Wokai's China Microfinance Series: China Microfinance Birdseye View

Geri Mason & Jason Korsmeyer

Here's a quick view into the landscape of the China microfinance sector and key stakeholders:

Rural Credit Cooperatives

Rural Credit Cooperatives, referred to as RCCs, were established in the 1950s, and are the major rural lending organizations in China. RCCs account for 85% of all agricultural loans. With the encouragement of the government, RCCs entered the microfinance sector in 1999.  Currently, there are approximately 32,000 RCCs with around 628,000 employees. This provides RCCs with an unmatched level of outreach and the potential to effectively implement large scale microfinance programs. Yet RCCs have been constantly plagued by corruption, misguided management, lack of competition, and non-performing loans.  These problems stem from a host of internal issues, including: unclear ownership, poor corporate governance, inadequate business scope, poor asset quality, a poor administrative framework, staff capacity and quality problems, a heavy historical burden, poor accounting practices, and a lack of internal control.   Externally, they have been protected by regulations constricting financial institutions’ regional movement, thus eliminating competition.  RCCs were restructured in 2004 to improve ownership clarity and business goals, but without competition RCCs will not provide efficient microfinance programs.

Agricultural Bank of China

The Agricultural Bank of China (ABC) is China’s second largest provider of agricultural loans.  Microfinance operations began here in June of 1998 .  The ABC has been burdened by non-performing loans and unclear goals.  So far, its microfinance programs have directed capital to the poor, but remain financially unsustainable.  The bank also lends at below market rates, which makes it difficult for the other participants in the microfinance sector to lend at rates that cover their costs. 

While ABC’s practices will continue in the short-term, change is approaching.  Within the year, ABC is expected to follow the Bank of China and China Construction Bank to become a publicly traded company.  Because it will need to attract investors, ABC will need to focus on sustainable microfinance growth or else exit the market.

NGOs

Beginning with Funding for the Poor Cooperative (FPC), NGOs have been conducting microfinance activities in China since 1994.  After the first action-research projects conducted by the FPC, there was an influx of international attention and dollars into China’s microfinance industry.  This influx came from the United Nations , the World Bank , AusAid , the Ford Foundation , etc., and established a microfinance base in China. Currently, there are approximately 300 microfinance programs of this nature.

Within China’s microfinance sector, NGO programs represent a small portion of the pie.  However, they have functioned effectively as an arena for research and best practices development, resulting in the most successful and sustainable microfinance programs in China to date. 

Microcredit Companies

In December 2005, the People’s Bank of China authorized the launch of seven microcredit companies , the first microfinance programs with legal recognition in China. Of these seven MCCs, one, “Procred ”, is a wholly foreign owned organization.

While this is a major step forward, these MCCs are only able to provide loan services and unable to collect deposits, because they are not formal financial institutions.  Thus, equity for loans comes from private capital, which is a major hindrance to MCCs’ ability to expand.  But legal recognition does give the MCCs potential to become sustainable institutions, which would go a long way to bringing change in the future.

MCCs are also limited geographically; the approval process requires them to designate a particular area where they will conduct their financial activities.  This obstacle hinders the ability of successful organizations to grow and implement their model throughout the country.

Village Banks

On December 22, 2006, the Central Banking Regulatory Commission launched a program to authorize Village Banks.  Before this program was introduced, there were hardly any entrants to the rural financial market.  This program lowered the capital threshold to three million Yuan for a county level bank, and lowered it to one million Yuan for a town or village level bank.  These organizations function like normal banks, providing loans and collecting savings.  While this gives them the ability to expand naturally, they are still limited geographically to the region where they are approved to operate, and by their respective capital thresholds. 

Village Banks face two other limitations, as well. First, an established bank must hold at least a 20% share in the newly formed village bank.  The goal of this regulation is to ensure new village banks have financial experience.  It hinders the ability of these new organizations to prosper, however, by forcing them to be reliant on the established bank.  Second, an individual investor can hold a maximum share of 10%, limiting the freedom for public investment.  Despite these limitations, HSBC has opened the first foreign village banks in China.

Postal Savings Bank of China

In 2007, China Post was authorized to enter the rural financial market and provide retail financial services to rural markets.  With a massive number of branches already established, China Post has the potential to reach millions of clients.  As of March 26, 2007, China Post had launched collateralized loans through 1901 offices and made 228 million dollars worth of loans.  With the permission of the Central Banking Regulatory Commission, certain branches of China Post have also been conducting experiments with uncollateralized loans across the country.

Because the Postal Savings Bank of China is a new player in the microfinance market, with branches established throughout the country and relatively relaxed restrictions, their potential for success is high.  However, the possibility for misdirection and failure is also high because they are new and need to create a regulatory infrastructure with in which to operate.

