Creativity Goes Where Banks Fear to Tread

When the peso crisis hit Mexico in late 1994, a mid-size computer company called Dataflux was one of many firms that struggled to survive a deadly mix: spiraling interest rates, rampant inflation and a peso that had suddenly lost half its value.

Even though its operations were healthy, the Monterrey-based company was in danger of collapsing under the weight of the bank debt it had taken on to finance its rapid growth.

Company President Guillermo Salinas Pliego came up with a novel solution. He persuaded his brother, Ricardo Salinas Pliego, owner of TV Azteca, Mexico’s second-largest television network, to invest in Dataflux; Azteca paid for its stake not with cash but with advertising time. Guillermo Salinas Pliego then got Dataflux’s banks to accept ads on Azteca stations as a form of repayment.

That unconventional source of noncash financing worked for everybody: Dataflux got some breathing space, Azteca sold some much-needed advertising, and the banks got repaid--through advertising exposure rather than money.

The Dataflux anecdote helps answer an important riddle: how Mexico achieved such impressive economic growth--7% in 1997 and a still-respectable 4.5% projected for this year--when the nation’s banks are lending hardly any money. The banks have been stagnant since they nearly drowned in bad loans during the crisis, and the latest global turmoil has further dampened new lending.

So who has been financing the strong recovery?

Part of the answer is that the peso crisis itself encouraged Mexican businesses to develop a whole new arsenal of financing tools. The emergence of these creative sources of capital has encouraged what most analysts see as a healthy shift away from banks as the traditional intermediary between lenders and borrowers.

It’s an emerging-markets version of the kind of diversification of financing that has occurred in the United States in recent decades.

“One of the fascinating stories is that we’ve seen growth can be achieved without the banking sector,” said Deborah L. Reiner, chief economist of the U.S.-Mexican Chamber of Commerce. “It does constitute an obstacle to growth, but the economy has managed to grow without borrowing from the banks.”

Poor countries like Mexico have traditionally spawned creative, sometimes underground financing systems in lieu of banks. But the peso crisis and its aftermath seem to have ratcheted up the development of new techniques.

The new financing landscape ranges from huge Mexican conglomerates issuing their own corporate bonds, to wealthy families pouring savings into venture-capital projects, to imaginative home mortgage schemes designed to revive middle-class buying. Most of these occur without any bank involvement at all.

For consumers, perhaps the most unusual creative financing scheme is Autofin, a company that brings together pools of savers who want to buy a car or make a down payment on a house.

Members of the pool pay for their car in 50 monthly payments, but they don’t actually get the car until they make a certain number of those payments--typically 15.

For a house, a buyer makes monthly payments for four years to achieve the down payment. At that point, the buyer takes possession of the home and continues making payments for a total of 200 monthly installments.

Autofin’s car program predates the 1990s, but the company expanded into home financing in 1994 at a time when conventional bank mortgages were all but frozen. Since the peso crisis bottomed out, the program has expanded dramatically.

Local savings schemes are also thriving in Nuevo Leon state. Called “social banks,” these savings clubs are regulated by the state through the I Give My Word Credit Program, which counts about 200,000 peasant savers around the country as members. Four clubs in one county alone have saved $3 million to finance tractors and other farming tools, according to organizer Pedro Morales.

In the town of Doctor Arroyo, Morales said the savings club was so successful last year that “to everyone’s surprise, the club acquired the local branch of Bancrecer, which was on the point of closing for lack of economic activity.”

But more striking is the degree to which small and medium-sized companies have managed to grow and to create jobs.

Since returning from the abyss in 1995, Dataflux has virtually stopped borrowing from banks. Instead, it relies on a cocktail of financing devices that reflect the changing ways of doing business in Mexico. And it has grown, from $8 million in sales in 1992 to an expected $210 million this year.

At the height of the peso crisis in mid-1995, financial director Gerardo de la Garza remembers, the company’s suppliers extended the first lifeline. The computer companies whose products Dataflux distributed, including Compaq, Hewlett-Packard, IBM and Apple, offered different types of support. Some agreed to freeze the dollar-peso exchange rate when calculating the cost of goods; others extended interest-free payment deadlines up to 10 months.

When it resumed its powerful growth, Dataflux shunned bank financing in its search for capital. It went public in mid-1997, selling 16.5% of its share capital on the stock exchange for $30 million.

The company is seeking another $30 million in financing over the next five years to fund expansion of its newest and most successful initiative: computer schools.

