Pawning Helps Pay for the Pinata in Loan-Poor Mexico

MEXICO CITY —  Aurora Rico Torres is hosting a big holiday party this week, part of a nine-day celebration leading up to Christmas. Before buying the pozole, punch and pinatas, she took part in another Mexican tradition: pawning.

On a recent afternoon, the young homemaker went to El Nacional Monte de Piedad, or National Mountain of Pity pawnshop, to hock her $250 diamond bracelet and gold earrings to help fund the celebration.

Looking bewildered among the snaking lines of customers, Rico confessed: “It’s my first time here.”

It probably won’t be her last. Many Americans consider pawnbrokers to be lenders of last resort. But for millions of credit-deprived Mexicans, the pawnshop is the only option for obtaining a loan.

That kind of demand is driving fast growth in the industry here. Pawnshops are unregulated in Mexico, so reliable figures on the number of outlets are not available. But there’s little doubt that local outfits are expanding while U.S. companies such as Mister Money-USA Inc. are aggressively moving south of the border.

The Fort Collins, Colo.-based chain has 22 locations in Mexico and is planning 20 more in the next three years, said Tim Lanham, president of the privately held company.

“We’re putting all of our growth into Mexico right now,” he said. “The return on your investment is better than in the United States.”

Mexican pawnshops do a brisk trade year-round. But December and January are the busiest months. That’s when consumers pawn household goods to pay off extra bills. Others comb the aisles of forfeited merchandise looking for bargain Christmas gifts.

Rico was disappointed with the $50 that she got for her lot. But her fiesta-financing scheme is more troubling for Mexico. The nation’s economy isn’t expanding fast enough to generate sufficient jobs and prosperity for its 105 million people.

Most Mexicans still lack bank accounts. Fewer than 15% have credit cards. The world’s 10th-largest economy runs largely on cash.

Despite a surge in new lending in recent years, Mexico remains one of Latin America’s most credit-poor nations. The dearth of lending to help many Mexicans build homes and businesses -- and to make household purchases -- is retarding economic growth while nurturing tax evasion and the underground economy.

“It is hurting Mexico’s development and competitiveness,” Gustavo del Angel, an economics professor at the Center for Economic Research and Teaching in Mexico City, said of the nation’s credit crunch.

Although many struggling families pawn goods to tide them over, it’s not just the poor who rely on such services.

Mexico City jewelry trader Sergio Becerril said he had diamonds almost continually in hock to raise capital for his business. He said banks wouldn’t give credit lines to a small businessman like him. Even if they did, he figured the terms would be too onerous.

“Pawning is quick and easy,” said the fast-talking Becerril. “It’s all about cash flow.”

Mentioned in the Old Testament, pawnbroking may be civilization’s oldest form of lending. Borrowers put up items such as jewelry, tools or musical instruments as collateral. A pawnbroker appraises the merchandise and typically loans about 50% of what the assets would bring in a sale. The borrower agrees to repay the loan with interest, usually within a few months, to reclaim the goods. If the customer defaults on the loan, the pawnbroker keeps the merchandise and sells it.

This ancient practice continues to thrive in Mexico. Borrowers don’t need to have a job, a credit history or a co-signer. All they need is something of value to serve as collateral.

Because there is little government scrutiny, pawnbrokers in Mexico can charge whatever they wish. Still, Mister Money’s Lanham said the 12% monthly interest rate that his firm levied on Mexican consumers, equivalent to 144% annually, was lower than that in some U.S. states, including Texas and Florida.

The appeal of the Mexican market, he said, is the fastidious habits of its borrowers. He said only about 7% of his customers in Mexico forfeited their merchandise, compared with about 25% in the United States.

Lower forfeiture rates mean bigger profits for pawnbrokers, who generally make more on lending money than on selling merchandise. He said goods that Mexicans lost to the pawnshops tended to be in excellent condition.

“The United States is a throwaway society,” Lanham said. “Mexicans work hard for their possessions. They take care of them ... and they want to hang on to them.”

Although pawnshops are multiplying around Mexico, the oldest and best known is El Nacional Monte de Piedad, known simply as El Monte to its legions of loyal customers.

Founded in 1775 by a Spanish-born silver baron to help impoverished Mexicans, the institution has grown to 130 branches and 3,000 employees. Unlike its competitors, Monte de Piedad is a nonprofit. Its annualized interest rate of 36% is cheaper than what many credit card companies charge in Mexico.

Customers line up early outside the institution’s headquarters in a colonial building facing the capital’s historic Zocalo or central square. Inside, stately pillars, high stained-glass ceilings, and bas-relief doorways lend an air of high finance to the transactions, which average a little more than $100 each.

The crowd on a recent December afternoon represented a cross-section of Mexico: grandmothers in house smocks, students with backpacks and bellybutton rings, mothers with babes in arms, office workers in business suits, and day laborers in scarred work boots and paint-splattered pants. Some had come only to gawk at the lavish Nativity scene in the main lobby.

Most, like Rosanely Beltran, needed cash.

Monte de Piedad will lend on almost any asset except livestock, food, weapons and frequently stolen articles such as auto parts. But jewelry is the most commonly hocked item and the only merchandise accepted at the downtown headquarters. Beltran was pawning some baubles to buy Christmas presents and to deck the holiday table with such treats as pozole, a hearty hominy soup with shredded pork.

“My little salary just won’t reach this time of year,” said Beltran, who works as a secretary.

This year, Monte de Piedad will loan more than $700 million to 6 million customers, said Javier Velez Bautista, the pawnshop’s director general. Money earned above the cost of operations is distributed annually to charity.

“There is no other financial institution that is as important to the poor in Mexico,” Velez said.

Indeed, a 5 1/2 -month strike by the institution’s unionized workforce that began in December 1997 caused such widespread hardship that Mexico City’s mayor intervened to settle it.

The annual Christmas rush has pawnshop employees, including veteran appraiser Jose Luis Medina, working harder than Santa’s elves. As many as 250 hopefuls a day trudge to Medina’s narrow teller’s window, clutching diamond rings, gold chains, religious medals and watches.

Customers watch anxiously as he squints, weighs the merchandise and calls out the offer. Most transactions take less than a minute. Some customers plead for a few more pesos.

The courteous, neatly dressed Medina doesn’t seem to mind. “I try to give a little more whenever I can,” he said. “Especially to my regular customers.”

Despite its long lines and short hours, El Monte has developed an almost cult-like devotion from longtime clients such as Ofelia Perez.

The 56-year-old has been without steady employment since losing her job as a secretary 15 years ago. She has worked sporadically cleaning houses ever since. Fingering a handful of pawn slips, Perez said she had lost track of how many times she had borrowed against her jewelry. With Christmas approaching, she said the need was greater than ever.

“I thank God for this place,” she said. “We poor people have no other place to turn.”