Though some observers are quick to question the competitiveness of Mexico's banks when talking of the proposed North American Free Trade Agreement, a closer analysis of the Mexican banking system reveals otherwise.

Considering what Mexican banks have been through in the past decade, it's a wonder they managed to survive. In the 1980s, the average annual inflation rate was nearly 80%. Banks were nationalized, then reprivatized. Regulations constantly changed.

Now, with Mexico's banks back on their feet and thriving, many wonder if they will be able to survive the impending on-slaught of competition from U.S. and Canadian subsidiaries under the trade agreement.

Untapped Opportunities

Not only will they survive, they should prosper.

Conventional wisdom has it that Mexican banks lack the innovative, entrepreneurial spirit of their U.S. and Canadian counterparts.

But Mexican financial institutions haven't even scratched the surface of their own market's potential, compared with banks in industrialized countries. Mexican banks currently finance about 27% of the country's gross domestic product, less than one-third the figure for the United States or even Spain.

Only about 8% of Mexicans have a checking account. Less than 1% of homeowners have a mortgage.

Playing Catch-Up

While we are increasingly becoming technologically sophisticated, we still have some catching up to do. So, some might argue, this all must translate into competitive weakness on the eve of Nafta. Not necessarily.

Mexican banks couldn't possibly have been expected to expand and offer innovative financial products and services during the economically turbulent 1980s. Facing hyperinflation, plummeting real incomes, and a devalued peso, the banks did well enough to hold their own.

They managed to finance about 25% of Mexico's GDP, only 3% less than today. They adapted their financial products and services to the highly unstable environment of those years.

Growing Economy

Now that the macroeconomic situation has dramatically stabilized and improved, it will be much easier for Mexican banks to offer innovative financial products and services as real incomes and savings grow.

Economic growth and stability will, in addition, allow the banks to increase their base of customers, both commercial and individual. This trend is already taking place.

Individual retirement accounts, for example, are now being offered by many Mexican banks. More than 13 million IRAs have recently been opened. And many of these customers never had a bank account before.

As the banks attract more customers, they will be able to reduce costs and offer a wider array of services. For example, many banks are now offering their customers more widespread access to automated teller machines.

Latest Technology

It is true that to be competitive, Mexican banks will have to invest in technology. Their current lack of cutting-edge technology has a benefit, however. The banks can learn from the experiences of others, particularly in the United States and Canada, avoiding their pitfalls and faulty technology.

In other words, Mexican banks will immediately get on the highway to modernization, bypassing the bumpy road.

For example, Mexican banks are now offering customers debit and credit cards as an alternative to the traditional checking account, soon to be a financial dinosaur. In this way, Mexican banks will catch up quickly and penetrate their own market more fully.

To prosper in an increasingly competitive marketplace, businesses must constantly offer products and services tailored to the markets they serve. Banking is no different. Mexico's banks have demonstrated their ability to tailor their products and services to market conditions.

Faced with imminent competition from the north, Mexican banks are indeed rising to the challenge. They are modernizing, offering new products and services, and building their customer base. They will be ready for Nafta.

Mr. Helu is chairman of the board of Grupo Financiero Banamex-Accival, Mexico's largest private bank.

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