Sign up for chump change: as bankers remain stingy, small creditors step in to pick up the slack.

The strength of consumer spending within Mexico, spurred by steady increase in credit, has defied a war-rattled world economy so far this yea Geopolitical instability has battered the demand for Mexican exports, leading Banco de Mexico Gov. Guillermo Ortiz to reduce his estimate for economic growth this year.

But analysts are acknowledging new internal dynamism in the Mexican economy, thanks in no small measure to increases in business and consume credit, which sustain spending on commercial construction, home appliances cars, and even weddings and funerals.

The total of all outstanding consumer loans has rebounded to 94% of where it stood in 1994 before the peso devaluation and corresponding financial crisis. (Housing and business credit balances are still much smaller than pre-crisis levels).

"Right now the economy is not growing that fast," said Fabiola Molina, manager of analysis and strategy at Casa de Bolsa Banorte. "But growth in consumer credit is becoming very important because it was not available in the past."

During the so-called Tequila Crisis, more than half the bank assets in the country were written off, and portfolios loaded with home mortgages were especially hard hit. In the aftermath, consumers often arranged loans with stores and vendors, for lack of other options. But layaway plans were no substitute for a mature system of personal credit.

"Much of the credit after the crisis was given by way of providers, which isn't measured by the government or banks," said Molina. "But little by little the system is being strengthened to make sure credit increases. And obviously there are studies indicating that credit is important for the development of an economy. In an economy where there is no credit, growth is less than in an economy where credit is more advanced."

HOOKING UP THE LITTLE GUY

Much of Mexico's recent credit growth can be attributed to Limited Purpose Financial Societies, known as Sofoles by their initials in Spanish. A 1993 law authorized these creditors to take on the social purpose of providing credit to people with modest incomes--those often passed over by banks. Federal government credits helped Sofoles make housing loans, in particular, more accessible.

Last year, the nation's 34 Sofoles authorized about 1.5 million loans, increasing their portfolios by 32%, according to the Mexican Sofoles Association. In the fast-growing consumer loan market, non-bank lenders managed more than US$8 billion in credit, nearly half the national total.

Banco de Mexico records show an overall increase in consumer credit from 64 billion pesos in 1998 to 168 billion pesos at the close of last year-- an average of more than 40% annual growth. Consumer credit growth has been fueled by the proliferation of personal credit cards and more accessible auto loans, analysts said.

Eager to attract new cardholders, lenders devised so-called "zero-interest" deals--delaying initial interest charges for new cardholders. Mega-retailers have devised their own cards to stimulate spending. Banks are ready to introduce "smart cards" to a Mexican public wary of credit card cloning. Finance deals are making car ownership an option for many Mexicans long priced Out of the market.

Sofoles Ford Credit de Mexico and GMAC Mexicana so far have awarded 3.1 million auto loans. And with help from Sofoles, the domestic automobile market has stood out as a source of growth in the auto industry. Auto production for the domestic market increased 4.5% in 2002 compared with 2001, according to the Mexican Automotive Industry Association. During the same period, production for exportation dropped 4.3% and export sales dropped 6.4%.

More sophisticated central record-keeping is helping creditors keep tabs on lenders. Mexico's independent Credit Bureau is now used regularly by banks and Sofoles before authorizing loans.

In the month of February, consumer credit increased 35.2% over the same 2002 period, according to central bank figures. The national total for outstanding consumer credit had increased for 38 consecutive months. Nearly half of that credit is held by non-bank lenders, mainly Sofoles.

LENDING WITH A CONSCIENCE

Financiera Independencia is among the Sofoles fueling the rapid growth of consumer credit among working class borrowers. Financiera Independencia's loans fall between US$150 and US$800. They help furnish houses, throw weddings, pay tuition, allow vacations and cover medical emergencies.

"Banks are not in this niche," explained Gerardo Chavez, the Sofol's commercial director, noting that his customers would not qualify for most credit card offers. Interest rates range from 3.6% and 4.5% a month, including all fees and a form of unemployment insurance that can freeze loan payments temporarily without default.

