Microfinance in China

1.0 Introduction

This paper evaluates the historical development of microfinance in China. It also explores the

goals and objectives of promoting microfinance in China. Then, it analyses the models of

microfinance in China and how microfinance has helped in reducing poverty in China. This

study also evaluates how microfinance became available in China through Non

Governmental Organization sources. The evaluation of models is followed by an analysis of

organizations involved in microfinance in China, their organization structures, sources of

funding, marketing and distribution strategies that include large scale campaigns and rural

campaigns. Finally, the paper evaluates the future of microfinance in China and the role of

different microfinance institutions in achieving the objectives of a microfinance program.

2.0 Historical Development of Microfinance in CHINA

The history of microfinance dates back to 1976 when the Grameen Bank in Bangladesh

started credit facilities for poor women by providing micro loans to small groups (Sun, 2002).

This particular segment of society would never have qualified for credit from the large banks

since they had no assets for collateral and no proven cash flows. The model proved extremely

successful in Bangladesh as it empowered poor villagers, to utilize seed capital to generate

additional income and reliably repay their loans.

This model received international acclaim as many others tried to emulate the model. It is

estimated that some 90 million people globally, have obtained loans from different schemes

under microfinance, and these people would otherwise not be eligible for any loans from the

conventional banking and financial institutions (Shan, 2005). Like many other nations, China
also tried to emulate the success of microfinance in Bangladesh. The objective of

microfinance has been same everywhere and it is poverty alleviation. The long term success

of any microfinance program is ultimately measured by how many people it ultimately raised

from poverty (Brandt, 2003).

Microfinance started in China in the early-1990s and has since been in existence in the

country in different forms for over 20 years. It started when the World Bank and the United

Nations Development Program (UNDP) started to support the concept of Microfinance in

rural China in cooperation with Chinese organizations. In 1994, the first Non Governmental

Organization program that was approved in China was the Funding the Poor Cooperative

(FPC) in the Yixien County of Hebei Province (Bislev, 2001). In the initial few years, there

was little or no involvement of the Chinese government.

In the years that followed the official recognition, the government of China provided funding

for development programs in rural areas of China that amounted to hundreds of millions for

supporting microfinance programs. The channel for providing the funding was the Chinese

system of financial institutions which include the China Development Bank, the Agricultural

Bank of China and the Rural Credit Cooperatives. Apart from the Chinese system of financial

institutions, global institutions such as the Grameen Trust (a global microfinance organization

different from the Grammen Bank in Bangladesh) the United Nations Development Program

and corporate social responsibility arms liek Ford foundation also provided funds for

micro finance organizations in China (Chia and Counts, 2003).

However, in spite of the significant efforts of Chinese government and other institutions in

the last decade, micro finance institutions in China achieved modest success (Osthoff, 2005).

They reach of microfinance institutions has been limited, the business models have not
achieved long term sustainability and financial metrics like default rates, repayment rates and

interest rates charged for lending have not been satisfactory. There are many reasons for this

rather unimpressive success of microfinance in China.

Firstly, the funding for microfinance has often been inadequate and as a result many

microfinance institutions in China have failed after a few years of operation (Osthoff,

2005).Secondly, there has always been a lack of professional management experience in the

Micro Finance Institutions (Osthoff, 2005). Since the senior managers in microfinance

institutions are themselves not trained in finance, they cannot train the ground level workers

either. Micro Finance institutions do not have the same level of expertise or experience in the

best lending practices and the default and repayment rates in microfinance institutions tend to

be poor (Chia and Counts, 2003). Thirdly, the operations of Micro Finance Institutions is still

inefficient. Most of the inefficiencies come from an inadequate data collection and

maintenance by Micro Finance Institutions. Many Micro Finance Institutions do not know if

the farmers they are lending too have already taken loans from other Micro Finance

Institutions. Lack of data collection also implies that the management of Micro Finance

Institutions is not able to gauge the health of their business by looking at metrics, as they fail

to capture the ground level realities (Duval, 2004). Similar problems with data collection

were faced by microfinance institutions in India. In India, private players entered into

microfinance and some of them became large enough to become public listed companies.