Geri Mason & Jason Korsmeyer

Here's a quick view into the landscape of the China microfinance sector and key stakeholders:

Rural Credit Cooperatives

Rural Credit Cooperatives, referred to as RCCs, were established in the 1950s, and are the major rural lending organizations in China. RCCs account for 85% of all agricultural loans. With the encouragement of the government, RCCs entered the microfinance sector in 1999.  Currently, there are approximately 32,000 RCCs with around 628,000 employees. This provides RCCs with an unmatched level of outreach and the potential to effectively implement large scale microfinance programs. Yet RCCs have been constantly plagued by corruption, misguided management, lack of competition, and non-performing loans.  These problems stem from a host of internal issues, including: unclear ownership, poor corporate governance, inadequate business scope, poor asset quality, a poor administrative framework, staff capacity and quality problems, a heavy historical burden, poor accounting practices, and a lack of internal control.   Externally, they have been protected by regulations constricting financial institutions’ regional movement, thus eliminating competition.  RCCs were restructured in 2004 to improve ownership clarity and business goals, but without competition RCCs will not provide efficient microfinance programs.

Agricultural Bank of China

The Agricultural Bank of China (ABC) is China’s second largest provider of agricultural loans.  Microfinance operations began here in June of 1998 .  The ABC has been burdened by non-performing loans and unclear goals.  So far, its microfinance programs have directed capital to the poor, but remain financially unsustainable.  The bank also lends at below market rates, which makes it difficult for the other participants in the microfinance sector to lend at rates that cover their costs. 

While ABC’s practices will continue in the short-term, change is approaching.  Within the year, ABC is expected to follow the Bank of China and China Construction Bank to become a publicly traded company.  Because it will need to attract investors, ABC will need to focus on sustainable microfinance growth or else exit the market.

NGOs

Beginning with Funding for the Poor Cooperative (FPC), NGOs have been conducting microfinance activities in China since 1994.  After the first action-research projects conducted by the FPC, there was an influx of international attention and dollars into China’s microfinance industry.  This influx came from the United Nations , the World Bank , AusAid , the Ford Foundation , etc., and established a microfinance base in China. Currently, there are approximately 300 microfinance programs of this nature.

Within China’s microfinance sector, NGO programs represent a small portion of the pie.  However, they have functioned effectively as an arena for research and best practices development, resulting in the most successful and sustainable microfinance programs in China to date. 

Microcredit Companies

In December 2005, the People’s Bank of China authorized the launch of seven microcredit companies , the first microfinance programs with legal recognition in China. Of these seven MCCs, one, “Procred ”, is a wholly foreign owned organization.

While this is a major step forward, these MCCs are only able to provide loan services and unable to collect deposits, because they are not formal financial institutions.  Thus, equity for loans comes from private capital, which is a major hindrance to MCCs’ ability to expand.  But legal recognition does give the MCCs potential to become sustainable institutions, which would go a long way to bringing change in the future.

MCCs are also limited geographically; the approval process requires them to designate a particular area where they will conduct their financial activities.  This obstacle hinders the ability of successful organizations to grow and implement their model throughout the country.

Village Banks

On December 22, 2006, the Central Banking Regulatory Commission launched a program to authorize Village Banks.  Before this program was introduced, there were hardly any entrants to the rural financial market.  This program lowered the capital threshold to three million Yuan for a county level bank, and lowered it to one million Yuan for a town or village level bank.  These organizations function like normal banks, providing loans and collecting savings.  While this gives them the ability to expand naturally, they are still limited geographically to the region where they are approved to operate, and by their respective capital thresholds. 

Village Banks face two other limitations, as well. First, an established bank must hold at least a 20% share in the newly formed village bank.  The goal of this regulation is to ensure new village banks have financial experience.  It hinders the ability of these new organizations to prosper, however, by forcing them to be reliant on the established bank.  Second, an individual investor can hold a maximum share of 10%, limiting the freedom for public investment.  Despite these limitations, HSBC has opened the first foreign village banks in China.

Postal Savings Bank of China

In 2007, China Post was authorized to enter the rural financial market and provide retail financial services to rural markets.  With a massive number of branches already established, China Post has the potential to reach millions of clients.  As of March 26, 2007, China Post had launched collateralized loans through 1901 offices and made 228 million dollars worth of loans.  With the permission of the Central Banking Regulatory Commission, certain branches of China Post have also been conducting experiments with uncollateralized loans across the country.

Because the Postal Savings Bank of China is a new player in the microfinance market, with branches established throughout the country and relatively relaxed restrictions, their potential for success is high.  However, the possibility for misdirection and failure is also high because they are new and need to create a regulatory infrastructure with in which to operate.

Comments

[Prashan P]

Some comments:

1. The China Foundation for Poverty Alleviation (CFPA) deserves a mention in your NGO section, considering it's the largest NGO-based MF program in China with some 30,000 active clients.

2. In relation to MCCs, it is not the fact that the MCC cannot take deposits that's a restriction to growth (there are plenty of non-deposit taking lending institutions in the world). It's the restrictions that are placed on how much you can leverage your equity.

3. In relation to Village/Township Banks (VTBs), how does having a minimum capital threshold limit their ability to grow? Also, how does requiring an established bank to be the major shareholder in the VTB hinder their growth? Surely the VTB would benefit from the bank's experience. The real hinderance is that most MF networks are blocked out of being shareholders due to China's qualified foreign investor requirements (>US$1b in assets, for investment in VTBs). HSBC, Standard Chartered and the IFC have all invested into VTBs in China. There were 100-odd at the end of 2008 and this is set to rise dramatically.