Why is the Microfinance Industry in China So Far Behind?

Microfinance Cross-posted on Give2Asia Forumby Cissy DeLuca, Philanthropic Initiatives Intern

There are currently 480 million people in China without access to formal credit. According to the World Bank, poverty in China is an almost exclusively rural phenomenon with 90% of the poor population residing in rural areas. As poverty declines, the dispersion throughout villages makes it irrelevant for the government to target entire areas for poverty reduction. The need is for an approach that targets poverty at the rural household level, such as microfinance.

The demand for microfinance, specifically microcredit services, comes from rural households, urban laid-off workers and micro-entrepreneurs. Microfinance services in China mostly consist of microcredit, which is of the highest demand, but there is also demand for microinsurance, microsavings and investment. These services are currently not commonly offered by microfinance providers, due to the slow growth of the industry.

Currently, there are about 100 microfinance NGOs in China. None have sufficient and regular access to capital and few have adequate cash flow to cover financing and operating expenses. The most universal challenges faced by microfinance programs in China include insufficient funding, lack of management experience and slow evolving government regulations.

In 2004, the China Banking Regulatory Commission (CBRC) liberalized the lending interest rate limit. This was a giant stride for the industry because microfinance requires significantly higher interest rates than regular banks to sustain operations. Typically, a loan officer must travel to the client numerous times to collect repayments. Each microloan can be a very expensive transaction in proportion to the actual loan amount.

Microfinance institutions are legally prohibited to access debt or equity investments. This barrier stifles foreign investment in the industry. The microfinance industry in China, estimated to be at $200 million, is a drop in the bucket compared to India’s nearly $3 billion industry. Wokai, a US based non-profit, connects contributors worldwide to entrepreneurs in China through the internet.

Wokai relies on previously existing microfinance institutions to manage the disbursement and collection of loans. One of their partners, Chifeng Zhaowuda Women’s Sustainable Development Association (CZWSDA), lends exclusively to women in Chifeng, Inner Mongolia. Established in 1998, the mission of CZWSDA includes initiatives to empower women comprehensively by providing them credit and technical assistance. With a 99.97% repayment rate, they are very successful with their current portfolio of over $1 million serving 3,120 clients.

As organizations, such as Wokai, present foreign investment opportunity in the Chinese microfinance industry, growth can take place. ACCION International recently launched operations in Inner Mongolia, an autonomous province of China, as the first foreign-funded microfinance bank in the province. These are positive steps for microfinance in China, and hopefully more will follow.

Sources and related links: – China Association of Microfinance. 2009, China Microfinance Industry Assesment Report. – Dan Chinoy, “Blocks on the Road to Riches,” China Daily, 2009Wokai – “Microfinancing China,” The Wall Street Journal

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