China's Emerging Micro-finance Industry

Although China has one of the fastest-growing urban economies in the world, more than 85 percent of the population remains in rural areas. Rural production has been limited by a lack of access to reliable, affordable credit to purchase inputs and to invest in small, off-farm, income-generating activities. China's mainstream rural financial institutions include more than 50,000 rural credit cooperatives in villages and townships and thousands of branches of the Agricultural Bank of China in townships and county seats. But these institutions provide credit mainly to the government, to purchase staple crops, and to rural and state collectives and large enterprises. The government-set ceiling on on-lending interest rates historically has been below the rate of inflation. The lack of individual ownership of land limits a poor household's ability to offer collateral, making poor rural clients unattractive to conservative Chinese rural bankers. For these reasons, the informal credit market is growing rapidly. Yet it remains localized, usurious, and too weak to provide a real alternative for most rural households and microenterprises.

The stakes are high for micro-finance in China. The potential market can be measured in the tens of millions of households. For this reason, and given the government's commitment to national poverty alleviation by the year 2000, micro-finance has attracted the attention of many donors and several government agencies.

Pilot Programs of Non-governmental Organizations

Because micro-finance is relatively new to China, donors have supported pilot operations to test the ability of various micro-finance methodologies to reach poor rural households. For example, the Ford Foundation and the Chinese Academy of Social Sciences set up an action research pilot based on the Grameen Bank model in five northern provinces starting in 1993. The German technical cooperation agency GTZ and its local counterparts have taken a holistic poverty alleviation approach, including micro-finance, to reach extremely poor households in the southern provinces of Yunnan and Sichuan. In addition, the Australian Agency for International Development (AusAID), the United Nations Development Program (UNDP), the Canadian International Development Agency (CIDA), the International Fund for Agricultural Development (IFAD), and UNICEF are also supporting various initiatives to promote micro-finance development.

These pilot efforts have proved that micro-finance is a valued service for low-income households with income-generating activities, and that very high repayment rates can be achieved. The pilot efforts have not yet shown that micro-finance can be profitable, covering all costs and requiring no subsidies from the government or donors in the long term.

The Government's Approach

Micro-finance is an integral part of the National 8-7 Poverty Alleviation Strategy, intended to help 80 million Chinese move beyond a per capita income of Y.510 (US$70) by the year 2000. In the past three years, the government has taken important steps to improve the outreach of services provided by rural financial institutions.

Impressed by the ability of donor-supported pilots to reach the poor directly, the People's Bank of China recently reorganized the country's rural credit cooperatives, providing greater freedom to expand operations with a business orientation and the leeway to test new products, clients, and delivery approaches. The government also formed the Agricultural Development Bank of China, which is testing micro-finance activities with the Leading Group on Poverty Reduction (LGPR), a national government unit. With World Bank support, the LGPR has established cooperatives to implement a Grameen Bank replication in Sichuan and Shaanxi to reach 9,600 clients in five years. Pilot micro-finance operations are also being conducted by the All-China Women's Federation, which is using different group-based approaches.

Although government institutions, with their financial and technical resources, hold the potential for massive micro-finance outreach, they are constrained by policies and practical realities. These include the subsidized interest rate, a long tradition of targeted (and subsidized) credit allocation, and the amount of time required to reorient giant government agencies.

The Task Ahead

CGAP responded to donor and government interest in micro-finance in China by co-sponsoring a micro-finance conference with the Ford Foundation, UNDP, and local Chinese institutions in October 1996. This occasion provided the first opportunity to exchange lessons learned by Chinese practitioners and government policy makers, and to introduce international best practices in credit, savings, financial management, and the formulation of financial sector policy.

Conference discussions revealed the need for a broad-based policy dialogue and information dissemination approach to assist the local micro-finance industry. A CGAP-commissioned study revealed several areas for training, including the construction and interpretation of financial statements, management information systems, interest rates, portfolio quality measurement and management, and development of attractive credit products for pioneer MFIs.

In response to these needs, CGAP has translated several technical materials into Chinese and is engaged in increasing the exposure of senior government officials to international best practices in micro-finance. Future capacity-building efforts may focus on developing a micro-finance training center that offers general and specialized courses in management of sustainable micro-finance institutions. UNDP, Ford Foundation, the Chinese Academy of Social Sciences, and LGPR all have expressed interest in designing the curriculum of a micro-finance training center and identifying micro-finance practitioners.

Reforming the legal and regulatory framework, to enable current micro-finance projects to evolve into sustainable financial institutions, and building the technical skills of micro-finance practitioners will be critical for the development of China's MFIs. With support from policy makers and the international micro-finance community, micro-finance in China can make a serious contribution to both rural poverty alleviation and financial sector deepening.

CGAP Newsletter No. 5, January 1998

Hari Srinivas -
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