Wokai China Microfinance Series: The Idea of Microfinance

Geri Mason

The Idea of Microfinance

Microfinance: (n) small finance; various financial services and transactions carried out on a micro, small, tiny scale; financial services, loans, savings, deposit collections, in small denominations. Non-traditional relationships between a financial institution and a customer, based on human interaction rather than on collateral, profit volume, and legal recourse.

Microfinance is more than just small finance. It’s more than a $25 loan or a $5 profit. It’s a door to walk through. Another option in a place where there aren’t many. It’s a network of relationships, built of time and trust. People are what makes microfinance work. Lenders, borrowers, donors, entrepreneurs, families, communities.

Microfinance has a significant impact on the levels of production and consumption in the local economy, increasing both. Wenzhou is considered the most entrepreneurial city in China, with over 300,000 small businesses. The roots of this wealth of production are modest and familiar: microfinance. Microfinace, in the form of informal extended-family credit, fueled Wenzhou's manufacturing boom in the late 20th Century.

As small businesses start and grow, so do incomes. Opportunities increase in the community, and so does income and consumption. This provides the chance for advancement and growth to related businesses as well, who then repeat the cycle, spreading the benefits further. It is the same principle that drives the fiscal policies of the governments in developed countries: the Multiplier Effect. It is what drove the economic development of the isolated city of Wenzhou, China, to the flourishing manufacturing center it has become. It becomes an avalanche of growth.

A Financial Times article in December 2008 featured the story of Li Anlian, a Wenzhou entrepreneur, who owns a shoe factory started with a micro loan. She now employs 3800 people in her factory and produces 10 million shoes annually. Many factories in Wenzhou boast a similar tale. In fact, according to the Financial Times article, for anyone who uses a cigarette lighter, there is a 70 per cent chance it was made in Wenzhou.

 

Wenzhou is not thriving today as it has for the last three decades. With the current financial crisis spreading as far as the manufacturing industry in China, foreign demand is hurting an industry that depends heavily on exports. Microfinance is becoming a crucial source of credit for threatened entrepreneurs facing lower export demand from their best customers, including the United States. Many factories are facing closure, no longer able to find markets for their products overseas or access the credit they need to keep them operating in this period of reduced revenue.

“China’s financial system has not opened up enough,” says Yao Xianguo, dean of the College of Public Administration at Zhejiang University. “Big private companies increasingly rely on the government while smaller firms suffer from their inability to get loans from state-owned banks.”

Microfinance has an important role to play in China. It is more than one small loan for one poor person, although that is where it starts. The idea of microfinance is the idea of life: we are all interconnected. Change one person’s life and it will affect others’. No snowflake in an avalanche ever feels responsible. (Voltaire) Whose life will you change?

Visit www.wokai.org and click on the contribute tab. Want to start an avalanche?

Comments

[Bing Wu]

Kellee Tsai, now a professor in Johns Hopkins, wrote her PhD thesis on the role private small loans played in China's rural economy.

Her paper is now a widely sited book, "Back-Alley Banking: Private Entrepreneurs in China" (Amazon.com: http://www.amazon.com/Back-Alley-Banking-Private-Entrepreneurs-China/dp/0801489172)

In this book, Tsai combined first-hand interviews with statistics collected over the early years of the Reform era to portray a vibrant private credit market that helped millions to escape poverty. However, her study also shows the regional differences and the limits of an "underground" credit market.

As the Chinese government still contemplating on a new legal framework, there are plenty of evidence that official attitude toward micro finance has changed significantly over the years. (Also see my blog at http://mfi-china.blogspot.com/)

All indication points to a bring future for Wokai.