The shareholders and regulators realized after some time that the metrics reported by the

microfinance institutions do not capture the ground realities, which were much worse than

what the numbers suggested (Wall Street Journal India). Fourthly, even if the operational

processes were efficient, they still would have been inadequate. Efficient operational

processes will not solve the problems of high default rates. High default rates do not happen

because the ground level workers are any less efficient than banking officials elsewhere.
Rather, the real reason for high defaults in micro finance sector is a lack of reliable credit

history of the recipients of loans. Such lack of credit history makes disbursal of loans, a rather

ad-hoc exercise in which human judgement is relied upon much more than bankable financial

and lending models (Duval, 2004). Finally, the supervision of the Micro Finance Institutions

has been found to be inadequate (as compared to other financial institutions). Poor

supervision is related to the poor data collection mentioned above. Micro Finance Institutions

often do not adapt speedily with any changes in government regulations (Osthoff, 2005). One

of the key problems of Micro Finance Institutions has been that they are not able to become

financially self sustainable with time (Tsai, 2004). A financially self sustainable microfinance

institution is one which is able to generate enough profits to pay for its operating expenses,

capital expenditures and for future growth (Park, 2004). According to the United Nations

Capital Development Fund, only 1 per cent of Micro Finance Institutions in China are

financially sustainable (Chia, 2003).

The relative failure of microfinance institutions in China is also evident from the fact that

even today, informal finance continues to play a major role in China. Many researchers have

cited multiple explanations for the continued importance of informal finance in China. The

first reason cited is the poor supply of formal credit which is an issue that has been

inadequately addressed even till today. Second reason is the limitations in governments

capacity to execute its policies. Third reason is the fragmentation of local markets (on

political and social parameters0. Finally, there are institutional weaknesses in many

microfinance programs (Tsai, 2004).

Graphic: Brief Timeline of Microfinance in China
(Source: http://www.planetfinancechina.org/)
3.0 Models of Microfinance in CHINA

Microfinance in China may include several types of financial services (like deposit taking,

loans, hire purchase agreements, insurance cover etc) for amounts that are small even by

retail banking standards. A term related to Microfinance is Microcredit which implies small

loans of principal amount anywhere between 1,000 to 3,000 Yuan (Chia, 2003). Three types

of Micro Finance Institutions can be identified in China. The first kind comprises of Non

Governmental Organizations, which were the first micro finance institutions in China. The

other two types are Regional Credit Cooperatives and State funded microfinance institutions.

Both of these microfinance institutions are large-scale programs when compared to Non

Governmental Organizations. However the relative importance of Regional Credit

Cooperatives and State funded microfinance institutions has been changing in the last few

years (Duval, 2003).

3. 1 Rural Credit Cooperatives

The network of the Rural Credit Cooperatives have branches in nearly all villages of China

and because of their reach they are often considered the most important source of formal

credit in rural China. One of the key objectives of any microfinance program is to reach out

to people who have no access to conventional sources of finance, either due to poor financial

background or due to poor geographical location. The Rural Credit Cooperatives were

regarded by the Chinese government as good instruments for carrying out its large-scale

microfinance programs as a well developed channel already existed for reaching out to far

flung and remote villages (Duval, 2003). Accordingly, since 2000 Rural Credit Cooperatives

have begun to establish Microfinance programs by offering guaranteed loans in which a

group takes the collective responsibility of repayment of loan. This model of offering

guaranteed loans is very similar to the model adopted by Grameen bank in Bangladesh,

where a group based credit approach is utilized to ensure the repayment. Due to the peer

pressure of collective guarantee, repayment rates are expected to be good.

Since 2002, the Rural Credit Cooperatives are operating their Microfinance programs on a

national basis. They are the most important institutions offering government-funded

Microfinance because of their scale and reach. In last few years, their role and influence has

been increasing consistently (Park, 2004).

3.2 Non Governmental Organizations

Non Governmental Organizations led programs of microfinance in China that are still seen as

a temporary experiment. The first microfinance institutions in China were Non Governmental

Organizations. In 2003, there were already ninety two Non Governmental Organizations in

China, which were functioning as micro finance institutions (Brandt, 2003). In 2008, the

number was expected to be close to one hundred and fifty (ADB, 2008).

China Associate of Microfinance is an important Non Governmental Organizations that aims

to bring all the Non Governmental Organizations working as micro finance institutions on
one platform. The association's members include microcredit companies, commercial banks

and microfinance institutions focussed on poverty alleviation. The association participates in

fundraising technical assistance, information exchanges policy advocacy, training and

regulation of microfinance institutions in China (China Associate of Microfinance website).

