especially in relation to accessingemergency funds following natural disasters (such asHurricane Marty in 2003, that damaged roads to bothLoreto and Santa Rosalía). Insufficient Funds: the Demand for Banking Services in Mulegé, BCS page 11
  13. 13. Mulegé’s ChallengesChallenges to Banking?The evolution of Mexico’s banking sector will take time, and there still may not be theneeded incentives for a bank branch to open immediately in Mulegé. The challengesMulegé has experienced in attracting a bank are, in fact, numerous: ! Distance & Cost: These two key and critical issues are intertwined when it comes to discussing why no bank currently exists in Mulegé. According to two banking representatives, the cost to open a branch (approximately US$400,000-600,000) is part of the equation. Another part of the equation is the long distance between major population centers and the subsequent increases in a wide range of operational costs for supporting stand-alone branches (or ATMs). A unique and unavoidable cost for banks cited by three of the banking representatives interviewed for this study was the cost to physically transport money to banks in Baja California Sur. Money and checks must be regularly transported between either Tijuana or Culiacán. This involves armed vehicles traveling either by road, or (in the case of Culiacán) air shipment of cash. This cost applies to already existing banking centers in BCS, but is more pronounced for outlying locations. ! Population: Mulegé also appears to have the size of a population base that falls into a demand gap for many banks: it is large enough to have a reasonable demand for banking services, but not quite large enough to definitively ensure an appropriate return on a bank’s investment. Related to this latter point, Mulegé also has not yet been able to attract enough tourism (or retirees) to attract sustainable amounts of foreign currency inflows that support many BCS branches. For instance, in Cabo San Lucas and San Jose del Cabo, between 50-60% of funds in bank accounts are denominated in foreign currency (typically U.S. dollars). Currently, more than two thirds of all bank branches in the State are concentrated in the two municipios of Los Cabos and La Paz. Much of this can be attributed to two very real facts: first, that the populations of these two municipalities are somewhat concentrated into a relatively smaller geographic region; and, second, that this region corresponds with much of the economic flows within the State (especially in terms of real estate development and tourism, which attract large amounts of dollars). Insufficient Funds: the Demand for Banking Services in Mulegé, BCS page 12
  14. 14. The issue of population dispersion can again be seen by comparing the number of existing bank branches to the size of each of Baja California Sur’s five municipios. Los Cabos has the greatest concentration of bank branches (i.e.: the lowest amount of square kilometers/branch), with one branch for every 165 Concentration: Square Km./Bank square kilometers. The municipio of Mulegé, on the 12,000 Sq. Kilometer/Branch other hand has nearly one branch 10,000 for every 11,000 square 8,000 kilometers of territory. 6,000 Looked at another way, the 4,000 concentration of bank branches 2,000 in the municipio of Los Cabos means that there is 0 Mulegé Comondú Loreto La Paz Los Cabos approximately one branch for every 5,000 residents of that area, and only one branch for every 15,000 residents of the municipio of Mulegé5. The issue of population dispersion is – and will continue to be – a major challenge for siting a bank branch in Mulegé. ! An Issue of “Power”?: Consideration was also given to the stated concern that perhaps – for political or business reasons – there was some influence preventing a bank from opening in Mulegé. In particular, a few individuals expressed the benefit that accrues to Santa Rosalía’s economy by not having a bank in Mulegé. While this is true to some extent (discussed later), to quote one of the banking directors interviewed for this report: “Holding back a bank from a potential market can only be a temporary thing – not even the Governor can say ‘no’ when there’s demand.” ! First Mover Advantage: With the economic fluctuations that occur in some areas of Baja California Sur, and with the fierce competition that exists between Mexico’s banks, only one or a few banks will have the ability to profitably survive in a smaller market. Using the example of Todos Santos, when a town is already dominated by one bank branch, it becomes nearly impossible for other banks to enter the market and secure new customers. Such a situation will likely exist in Mulegé: the first bank to open a branch, will likely dominate the market for years to come, presenting a challenge to creating a competitive marketplace.Mulegé’s Larger ChallengesAlthough the focus of this study was originally intended to be solely related to the demandfor banking services within the community of Mulegé, there are potentially largerchallenges in both its current economic system and its future development. As onecommunity leader put it: “The lack of a bank is only a symptom. There are other, moreprofound problems.”Some of the most critical challenges mentioned by community leaders include: Insufficient Funds: the Demand for Banking Services in Mulegé, BCS page 13
