Wokai Blog: A glance at China Microfinance: Wokai China Microfinance Blog

Reuters recently published an article about China Microfinance, called China slowly moves to tap microfinance. The article interviewed IFC microfinance guru JinChang Lai, who serves as deputy general manager of the IFC's private enterprise partnership in China.

JinChang recently spoke at the Global Microfinance Investment Conference in NYC on a panel discussion about China Microfinance. The panel highlighted how 2008 will be a critical year for China's rural financial system due to relaxation of restrictions on village banks and microcredit companies as well as the reform of existing institutions. The panel also emphasized that the Chinese government will have a definite role in the large-scale outlay of China Microfinance.

The article gave some updates on the macroeconomic situation in China, which I thought I would ellaborate on.

Q: What does the industry landscape of China Microfinance look like?

A: The China Microfinance industry consists of the following categories:

1.) Government Banks - these include government-run financial institutions involved in microfinance,  which include: a.) Rural Credit Cooperatives (RCC) b.) Postal Savings Bank

2.) Non-Government Organizations (NGOs) - These are microfinance institutions that have been solely or partially started by non-profit institutions. In the case of the latter, an NGO would partner with a local bank to start the program.  Example: Planet Finance

3.) Microcredit Companies - These are the first microfinance programs that are legally recognized in China. There are seven, one of which is foreign-owned called MicroCred

4.) Village Banks - These are organizations that meet the following requirements a.) 20% equity stake held by an established bank  b.) the maximum amount an investor can hold is a 10% equity stake

5.) Networks - These are organizations that provide grants, technical support and ratings systems. They are also responsible for the exchange of ideas via conferences and networking sessions. The one network in China is China Association of Microfinance (CAM)

Q: How many of the above institutions are there?

A: As for government banks, there are over 32,000 RCC branches across China. However not all of those branches participate in microfinance. As for NGOs, there have been over 300 of these organizations since the first pilot program was established in 1994. Today, it is reported that there are about 100 operating NGO microfinance institutions. As for Microcredit Companies, there are about 7. And as for Village Banks, there are about 25.

Q: Who are the big players?

A: In the NGO microfinance world, there are a number of organizations that have been involved including the United Nations Development Program, Planet Finance, Citibank, China International Center for Economic and Technology Exchange (CICETE), Grameen Foundation, Chinese Academy of Social Sciences, and CAMs.

Q: What are the major challenges faced by the industry?

A: There are several issues hindering the sector:

1.) Government is a large constraint on the growth of the microfinance industry. Microfinance institutions do not have a legal status in China. As such, they are not able to mobilize funds through savings deposits (from customers) and/or capital markets (loans from banks or equity offerings).  As a result, microfinance institutions are left reliant on meager government and NGO grants. Many of these grants ae small in size and do not allow microfinance institutions to scale to a size to cover their operating costs.

2.) The microfinance sector is young in China. Microfinance in China started 10-15 years later than it did in other countries like bagladesh and area in Eastern Europe and Latin America. As such, there are few intermediaries to help microfinance institutions with technology, fundraising, training, and capacity building. Therefore microfinance institutions are left to do all of this on their own, which causes various inefficiencies - most importantly a significant drain on funds.