Another important organization in the Non Governmental Organizations space is the

Grameen Foundation. Grameen Foundation is different from the Grameen Bank in

Bangladesh, and is an international organization that works with local microfinance

institutions in multiple countries. The Grameen Foundation in China, offers help to the

Chinese microfinance Non Governmental Organizations (those who have more localized

operations) and helps them build a larger and more efficient operation. The Grameen

Foundation often works with them to achieve the common objectives of microfinance

(poverty alleviation and access of credit to poor). Similarly, China Social Entrepreneur

Foundation was established to support young entrepreneurs through providing funding and

training opportunities.

One of the key issues with Non Governmental Organizations working as microfinance

institutions is that they are not able to achieve a sufficient scale to achieve profitable

economies in their operations (ADB, 2008). Achieving a large scale helps a financial

institution in lowering its costs and ultimately in lowering the lending rates which are offered

to the borrowers. Low lending rates can help the financial institution in achieving large

volumes at a decent margin. The role of Non Government Organizations in microfinance is

expected to decline in the near future (ADB, 2008).

3.3 State Funded Organizations

The third category of micro finance institutions in China includes the state funded

organizations like the China Development Bank and the Agricultural Bank of China. In
October 2009, the microfinance arm of the China Foundation was given a RMB 200 million

(EUR 22 million) loan by the Agricultural Bank of China (ABC) (Du X, 2004). Thus was the

first national-level partnership of this scale and scope in China.

The role of State Funded Organizations in Microfinance has been declining as the role of

Rural Credit Cooperatives in Microfinance continues to grow and expand (Park, 2004).

Despite the declining influence, state finance institutions will continue to play a role in

Microfinance as they are expected to cooperate with Non Governmental Organizations and

Rural Credit Cooperatives to support Microfinance in China. State Funded Organizations

have a more professional and commercial approach to lending (Bislev, 2001).

4.0 Organizational structure of the organizations involved in

Microfinance in CHINA

4. 1 Rural Credit Cooperatives

Rural Credit Cooperatives have had a prominent role in rural China and development of

communities in the rural region since the 1950s. From the1970s to the mid 1990s, the Rural

Credit Cooperatives were regulated and supervised by the Agricultural Bank of China

(Bislev, 2001). In the late 1990s, the responsibility of supervising Rural Credit Cooperatives

was given to the Peoples Bank of China. In June 2003, control and management of the Rural

Credit Cooperatives was transferred from Peoples Bank of China to provincial governments.

This started the gradual process of transforming Rural Credit Cooperatives into rural

commercial banks. Rural Credit Cooperatives provide the most financial services to the rural
sector with 85% of the countrys agricultural loans (Duval, 2004). Due to their scale and

reach they are the most prominent micro financial institutions in China.

Rural Credit Cooperatives are controlled and managed by provincial government. They are

governed by the regulations for the management of rural credit cooperatives of 1997 (Du,

2005). Rural credit cooperative is a nominal cooperative organization managed according to

administrative directives. Each individual Rural Credit Cooperative, although small in size

and volume of their deposits, loan portfolios and client volume, is a separate legal entity and

profit centre. While Rural Credit Cooperatives operate on the township level, Rural Credit

Cooperatives unions are set up at the county level. Many Rural Credit Cooperatives also have

savings and credit stations at the village level.

4.2 Non Governmental Organizations

The majority of Non Governmental Organizations in China are government organized NGOs,

which have close ties with the government. Some individual organized Non Governmental

Organizations have also emerged and some have become quite influential in society. A typical

Non Governmental Organization in China has few members of the Chinese government on

the managing committee or board of directors. The managing committee or board of director

appoints the Chief executive officer or principal or director of the NGO who is a full time

employee (Du, 2005). The director in turn appoints the key personnel such as Program

Manager, Administrative Officer and Accounts Officer. Senior Officers like program

managers and administrative officers have project coordinators and field workers reporting to

them.
Microfinance programs which are often collaborations between international Non

Governmental Organizations and the local government, financial or research institutions are

not covered by any regulations like the way Rural Credit Cooperatives and State Funded

Organizations are covered by separate regulations and which gives them a clearly defined

legal status. Despite lack of clear legal status Non Governmental Organizations have

performed better than State Funded Organizations or Rural Credit Cooperatives as far as

repayment rates are concerned (Bislev, 2001; China Development Brief, 1999). Non

Governmental Organizations have to register with the Ministry of Civil Affairs which also

serves as the supervisory body in their case. (Chia and Counts, 2003)

4.3 State Funded Organizations

Chinas banking sector is dominated by four major state-owned commercial banks. Among

them, the Agricultural Bank of China has a significant role in supporting microfinance.

