Sunday, October 12, 2008

The Ugly Side of Mircolending (part 2 of 5)

Reproduced from an article in Business Week, December 13, 2007.
Full article http://www.businessweek.com/magazine/content/07_52/b4064038915009.htm
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But it creates tempting hazards as well, which in Mexico are drawing many unsophisticated families into a maze of debts. Pawnshops and loan sharks, whose interest rates of up to 300% have plagued generations of Mexicans, now face rivals offering terms that are less harsh. But along the road to previously unavailable financing, some Mexicans are stumbling badly.

The Arana family is but a blip on one of the wide screens at Azteca's operations center. Beneath the digital glimmer lies a story of striving. Adrián Arana Sánchez, his wife, Francisca, and their extended family take whatever work they can find, adding a few pesos here and there. Last July, Adrián lost an $80-a-week job delivering soft drinks to stores in gritty, exhaust-choked San Martín Texmelucan, a city of 143,000 two hours southeast of Mexico City. He now brings home half that amount peddling vegetables door to door and making plaster-cast statuettes of Jesus. Francisca sells crunchy slices of jicama root outside an elementary school. With four children, two grandchildren, and a son-in-law, they live in a four-room cinderblock house in the shadow of snow-capped volcanoes once revered by the Aztecs.

Although indigent by U.S. or Western European standards, the Aranas see themselves as aspiring consumers and even as entrepreneurs in a society that makes all manner of goods and services available for what seem like manageable weekly payments. Banco Azteca plays a central role in that emerging credit economy. Started five years ago, it operates from the nearly 800 locations of its parent, Grupo Elektra, Latin America's largest electronics and home appliance chain. Elektra/Azteca has the sort of ubiquitous presence that Wal-Mart enjoys in the U.S.

SEEKING A MIDDLE-CLASS LIFE

The dazzling yellow facades of Elektra/Azteca outlets shout for attention in rundown neighborhoods. Inside the store across from the Catholic cathedral in San Martín Texmelucan, a tag on a six-speaker sound system throbbing with ranchero music carries a price of $691, but larger bold print stresses weekly payments of only $16. An installment plan can be arranged by Azteca staffers who work from metal desks at the back. Over 18 months, the weekly payments nearly double the price, to $1,248. That's an APR of 88%. APR is commonly used in the U.S. to compare total loan costs. In Mexico, Azteca isn't legally obliged to disclose it—and doesn't. (Mexican loans include a 15% tax on financial services.)

Adrián Arana, 50 years old and with a sixth-grade education, has become a regular customer at this branch of Elektra/Azteca. He and Francisca, who completed only the second grade, have obtained a series of small loans over the past four years to purchase a CD player, bicycle, TV, video camera, and bedroom furniture. In 2006 they took the next step, borrowing $920 to pursue a long-cherished ambition: opening a dry-goods store in the front room of their house. They saw the store as a means to achieve stability, and maybe a middle-class life. But like many tiny businesses started by inexperienced proprietors, this one soon failed. A neighbor had just opened a similar but better-stocked home shop. The Aranas toiled diligently at their other jobs to pay back the loan, missing some weekly payments and incurring late fees. With an APR of 105%, the loan ended up costing about $1,485 over a year. But they paid it off.

Determined to try again, they were back at Azteca in February with a new plan, this time to start a gift shop. Azteca granted them a bigger loan, for $1,380 over 18 months, but deducted $65 up front, leaving the Aranas with $1,315 and an APR of 90%. They say they didn't understand these terms. They focused instead on the weekly payment of only $32. "They never tell you what the interest rate is," says Adrián. "They say, Sign here,' but they don't give you time to read everything."

Some Azteca executives concede that borrowers sometimes walk away confused. "Terms are explained to them, maybe not as clearly as they should be, but many clients don't understand,"

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