Backdrop of Microfinance in China
First, a Word on Words
In China, use of the terms “microfinance” (小额信贷), “micro-credit” (微款) or “micro-enterprise credit” (微型企业贷款) have become somewhat confusing, because aside from the universally recognizable low-value loans being distributed primarily in rural and semi-rural areas, these terms have come to refer to much higher-value loans in China. The source of this confusion is two-fold: 1) mainstream bankers call small- to medium enterprise (SME) loans “micro” compared to higher-value state enterprise or infrastructure loans and 2) the People’s Bank of China initiative to establish Microcredit Companies has somewhat been taken over by SME borrowing further confusing perceptions.
It is common among microcredit companies (MCCs), village and township banks (VTBs) and local banks to hear people referring to RMB 1 million (EUR 110,000) as “microcredit” as they compare to mainstream lending business which oftentimes calls for several hundred million RMB worth of credit. There is therefore a huge difference between microfinance as understood by global organizations, and the way the term is used in China.
What we can say is that if we are looking at NGO-style or government-supported organizations doing microfinance, it is likely to doing business with the internationally understood definition of microfinance, with values ranging between RMB 1,000 to RMB 8,000 (EUR 110 to 880). This is what PlaNet Finance China refers to as “Classic Microfinance”. PlaNet Finance China defines classic microfinance loosely as:
- Short-term (1-year or less)
- RMB 100,000 (EUR 11,000) loans in urban areas
- Under RMB 20,000 (EUR 2,200) loans in rural areas
Graphic: Brief Timeline of Microfinance in China
Key Milestones in the Development of Chinese Microfinance
- 1989: The first credit scheme is initiated through the Women's Federation of Shaanxi Province as part of an integrated program for women's economic empowerment.
- 1994: The Rural Development Institute of the Chinese Academy of Social Sciences initiates the first independent Chinese microcredit program as a “research-action” experiment. It receives funding from the Ford Foundation and other international sources. The Grameen Bank of Bangladesh inspires its credit methodology.
- 1995: United Nations agencies begin to contribute major funding to quasi-governmental microcredit programs throughout China. Other international agencies, including bi- and multi-lateral donors and international NGOs, begin projects of their own.
- 1998: The Chinese government, particularly through its Poverty Alleviation Office, notes the evidence of high-performance among the pioneering NGO microcredit projects and decides to adopt microcredit as a key tool in "targeting households" with poverty alleviation measures. The age-old subsidized lending program is nominally transformed into a "microcredit" scheme. The Ministry of Finance channels earmarked poverty alleviation funds through the Agricultural Bank of China. The Poverty Alleviation Office plays a management role, which turns out be less that optimal because poor farmers treat the loans not as loans, but as donations from the state.
- 2000: The first urban microfinance program is begun through the Women's Federation with sponsorship from the United Nations Development Program, and is recognized for its relevance in light of the growing problem of unemployment due to the overhauling of state-owned factories.
- 2001: Three years of poor performance prompt the Ministry of Finance to cancel the government's microfinance scheme. Poverty Alleviation Offices are no longer allowed to offer microfinance directly. The Agricultural Bank continues to struggle with non-performing loans and some lingering policy-driven lending responsibilities.
- 2003: New leadership in the Chinese government highlights rural development as a crucial priority. The Rural Credit Cooperatives are subjected to major financial and institutional reform. At the same time, interest rates are relaxed in pilot areas. RCCs are mandated to perform a broad range of microfinance activities, even if these mandates work in opposition to ambitious targets for profitability and commercialization.
- 2004: The government expands RCC pilot reform into most provinces but many of these these continue to show high levels of non-performing loans. The People's Bank of China begins an earnest study of the appropriate policy environment for microfinance in China.
- 2005: The People’s Bank of China (PBOC) announces a pilot program to start commercial lending limited liability companies in counties of selected provinces.
- 2006: the China Banking Regulatory Commission (CBRC) announces new guidelines for the establishment of village banks.
- May 2008: Joint announcement by the CBRC and the PBoC which is a re-iteration of the regulation of microcredit companies (MCCs) but also addressed the possibility of conversion of MCCs into financial institutions.
- October 2009: The Agricultural Bank of China (ABC) issued a RMB 200 million (EUR 22 million) wholesale loan to the microfinance arm of the China Foundation for Poverty Alleviation, the first national-level partnership of its kind in China.
- February 2010: The PBoC announced intentions to abolish interest rate caps and expand funding for microfinance institutions in China - yet to be formally announced.
- 2011: The 12th Five-Year Plan was announced which stresses "building of a resource-saving and environmentally-friendly society" and seeks to modernize rural development by "promoting the development of modern agriculture, improving public services and infrastructure construction in rural areas, and seeking new ways to increase farmers' incomes".