And there, Dataflux is doing its own bit of creative financing: extending credit to its students. Dataflux assembles and sells no-name computer clones, which it also uses in its training schools around the country. Students who want to buy the computer on which they are being taught can do so by paying $14 a week over 38 weeks.

Thus Dataflux is developing a market for its own products through its body of 20,000 students in the 70 schools now operating. Another 80 schools are planned.

In such forms, the financing revolution has moved beyond the nation’s army of exporters, which formed the backbone of Mexico’s initial post-1995 economic recovery. After all, it is relatively easy for exporters to borrow dollars from U.S. sources, using their dollar-based export earnings as a guarantee. It is much harder for smaller companies serving the domestic Mexican market to finance their growth.

And another fresh source of capital is on the horizon: a massive increase in pension funds in Mexico due to retirement system reforms in the 1990s. This will make vast sums available for housing loans and other investment, said Antonio Ortiz, general director of corporate banking for the aggressive and successful Banorte bank.

Ortiz cautioned that Mexico’s recent economic growth seems dramatic in part because the 1995 plunge was so severe. Few economic indicators have regained their pre-1995 levels, he added, “and much of the productive capacity was already sitting there idle. There wasn’t a need for a very big process of investment to allow growth to resume.”

To be sure, the Mexican economy still relies more heavily than the United States on conventional bank finance. Ricardo Guajardo, chief executive of Bancomer, Mexico’s No. 2 bank, told a conference that until recently, banks were intermediaries for most of the financial resources of Mexico, “and this is not healthy. I believe that the emergence of more specialized [financial] institutions is something that will make the market much more efficient.”

Eighteen foreign financial institutions have set up shop in Mexico since the 1994-95 peso crisis, mostly offering specialized corporate and investment services to large Mexican companies rather than consumer banking. The foreign banks are not yet a major factor in overall growth, however.

John S. Donnelly, longtime Mexican hand and head of Chase Manhattan Bank’s Mexican operation, estimates that 60% to 70% of Mexico’s recent economic growth has resulted from “supplier-chain financing” rather than bank loans.

He said Mexico has begun to emulate the U.S. process of “disintermediation”--a reduced dependence on banks as intermediaries that take deposits and lend to companies to finance growth.

Monterrey, an arid industrial city in Nuevo Leon state adjacent to Texas, is often cited as a center of innovation in Mexican business, and the forays of its companies such as Dataflux into new finance are an example.

Carlos Zambrano Plant, who joined the state government a year ago as economic development secretary after 37 years as an auto parts executive, says Monterrey’s growth historically flowed from local capital, starting with the Cuauhtemoc brewery in 1875 and Latin America’s first steel mill in 1900 and continuing today with the world’s largest cement company, Cemex, and other multinationals.

“Scarcity is what made Monterrey,” Zambrano said. “The people of Monterrey know where to put their money. . . . [T]he industrial community here values two things: work and savings. And if you mix work and savings, the common denominator is productivity.”

He cited an example of local capital formation: A group of 180 struggling orange growers in Montemorelos banded together last year, pooled their savings and established a mushroom-processing plant that now is proving highly profitable. The state gave a small amount of funding to the stockholders, which is now being repaid.

Family and personal ties are often described as key factors in obtaining financial support and clinching business deals in Monterrey. Deals made through family relations play a role that is hard to quantify but nevertheless essential in venture capital funding and other private equity investment in this alternative, non-bank financial system.

“The parallel financing system that sprang up after the 1982 debt crisis still exists,” said a Western diplomat familiar with the Monterrey scene. “There are a lot of people out there who want to lend, and they charge very high rates, and borrowers give them a piece of the action.”

Santiago Trevino, director of the U.S.-Mexican Chamber of Commerce in Monterrey, when asked where most financing is coming from, said: “I’d put family first. Second, I’d put shareholders, which sometimes is the same thing. Third, there is an emerging venture capital market . . . small organizations that have several million dollars to invest, and they do it by themselves without any bank involvement.”

For Mexico’s banks, still operating in low gear under a heavy burden of bad debt, this all points to an uncertain future, to say the least.

Carlos Gomez y Gomez, president of the Mexican Bankers Assn., acknowledged recently that financing for businesses is coming from suppliers, export customers and foreign lenders, not from Mexican banks.

Mexican banks, said Banorte’s Ortiz, must recognize that this is happening “and ask themselves, ‘What do I do in this new reality to grow?’ We are already fewer banks, consolidating, and those that survive will be those that provide good services, have world-class technology.

“We have to do the same as the companies we serve have done: create alliances, joint ventures.”