The Agricultural Bank of China is a specialised commercial bank focusing on working capital

loans to state enterprises or to the Township and Village Enterprises (TVEs). Only about 16

per cent of the Agricultural Bank of Chinas lending goes to agriculture and an even smaller

share to the household level. However, the Agricultural Bank of China is still important for

the rural poor. It administers some key poverty alleviation programs which are important

because of the large scale they have. One such program is Chinese governments subsidised

poverty loan program. (Park 2004; Park and Ren, 2001).

The other important state financed institution of microfinance in China is Agricultural

Development Bank of China. The Agricultural Development Bank of China, was separated

from the Agricultural Bank of China in 1994 and serves today exclusively as a policy bank

financing government procurement of agricultural products, mainly grain. (China

Development Brief, 1999) Even though these two institutions are active in rural areas, they

are mainly lending to state enterprises and have only minor significance for poor rural

households.

The licensing of financial institutions in China (like the Agricultural Bank of China) is based

on the Commercial Banking Law of 1995.

5.0 New product development, delivery systems, and management in

Microfinance

Organizations in China

According to a February 2008 Xinhua report , Chinese banks have lent over US$131 billion

in microloans to more than 77 million households, nearly 25% of all rural households

( Xinhua, 2008). Most microfinance programs, charge an interest rate of twelve to eighteen

percent annually to borrowers. This interest rate is lower than those charged in the

unorganized sector by private lenders. Private lenders often charge as high as twenty five

percent interest rate. However, the interest rates charged by microfinance institutions are

significantly higher than the rates charged by commercial banks. Rural Credit Cooperatives

on the other hand, charge between 12% and 20% (Xinhua, 2008).

Although reliable data from government programs is difficult to obtain, some surveys are

confirming that the large scale government programs are experiencing the common problems
of very low interest rates. Due to low interest rates, the funds allotted for microfinance are

often diverted to relatively richer households at a higher rate of interest. In addition,

repayment rates are seldom exceeding 60 per cent and are not significantly above the low

level of the poverty loans (Bislev, 2001). Poverty loans was an anti poverty scheme of the

Chinese government, that it adopted for poverty alleviation before adopting microfinance as

an official tool for reducing poverty in China. The failure of poverty loans was one of the

main reasons for the expansion of Microfinance. On the other hand, most Non Governmental

Organization programs in China are achieving repayment rates between 90 and 100 per cent.

(Bislev, 2001; China Development Brief, 1999).

In China, the geographical location of the poor in remote mountainous areas makes the

implementation of successful Microfinance programs much more difficult (Xinhua, 2008)..

As the poor areas are difficult to access and not very densely populated, the scope for

income-generating activities is more restricted to agriculture. In agriculture activities, the

repayment of loans is often contingent on the weather conditions, which can be very hard to

predict even by very sophisticated models. New product development in China should factor

in these ground realities.

6.0 Conclusion Future of Microfinance in China

The Rural Credit Cooperatives and Non Governmental Organizations in China should focus

on implementing operations and processes to improve the efficiency of microcredit. One of

the methods to improve efficiency will be to introduce professional lending and data

collection practice in the micro finance institutions in China. Some steps have been taken in
this direction. For example, the Citigroup foundation, which is the Corporate Social

Responsibility arm of Citibank, a leading global financial institution, sponsored and provided

financial assistance to China Microfinance Training Centre in 2009. The training centre aims

to provide training courses for employees in Micro Finance Institutions of China (Wall Street

Journal Asia). Microfinance institutions will benefit from the commercial lending experience

of global financial institutions such as Citibank.

Some steps are also being taken to manage Non Governmental Organizations at the grass root

levels. The grass root level field workers employed in Non Governmental Organizations

should be reporting directly (or submitting the details of their performance) to the officials

sitting in Beijing. The organizations need to streamline their processes and operations to

make that possible.

