This is a guest post by the Mexico Institute at the Woodrow Wilson International Center for Scholars.
Borrowing from formal banking institutions in Mexico requires high securities and involves high interest rates. As a result, it’s difficult for entrepreneurs, and small and medium enterprises to establish and grow businesses via the traditional financial system. There is a need to fill this gap with affordable capital to promote innovation, entrepreneurship, and ultimately, economic growth.
In this regard, crowdfunding can help to close the financing gap that has prevented innovation and entrepreneurism. Crowdfunding is the practice of funding a project by raising many small amounts of money from a large number of people. Supported in recent years by increasing internet access, crowdfunding has been gaining momentum. Even when it has been out there for hundreds of years (e.g. church’s alms or tandas) new technologies now allow larger numbers of potential donors or investors.
This year the Multilateral Investment Fund, member of the Inter-American Development Bank, published a report titled Crowdfunding in Mexico: The Power of Digital Technologies to Transform Innovation, Entrepreneurship & Economic Inclusion which analyzes the opportunities and challenges that Mexico faces to foster this practice. The document highlights signs of optimism for the success of crowdfounding like the country’s entrepreneurial culture, the independent creation of the Mexican Crowdfunding Association, economic reforms pushed through the current administration, and proximity to the U.S. capital markets.
However, there are still many challenges to exploit the full potential of crowdfunding in Mexico. Business education is fundamental for both borrowers and crowdfunders to understand financial projections, market conditions, and the risks associated to each project. Also, higher technological literacy is needed, from the supply side to navigate the internet looking for projects to crowdfund; and from the demand side to upload the projects in need of funding. Regulation is also an important challenge since regulators are not yet aware of all the potential risks and opportunities of this practice. It is essential to avoid government bureaucracies and at the same time guarantee the protection from fraud, money-laundering, and extortions.
Crowfunding is naturally seen with some skepticism among the population. Working on the above-mentioned challenges would unveil the potential benefits of accessing to a new and affordable source of financing for small and medium enterprises; especially for innovators and entrepreneurs that are in the quest of an opportunity to put their ideas into practice.
About the Author: Rodrigo Carriedo has worked at the Mexican Ministries of Social Development and Finance. His public policy areas of interest are financial inclusion, infrastructure for development and energy. He holds a Master of Economics from ITAM (Mexico) and a Master of Public Policy from Georgetown University.