Compared to other Asian countries, the Chinese microfinance sector has developed slowly. Even though the first Microfinance Institution (MFI) was introduced to China in 1996, MFIs have had a difficult time. Government regulations have stilted their progress and, much like NGOs, they have had difficulty gaining enough legal status to develop effective programs. Much is changing, however, in China’s microfinance sector. In September, famed microfinance pioneer Muhammad Yunus of Grameen Bank and Jack Ma, CEO of Alibaba, announced plans to create Grameen China. A recent article in China International Business Magazine (CIB) discusses the evolution of microfinance in China including new laws that signify a significant shift in the sector.
As the article explains, “traditional MFIs in China have not been officially recognized as legal entities and have thus been unable to take on any sort of debt investments.” Even though the first programs were sponsored by the United Nations Development Program and were welcomed by the government, they had no legal status and of the 300 projects they initiated, two-thirds failed. While the failure of these projects cannot be attributed solely to outside forces, the fact that interest rates were limited played a significant role in the mediocre outcome of these projects. Subsequent MFIs have had similar problems due to regulations on acquiring debt and accepting international donations. The types of institutions allowed to lend money have been limited. Additionally, international loans have been subject to denial by the government.
Recently, however, the government has developed a fresh view of microfinance and has increasingly seen it as a viable option for reducing poverty. In 2004, the China Banking Regulatory Commission (CBRC) loosened the limit on interest rates from 8% to 28% and allowed the first private investments. According to an article from US China Today, Huang Weizhong, Division Chief of the Cooperative Finance Supervision Department at CBRC said, “microcredit companies, village banks, and rural mutual cooperatives are the three new types of rural financial institutions that are strongly encouraged.” The CBRC established seven MFIs in five provinces in 2005 through their MCC Initiative. These organizations have unprecedented legal status including the freedom to take out loans. They also created “village banks” which provide services for microcredit loans, savings accounts, and even ATM services, according to CIB. In March, Xinhua reported several other initiatives, which include broadening the types of institutions allowed to provide micro-credit loans, expanding the type of industries that can receive loans, and increasing the credit limit from 3,000-5,000 RMB to 10,000-3 million RMB. Liu Ke Ge, a former banker and member of the national committee of the CPPCC explained that microcredit loans are a necessary component to easing unemployment in China, “In China, 75% of the jobs are provided by small and medium enterprises. Microfinance …[is] the most vigorous sector in the whole economy.”
Expanding the microfinance sector and legalizing private lending can create more secure lending for China’s rural population. A study by Tsinghua University last year found that nearly 70% of all rural households surveyed had used private lenders. Most of these people had no access to the more responsible option of MFIs and instead use less reliable options. Consequently, they can easily be taken advantage of by usurers.
Benefits of microfinance
Microfinance has a number of potential benefits for China. First, as mentioned above, it is a reliable source of credit. Rural borrowers can be subject to loan sharks and currently over 200 million people in China have no access to trustworthy credit sources. Additionally, MFIs can provide borrowers with financial resources and support beyond lending. Second, women make up the majority of borrowers and these loans can do much to improve their status, allow them to contribute to their families, and give them financial freedom. Thirdly, microfinance is a way to improve the economy. Rural and impoverished people have experienced the brunt of the economic crisis with jobs becoming scarce. Microfinance loans encourage entrepreneurship, distribution of wealth and stimulate spending.
There are, of course, potential drawbacks to microfinance as it stands in China today. While the new regulations allow for more freedom, some believe that the gates are now opened too wide. With more organizations now able to give loans, there must be careful monitoring of their business practices so that borrowers are not just given money but are also equipped to develop businesses that will contribute to the economy.
The new laws also allow lenders to dole out significantly larger loans than before. Because the labor lending costs are the same whether a loan is 3,000 or 10,000rmb, some lenders might give larger loans in an effort to reap higher returns. Consequently, some people are concerned that lenders may dole out money irresponsibly rather than focus on how lending can alleviate poverty. Critics are also asking whether the poorest are actually the ones receiving the loans since the new cap of 3 million RMB is presumably more than rural borrowers would ever need to start a small business. Loans in the millions can hardly be called micro. Wang Zhen Jiang, a report for 21 Business Herald visited MFIs in Inner Mongolia and found:
“Less than 20% of the loans of the microcredit companies I visited are serving the rural population,” he says. “Most of the loans are given to Livestock breeders and small businessmen with no property to mortgage.” These loans mostly serve the wealthiest of the poor, he says, whom the banks believe have the potential to become better off still.
Over the next few years, I believe we will see a lot of development in the Chinese MFI sector as both national and international organizations take on poverty through rural entrepreneurship. We will do well to evaluate the merit and mission of each organization and to allow the Chinese sector to develop in a way that compliments the needs of the people and the country—taking into account successful MFI models around the world but also allowing China to develop the sector with its own unique characteristics.
To learn more about microfinance in China—Our interview with Casey Wilson of Wokai, a nonprofit working with Chinese microfinance lenders; A Growing Footprint in the Wake of New Guidelines, A Crucial ‘Stimulus Package’.