With nearly 2 million square kilometers and over 100 million people, Mexico is Central America’s largest and most populous country. Blessed with a diverse climate, and abundant resources in land and oil, Mexico is a middle-income country that is currently recovering from its worst recession in over half a century, sparked by the 1994 devaluation of the peso. Since then, the economy has experienced sustained growth through expanded trade, currency stability, and modernization of its industrial and agricultural sector, now dominated by the private sector. Despite these gains, income distribution remains highly unequal and rural areas still suffer from endemic poverty. The informal sector provides employment opportunities for many Mexicans, 40% of whom are estimated to live under the poverty line.

Reliance on the informal sector in a context of economic stabilization provides a ripe environment for the development of a robust microfinance industry. Yet, the Mexican microfinance sector is characterized by high levels of fragmentation, low outreach and weak supply. A small number of microfinance institutions, supported by international networks, are emerging as market leaders and the government has indicated a strong commitment to support the industry through various capacity building measures, including the establishment of a specialized fund to support the development of microfinance institutions. However, the sector remains dominated by the “cajas” system, where each cooperative or savings and loan association demonstrates limited capacity for outreach and sustainability. The dearth of growing, sustainable microfinance institutions is especially acute in rural areas. While there is a plethora of rural financial intermediaries of varying institutional forms and operational purposes, most focus solely on the agricultural sector and few actually have the purpose and capacity to support microentrepreneurs on a sustainable, non-subsidized basis.

In this context, SUM and UNDP Mexico initiated a Microstart programme in 2001 to support the development of a robust microfinance industry in rural areas. The programme consists of three components. Under the first component, SUM and UNDP Mexico are working with Innova, a Technical Service Provider, to provide technical assistance to three rural financial intermediaries seeking to transform into full-fledged microfinance institutions. The tree institutions are GRENSA in the north (Magdalena), FMDR in the Federal District and ASEA in the southern state of Chiapas (Tapachula). The technical assistance includes the transfer of a specialized microfinance Management and Information System (MIS), training in microfinance lending methodologies and the development of specific microfinance products based on market research. The objective of the project is build replication models that will lead the growth of rural microfinance institutions. The three institutions began lending operations for this pilot project in December 2002. Under the second component of the Microstart programme, SUM and UNDP Mexico have contracted the services of Accion International to work with FIRA, a rural financial wholesale institution, and develop its capacity to support the microfinance sector through the development of appropriate monitoring and funding mechanisms. The objective of the project is to establish FIRA as a lead agency in the growth of Mexico’s rural wholesale microfinance industry. Under the third component, SUM and UNDP Mexico will leverage the experience garnered under the first two stages to expand the transfer of technology and knowledge to other actors through the development of a local supply of technical services providers, the expansion of funding sources, including the participation of the traditional banking sector, and the application of microfinance methodologies to a growing number of rural intermediaries.

Through the transfer of capacity at both the retail and wholesale level, Microstart is laying the foundations of a rural microfinance industry as a whole. Upon completion, SUM expects Microstart to serve as a catalyst for the participation of a broader range of actors in the industry, sparked by the examples of FIRA and the three microfinance institutions.