Today we bring you our second of three posts on microfinance by our guest poster Sarah Haig of Hope International. To read the first post click here: What is Microfinance: An Illustrative Hyperbole.
“No Business Left Behind.” Among all the “could have been” development slogans for China, this is my favorite. It would be foolish to do much more in this space than mention the tremendous economic growth that has catapulted China into the present and the future as a global economic influence. Similarly, much is being said about the millions of people who have been left behind the development growth curve—particularly the migrant workers that fuel the economy yet scarcely benefit from it. Underrepresented in the public discussion is a segment of the Chinese population that is well-positioned but still waiting to benefit from China’s growth: microentrepreneurs.
First, let me state a base-line assumption that undergirds the following thoughts: It takes money to make money. Micro- and small-business owners need consistent access to affordable credit in order to sustain healthy and opportunistic growth of their businesses. In simpler language, without easy and consistent access to loans, it’s hard for people to make their small businesses earn more money. For China to see that no business is left behind in finding opportunity to grow, there must be credit resources available to the entire spectrum of economic participants—from multi-national corporations to the fruit vendor who sells seasonal produce from a wagon on the street corner.
As China’s economy has grown, so has the availability of credit to private businesses. Sure, the majority of loans from the largest state-owned banks in China go to state-owned enterprises, and only a small percentage of the economic stimulus funds that China injected into the economy after the global financial crisis trickled into the private sector. Still, over the last five years there have been positive steps made by the Chinese banking sector towards making credit available to more than just the large companies in the coastal cities. Most effectively, the Central Bank is piloting the authorization of micro-credit companies (MCCs) to provide credit, without collateral, even without obtaining a banking license. There are now hundreds of MCCs registered across the country, serving many medium-sized businesses that were otherwise credit-less. The downside to this roll-out is the misnomer: micro-credit companies are tending to serve medium-sized businesses—with loans tending to fall in the range of 50,000 to 500,000 RMB. True microentrepreneurs, such as the fruit vendor above, are still left behind.
Additional progress has been made recently in providing credit to rural farmers. The Rural Credit Cooperatives (RCCs), once considered cheap credit for those with connections rather than available resources for the poorer farmers, are being revamped. The Central Bank has also loosened the requirements for village and rural banks, making it easier for existing banks to open branches in more remote areas. Rural harmony is a political priority for China, and thus rural finance is an economic priority. However, while farmers gradually have better access to loans for seed input and even diversifying crops or livestock, small urban traders like the fruit vendor are still left behind.
Unfortunately, there is a series of Great Wall-sized hurdles that separate the microentrepreneurs in the local markets from the loan that will give them an opportunity to expand the business:
1. The entrepreneur has no fixed collateral;
2. The loan size is too small to interest the local bank or MCC—they earn much more when charging 10% interest on a 100,000 RMB loan than 10% on a 10,000 RMB loan;
3. The entrepreneur has no guanxi, no connection to somebody “inside” who could expedite and approve the loan application.
So even as there are more banks, more MCCs, and more rural credit options, there are not necessarily more options for the millions of Chinese who support themselves through small businesses to improve their businesses, increase their incomes, and stabilize what can be vulnerable living situations.
The good news: microentrepreneurs in China are not completely left behind. There is a growing movement of microfinance programs that are working to expand the provision of credit services to the segment of business owners who are too small for banks and MCCs and too urban and non-agricultural for RCCs. These microfinance institutions are working to ensure that when it comes to participation in the economic development of China, everybody has an opportunity.
--Sarah Haig, HOPE International
Related post: What is Microfinance? An Illustrative Hyperbole