  15. 15. ! Jobs: “If there is cariño [care] or interest in the future prosperity of Mulegé, we need a way to create sources of employment.” So commented one long-time community leader, adding that creating jobs will also result in attracting a bank. Nearly two-thirds of Mulegé’s 1,400 workers are employed in commercial and/or service enterprises (nearly all with less than 5-10 employees). Another 250 or so workers are employed in industry-related jobs, and another 225 in agriculture/fishing activities. One thing is clear: job creation in Mulegé and other rural areas of Baja California Sur suffers from some of the same structural challenges faced by attracting a bank: distance between population centers, increased costs of doing business, and BCS Maquiladora Employment poor infrastructure. Nor can BCS achieve (Jan. 99-Feb. 03) the industrial development and 3,000 employment creation strategies of 2,500 neighboring states like Baja California or 2,000 Sonora, which have focused on 1,500 maquiladora or crossborder 1,000 manufacturing. The State’s inability to 500 retain maquiladora businesses is demonstrated by the steady decline of 0 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 such businesses since late-2000, as seen in the graph at right.! Financing: Little or no local control exists to create local sources of funding, or to direct how government funds may be allocated. This challenge (faced by most local communities in Mexico) stems from the fact that most governmental funds are derived either at the Federal or the State level, and must pass through several layers of decision-makers (including at the municipal-level) before they can reach towns like Mulegé. Given that Santa Rosalía is the seat of Mulegé’s municipal-level government, some doubts were expressed that funds to support necessary infrastructure development or planning would ever arrive in the town of Mulegé.! Little or no planning for Mulegé’s development has taken place, nor does a community plan of any kind exist. This is especially critical now, as new and potentially significant development projects may occur on neighboring ejiditario lands. To date, no mechanism exists to integrate the expected development of these farming cooperative lands into the larger context of the Mulegé community; and, in some cases where development has moved forward, poor uses (such as sewage ponds adjacent to beach areas) have resulted. In fact, considering the potential importance of tourism to the community’s future, there are some notable gaps between the existing uses on some properties in Mulegé, and the image needed to attract tourists and/or investors to the town. Insufficient Funds: the Demand for Banking Services in Mulegé, BCS page 14
  16. 16. ConclusionWhile no bank currently exists in the town of Mulegé, Baja California Sur, it appears thatthe expansion of banking services to the town is inevitable – albeit perhaps the timing maybe years rather than months. The existing demand from residents, businesses, and visitorsin the community, as well as changes in both Mexico’s banking institutions and the way inwhich “banking services” are conducted (relying more on electronic and/or onlinetransactions) indicates strong prospects for the expansion of some form of financialservices into Mulegé.As noted, Mulegé represents only one such community throughout many other areas of BajaCalifornia Sur and Mexico, more generally, that are experiencing this insufficient access tofunds. As Mulegé advances in this area, it presents an opportunity to assess how theentrance of such services to a community can affect its future economic growth. Perhapslessons can be learned from the example of Mulegé to benefit other small communitiesthat also have such incredible potential.Mulegé’s potential future growth, however, is tempered by deeper issues – areas of needthat may be part of the underlying reasons why no bank operates in the community. Someof these issues are: stability in the town’s economic future (given the need for jobcreation), a vision for the community’s development (especially considering the lack ofintegrated regional planning), and little control over governmental expenditures for thecommunity. Whether or not these issues can successfully be addressed must be the focusof future activities, and potentially the development of a strong civic culture and civicactivism from the community itself.What is clear as the waters of the Sea of Cortéz: despite insufficient funds and in someways being, as one banker put it, “an island”, Mulegé and many other communities withinthe State of Baja California Sur are approaching a point of transition. The direction of thattransition is the question that remains. Insufficient Funds: the Demand for Banking Services in Mulegé, BCS page 15
  17. 17. Appendices & Special ThanksAppendix 1: Selected Residential Survey ResultsIn late-November, 2003, CBA implemented a small survey of residents located in the maintown of Mulegé, and in communities within several miles of the town center. During CBA’sshort visit to the region, we were able to conduct a bilingual (Spanish & English) survey ofslightly more than 120 individuals. Approximately eight general locations were selected inorder to provide a somewhat representative balance of full- and part-time residents, andevery attempt was made to keep the sampling random. Our resulting sample size wassmaller than preferred, but acceptable: 122 participants resulting in a confidence level of95% +/- 8.5%. Table Res-1: Crosstab of Resident Type & Language Which of these statements best describes you (as a resident of Mulegé): Short Term/ Full Time Most of theYear Part time Frequent Visitor Other/Dont (10-12 mo./yr) (6-9 mo./yr) (1-5 mo./yr) (1-3 wks/yr) Know 80.3% 13.1% 5.7% 0.0% 0.8% Language Spanish 95.8% 4.2% English 25.9% 59.3% 11.1% 3.7% Table Res-2: Crosstab of Bank Acct Status & Language Do you or someone in your household have a bank account in BCS? Yes No 81.1% 18.9% Language Spanish 77.9% 22.1% English 92.6% 7.4% Table Res-3: Crosstab of Bank Acct Status & Resident Type Do you or someone in your household have a bank Yes No account in BCS? 81.1% 18.9% Which of these statements best describes you: I live in Mulegé Full Time (10-12 months/yr) 81.6% 18.4% I live in Mulegé Most of theYear (6-9 months/yr) 93.8% 6.2% I live in Mulegé Part time (1-5 months/yr) 57.1% 42.9% I am a Frequent Visitor to Mulegé (1-3 weeks/yr) 0.0% 0.0% Short Term Tourist/Other/Dont Know 0.0% 100.0% Insufficient Funds: the Demand for Banking Services in Mulegé, BCS page 16
  18. 18. Table Res-4: Crosstab of Bank Acct Status & Resident Type Less 1-3 MoreHow frequently do you currently need to visit Not than times/ Weekly thanyour bank in BCS? Applicable 1/month mo. 1/week 16.5% 39.2% 33.0% 8.2% 3.1%Which of these statements best describes you: I live in Mulegé Full Time (10-12 months/yr) 20.8% 36.4% 29.9% 10.4% 2.6% I live in Mulegé Most of theYear (6-9 months/yr) 53.3% 46.7% I live in Mulegé Part time (1-5 months/yr) 50.0% 50.0% I am a Frequent Visitor to Mulegé (1-3 weeks/yr) Short Term Tourist/Other/Dont Know 100.0% Insufficient Funds: the Demand for Banking Services in Mulegé, BCS page 17
  19. 19. Special ThanksAlthough the total number of people that contributed to this report are too numerous tomention by name, Crossborder Business Associates (CBA) would like to note the followingindividuals that played a key role in the development of this study:Residents of MulegéCBA’s research in the town of Mulegé relied on the personal time and interest of many individuals tosupport the goals of this project – including the residents and business owners that participated inthe project’s survey. However, a special note of thanks is given to the following individuals: ! Alfonso and Adrian Cuesta ! Leon Nolet ! Miguel Angel Quintana ! Alvaro Padilla ! Saul Davis ! Don Johnson ! Francisco Javier Marron Rodriguez ! Melitón Enciso RodriguezSurvey work was facilitated by the very kind Maestra Dolores Cuesta Mesa,who arranged for three very dedicated and hard-working high schoolstudent assistants: Salvador Higuera Camacho, Elvia Sanchez Pasillas, andAdiel Gorosave Cota (pictured above and at right).A note of thanks also to Mrs. Judy Tussy, who provided several useful recommendations at thebeginning of the project. Mrs. Tussy is one of several promoters in the town for the Mulegé StudentScholarship Program – a non-profit group that supports basic needs for students in Mulegé (for moreinformation, please visit www.bajaquest.com/msspi/ ).Banking RepresentativesThe following individuals generously gave their time, and provided special insight into BajaCalifornia Sur’s banking system: ! Roberto Miranda Caperon, Sub-Director Regional Zona, Banorte ! Joel Guerrero, Gerente, Scotiabank Inverlat ! Jorge Alberto Aguilar Siono, Sub-Director, BITAL ! Víctor Manuel Corral Valdez, Titular de Plaza BCS, BanamexResearch AssistanceAlthough CBA’s Director (Kenn Morris) conducted the majority of research and analysis for thisproject, important background research assistance and advice was provided by the very graciousDoctora Antonina Ivanova Boncheva, Professor in the Department of Economics from the UniversidadAutónoma de Baja California Sur (UABCS); and CBA’s Market Research Assistants Vereniz Lavenantand Yuen Yee Lepe Ley. Insufficient Funds: the Demand for Banking Services in Mulegé, BCS page 18
  20. 20. About Crossborder Business AssociatesCrossborder Business Associates is a San Diego-based crossborder marketresearch, strategic consulting, and policy analysis firm dedicated to helpingbusinesses, governments, and organizations explore opportunities and issuesacross and along the US-Mexico border. For more information, please seeCBA’s website at www.crossborderbusiness.com .About the International Community Foundation (ICF)ICF is a non-profit public charity formed in 1990 to foster lasting philanthropy to benefit under-served communities throughout the Americas and Asia. With over 70% of ICF’s recent grantmakingbenefiting charitable causes along the Baja California peninsula, ICF is assists donors from theUnited States and abroad with charitable giving needs from Tijuana to Los Cabos. For moreinformation, please visit ICF’s website at www.icfdn.org .1 Confidential interview with La Paz-based banking director, 11/17/2003. Banking representativesinterviewed for this project included La Paz, BCS, banking directors and managers from Banamex,Banco Azteca, Banorte, BITAL, and Scotiabank between 11/16 and 11/18 of 2003.2 Evolución Y Estructura De Los Medios De Pago Distintos Al Efectivo En México, Eduardo Jallath &José Luis Negrín, Banco de Mexico (August, 2001: p. 10).3 “Financial Market Development: Support from the IADB Group 1990-2002”, Inter-AmericanDevelopment Bank (February 2003, p.3)4 Because of the small sample size involved with the survey, CBA recommends additional researchto increase this estimate’s accuracy.5 Based on INEGI 2000 Census data and 2003 data from CNBV. Insufficient Funds: the Demand for Banking Services in Mulegé, BCS page 19

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