Financiera Independencia's 150,000 outstanding loans add up to a balance of about US$75 million, only a fraction of one percent of Mexico's outstanding consumer credit.

But this Sofol's explosive growth--albeit on a small scale--may help explain why Mexicans can continue spending in a cash-tight economy. Financiera Independencia expanded from 32 outlets to 52 outlets in 2002 and now employs 2,000. It will also open six locations in Guadalajara on April 28.

On a social mission to go where banks have never been willing to go, Financiera Independencia and other Sofoles have developed their own playbook for lending. Down payments or security guarantees are not required at Financiera Independencia, for example. The creditor instead looks for proof of on-the-books employment for at least one year. Home ownership or a co-signer also can qualify an applicant.

Despite the dazzling recent growth of consumer credit on a national scale, the sector represents less than 9% of the national credit pie. Credit to businesses--which accounts for 70% of direct financing--also increased in February by 12.9% in real terms. The short-term news followed steady increases in credit to businesses in recent years. The Banco de Mexico has recorded 3.8% annual growth in business credit over the past four years.

KEYING IN ON HOUSING

Sofoles have made their largest impact in the housing mortgage market, where bank participation continues to slide. Housing credit held by banks declined by 34% between 1998 and the end of 2002. The Chamber of Deputies has approved a mortgage reform plan that would make it easier for lenders to get back their money when borrowers default. If approved by the Senate, the reform could entice banks to reinvest in housing. Meanwhile, Sofoles have been steadily increasing their exposure and market share.

Between 1998 and the end of 2002, non-bank lenders increased housing credit from US$1.1 billion to US$6.1 billion. In the course of 2002, non-bank housing credit grew by about 32%.

But those gains have not compensated entirely for the banks' slow retreat from the home mortgage market. Overall housing credit, as a result, has been stagnant in recent years. The advance of housing Sofol Su Casita illustrates how non-bank lenders have turned the home mortgages wasteland of 1994 into fertile ground for business in 2003.

"After the 1994 crash, delinquencies on mortgages were sky high," said Mark Zaltzman, su Casita's corporate finance director. "We were created in stressful times and what we had to do was invent new methods of business."

AT LEAST NO BROKEN THUMBS

By focusing relentlessly on loan collection, Su Casita steered wide of Mexico's time-consuming legal process for reclaiming loans and property--a foreclosure process that helped gut bank portfolios after the '90s crisis.

"If there's a problem [with a mortgage holder], you detect it right away, you don't wait six months," Zaltzman explained. "We deliver all statements by hand, we don't slip it under the door. When a borrower cannot pay, the evaluation and negotiations start immediately ... The secret here is to do it as soon as possible and not wait and blame it on the borrower."

Known by its friendly beaver mascot, Sn Casita makes both construction loans to residential developers and direct home mortgage loans. Most Su Casita residential borrowers earn between US$250 and US$500 a month and housing loans now average about US$28,000.

A privately held company, Su Casita became the second-largest Sofol after it merged with Financiamiento Azteca. Su Casita started issuing public debt on the Mexican Stock Exchange in 2000 and now is a recurring issuer. The company now has assets of US$1.3 billion, which also counts as its loan portfolio.

More remarkably, Su Casita has been consistently growing 60% per year. That rate will slow down some this year because of the sheer size of the business, Zaltzman said.

"Slowing down" means Su Casita still expects to write between 11,000 and 12,000 mortgages, adding more than US$300 million to its portfolio. Larger home loans at Su Casita now total US$150,000. Some analysts say Sofoles have expanded to serve a broader market.

"Sofoles initially were created to write loans on the lower-income levels," noted Molina of Banorte. "But now they're providing loans for housing that's of a much higher price."

Molina said the full recuperation of credit in Mexico--be it at banks or Sofoles--may well be the key to speeding up national economic growth.

"I think once we see a boom in credit the economy is going to grow faster than we're seeing right now," she said.

Morgan Lee is a Mexico City-based freelance writer and a correspondent for the Albuquerque Journal.