The Microfinance Gateway would like thank Dr. Enjiang Cheng from the Centre for Strategic Economic Studies (CSES) at Victoria University, Australia for making himself available for this interview.
Q1: What should policy makers in China do to offer millions of poor people access to financial services?
Cheng: Financial services to the poor include the provision of loans, savings, remittances and other financial services. The poor people in China, except those in the remote mountainous areas, have had more access to savings and remittance services than loan services. Following the financial reforms in the last decade, the formal rural credit market has been increasingly dominated by rural credit cooperatives (RCCs) at the county and township levels. Many RCCs in China are, however, technically bankrupt and therefore unable to provide sustainable financial services to the poor. The poor in urban areas usually have no access to loan services. To offer millions of poor people access to financial services, policy makers in China should undertake a number of reforms:
- They need to reform existing financial institutions, including RCCs, the Postal Savings and other state-owned commercial banks. The ownership structure of RCCs needs to be clarified and corporate governance of RCCs needs to be improved to overcome moral hazard problems, hence to improve their financial performance. Savings, remittances and other financial services provided by Postal Savings and Post Office should be improved as well.
- More importantly, the central authorities in China should introduce more competition into China’s financial market, by allowing competition among RCCs, and by opening up financial markets for the poor and micro-entrepreneurs. As a first step, the government may legalize those lending only micro-financial institutions with a clarified ownership structure and sound corporate governance. Some well-performing lending-only MFIs could be transformed into full MFIs in the future.
- Thirdly, policy makers should encourage the state owned commercial banks and other commercial banks in China to provide micro-loans and other micro-financial services to the poor and micro-entrepreneurs in both urban and rural areas by providing tax concessions, training and technical support.
- Fourthly, the government should change the mechanism for the provision of heavily subsidized poverty loans in China which have had difficulties to reach the poor.
- Finally, the policy makers should provide more financial support to the poor regions and the poor by directly investing in rural infrastructure, education, health and agricultural extension services, so as to improve the repayment capacities of the poor, and hence their access to financial services. The establishment of a rural insurance system, such as health and property insurance in rural areas, also tends to improve the credit access of the poor.
Q2: What are the main challenges for expanding the microfinance industry in China today, and what is the potential for "leapfrogging"--building on other regional experience and moving faster?
Cheng:
- The major challenge for expanding the microfinance industry in China today is the lack of sustainable retail microfinance institutions. The experiments in the last decade have produced few long term sustainable microfinance institutions in China. RCCs in China as a whole are not financially sustainable.
- The second challenge is the lack of the supervision capacity for microfinance institutions: the People’s Bank of China (PBC) and China Banking Regulation Commission (CBRC) at the local level have neither experience nor expertise in supervising microfinance institutions. Without sufficient local supervisory capacities, it is difficult for China to open up the microfinance market for competition.
- Thirdly, there is insufficient knowledge for microfinance in urban areas as the pilots so far have focused on rural areas.
- Finally, formal financial institutions, such as state owned commercial banks and other commercial banks in China have so far overlooked the market for microfinance products and services, except the mortgage loans and loans for consumer goods.
The potential market for microfinance services in China is huge, given the size and the growth rate of the Chinese economy which generates investment opportunities, the strong demand from millions of poor and micro-entrepreneurs for financial services, the high savings rate, and the poor financial services provided by existing formal financial institutions. To develop China’s microfinance industry, China should:
- Learn from different models of microfinance and adapt these to the situation in China, rather than focusing on ‘one model’ or another. It is very important to adapt the models to the actual situation in China, according to farmers’ demand for credit, the community and household characters, the operation of the local governments and legal environment. Bear in mind that there is no one model that can fit all of China, as China is such a huge and diversified country.
- Legalize the professional microfinance institutions while encouraging existing financial institutions to provide microfinance services, staring with pilots in a few areas. Through the process of legalization, the MFIs with good corporate governance, poverty targeting and financial performance should be allowed to develop and prosper.
- Open up microfinance markets in limited areas on a pilot basis while strengthening the supervisory capacities of the local PBC/CBRC.
- Provide microfinance services to the clients in both rural and urban areas, as more and more rural labourers are moving into urban areas where there is a serious shortage of microfinance services.
Q3: What are specific aspects of rural/microfinance in China that cause challenges--or opportunities--for the industry?
Cheng: Great efforts have been made by microfinance practitioners in China, especially those working at the county and township levels, to do experiments with micro-loans in China. Most existing microfinance institutions in China are donor-supported Grameen replicates and located in rural areas. Most of these replicates have stuck to the Grameen Model of microfinance while the rural economy in China is changing rapidly.
- The demand from micro-entrepreneurs for micro-loans of RMB 1,000-2,000 with frequent loan repayment, group funds and compulsory savings is declining when the income level as well as cash incomes from migrant workers are increasing. The very poor, however, demand loans for education, sickness and consumption uses. Most MFIs have not yet developed any new products to meet the changing demand for microfinance services.
- Secondly, the scale of existing MFIs is generally too small, most donor-supported MFIs in China have less than 2 million RMB loan fund in a county, too small to be financially sustainable.
- Thirdly, many NGO MFIs are subject to intervention from local governments, and suffer from similar problems of RCCs: unclarified ownership structure, poor corporate governance and associated moral hazard problems.
- Finally, MFIs in China have not been legalized, so there is a lack of confidence from practitioners as well as potential investors.
The local staff of PBC/CBRC is in the process of developing their supervisory capacities, as financial institutions in China are state-owned and the deposits of RCCs are insured implicitly by the State.
Q4: Are there specific market characteristics that donors and commercial funders should be aware of when investing in the region? What should they do to support the industry?
Cheng: Donors and commercial investors should be aware of:
- The independence of the institution and program director; whether the institution is subject to local government control or intervention and to what extent; whether the director is a formal government employee.
- Which institutions monitor and supervise the operation of the MFIs and the capacity and experience of the monitor, or if there is any effective monitoring and supervision at all.
Under the current policy environment, the donor and commercial funders can support the industry by focusing on:
- Promoting policy changes for microfinance in China.
- Supporting existing institutions and others by testing and providing new financial products, training, information assimilation and technical support.
- Encouraging existing financial institutions to provide microfinance products and services to micro-entrepreneurs in China.
- Helping to develop the sector service industry on microfinance training, technical support, etc.
Q5: RCCs, NGOs or banks? Downscaling commercial banks, converting RCCs/RCBs, or bringing NGOs into the mainstream financial sector - what will work best in terms of extending outreach? Are there other actors such as retail shops, cell phone companies, or the postal system that could help expand outreach?
Cheng: In terms of outreach, RCCs, Postal Savings and commercial banks would work fast. However, without competition, it is difficult to make RCCs efficient MFIs that can serve millions of the poor. Most RCCs have insufficient funds for lending. It is always more difficult to reform an existing institution like RCCs, than to create new professional MFIs with a clear ownership structure and private investment. Cell phone companies and postal offices can help expand outreach as well.
Q6: Any other issues you would like to comment on.
Cheng: More needs to be done to understand the changing markets and demand for microfinance products and services in China.
This interview is part of a four-part series on microfinance China.