The rural credit cooperatives, non government organizations and leading state funded

financial organizations need to work together in China to achieve the ultimate objective of all

microfinance initiatives, which is poverty alleviation. Further, scope of partnerships also

exists among the different Asian nations which are confronting the challenge of poverty

alleviation. Asian Microfinance forum is an organization whose aim is to bring the Asian

countries on a common platform and encourage partnerships among microfinance institutions

of different countries. Some of the best practices of other Asian companies can help in

resolving many issues and challenges currently faced by Chinese microfinance institutions.

For example in Philippines, some telecom companies have successfully enabled cell phones

to act as cellular wallets using which farmers are able to manage their remittances, deposits

and loan payments. In Sri Lanka, micro finance institutions have formed partnership with the

postal service agency of the government to reach out to far flung customers. Such practices

can readily be adopted by Chinese microfinance institutions.

The microfinance institutions should aim at become financially self sustainable. To achieve

financial sustainability operational efficiency and streamlined process may prove inadequate

on their own. Operational and process efficiencies should be combined with the correct

interest rates to make the institutions profitable.

 References

1. Aghion B. A. & Sarah T. (2002). A Case for Successful Microfinance

Programs in China Paper prepared for the 5th Conference on Global
Economic Analysis, Taipei,Taiwan,
2. ADB. (2008). Key indicators 2008: For Asia-Pacific, Comparing poverty
across countries: the role of purchasing power parities, Asian Development
Bank, Philippines CAM. (2010).China Association of Microfinance, [Online]
http://www.ChinaMicro finance institutions.net/en/intro_aboutnet.asp.
3. CAM. (2008). A glimpse at the microfinance industry in China, Promoting
inclusive financial markets Workshop Report, World microfinance forum
Geneva
4. Du, XiaoShan. (2005). The regulatory environment of Microfinance in China,
Essay on regulation and supervision
5. Sun, R. (2002). The Development of Microfinance in China (Final Draft),
Rural Development Institute, Chinese Academy of Social Sciences
http://1990institute.org/microfinance/history
6. Tsai. S. K.,( 2004) Imperfect Substitutes: The Local Political Economy of
Informal Finance and Microfinance in Rural China and India, World
Development, 32(9), pp. 1487-1507
7. Park, A. and Ren, C. (2001), Microfinance with Chinese Characteristics,
World Development, Volume 29, pp. 39-62.
8. Bislev (2001), Microfinance in China An introduction to the use of
microcredit for poverty alleviation in China, Nordic Association of Chinese
Studies Conference 2001, http://www.helsinki.fi/nacs/ane_bislev.htm on
06/08/2004.
9. Brandt, L. et al. (2003), Are Chinas Financial Reforms Leaving the Poor
Behind? Department of Economics, University of Michigan,
http://www.econ.lsa.umich.edu/~alpark/papers.html on 16/08/2004.
10. Chia, L. and Counts, A. (2003), Microfinance Regulation and the Chinese
Context: An Opportunity for Making a Major Impact on Reducing Poverty,
Paper Presented on September 23, 2003 at Beijing Microfinance Summit,
Grameen Foundation USA,
http://www.gfusa.org/monthly/October03/ChinaPaper.htm on 17/08/2004.
11. China (2004), Illuminating Chinas Provinces, Municipalities & Autonomous
Regions,http://www.china.org.cn/english/features/43583.htm on
05/08/2004.
12. China Development Brief (1999), Banking for the poor, Volume 2, May
1999,http://www.chinadevelopmentbrief.com on 06/08/2004.
13. Duval (2004), Nurturing Microfinance in a Challenging Environment: The
Ford Foundation In China, CGAP DIRECT Good Practice Case Studies No.
10, http://www.cgap.org/direct/resources/case_studies.html on 07/08/2004
14. Du, X. (2004), Attempts To Implement Micro-Finance In Rural China, China
in the Global Economy: Rural Finance and Credit Infrastructure in China,
OECD, pp. 271-284.
15. Jackelen, H. and Xianfeng, M. (1997), UNDP Microfinance Assessment
Report for China, United Nations Capital Development Fund, Country
Feasibility Studies.
16. Park, A. et al. (2004), Micro-finance, poverty alleviation, and financial
reform in China, China in the Global Economy: Rural Finance and Credit
Infrastructure in China, OECD, pp. 256-271.