China’s Microfinance Landscape: Nonprofits, Microcredit Companies, Rural Finance...
China, September, 24 2014 -
Albeit a relative newcomer to microfinance, China’s market has grown rapidly in recent years. In 2012 the country had 6,000 microcredit providers, but only 25 percent had been in operation for more than three years.
Today the number of providers is a few thousand higher, spanning nonprofit institutions, government programs, microcredit companies, commercial banks, rural credit cooperatives and banks, village and township banks, and P2P lenders. Even Alibaba, China’s internet giant, is involved. It has offered loans to over 230,000 micro-entrepreneurs through its AliFinance arm, launched in 2011.
Earlier this year Accion’s Channels and Technology team conducted a comprehensive assessment to determine the training and knowledge-sharing needs of the microfinance providers sustainably serving the poor in China. The assessment was carried out in partnership with the China Microfinance Institution Association, the China Association of Microfinance, and the PBC School of Finance Tsinghua. As part of the assessment, the team compiled a landscape of the country’s microfinance institutions. Offering a snapshot of the state of the market and the challenges that lie ahead, here are some of its findings.
Nonprofit Financial Institutions
This category includes non-government organizations (NGOs), government programs, quasi-government organizations, social enterprises, and rural development associations. Among those the team identified few have reached sustainability. Of the 50 NGOs, for instance, fewer than 10 met the team’s criteria for sustainably serving the poor: at least 600 clients; an average loan size of RMB 300,000 (~US$49,000) or less; and at least three years in operation. Of course there are some success stories, including the NGO China Foundation for Poverty Alleviation (CFPA), which operates nationwide.
According to the People’s Bank of China (PBC), the central bank, the number of microcredit companies (MCCs) in the country totals 8,217. Approximately 10 percent of these meet the team’s specifications for sustainably serving the BoP. The majority of MCCs target financing for SMEs, not for individuals. To advance financial inclusion, incentives for MCCs to offer less-profitable microlending need to be integrated. One barrier MCCs face to improving their services to microfinance clients is low access to credit reporting information held by the PBC.
China has five large commercial banks (four of which are state owned), 12 joint-stock commercial banks, 144 city commercial banks, and 337 rural commercial banks. Disaggregated data was not available for determining the proportion offering microfinance. However, the team’s research indicates that there are likely fewer than 10 doing so. Similar to MCCs, most commercial banks focus on SME lending. Challenges to these institutions serving the base of the pyramid include mixed support for microlending from senior management, unfamiliarity with microfinance lending methodologies, and difficulty innovating due to a lack of autonomy from parent banks.
Rural Finance – VTBs, RCCs and PSBCs
Village and Township Banks (VTBs), Rural Credit Cooperatives (RCCs), and the Postal Savings Bank of China (PSBCs) provide large-scale financial services in China. There are about 2,000 country-level RCCs, 147 rural cooperative banks, 800 VTBs, and 39,000 frontline branches for the PSBC. Until recently, RCCs provided the majority of financial services outside cities. With its expansion branch network, PSBCs service about 2.2 million microcredit clients with an average outstanding loan size of RMB 54,000 (US$8,800). The main products offered by PSBCs are agricultural loans, women’s loans, re-employment loans, and loans with informal collateral. Challenges facing these rural institutions include a lack of microfinance expertise and reluctance to try new methodologies.
The P2P lending market in China crossed the RMB 80 billion mark (US$13 billion) in 2013, according to Forbes. The explosion of activity reflects the growth of e-commerce in the country. The advances haven’t been without missteps and complications, however. Of the 1,000 P2P lending providers in China, 58 went bankrupt in the first quarter of 2013.
Quickly becoming a household name around the world, Alibaba’s virtual marketplace ecosystem connecting customers and entrepreneurs with products, payments, financing, and each other has made products less expensive and more available and has reduced the startup and operational costs for businesses. Alibaba’s Taobao Market, the largest C2C marketplace in China, boasts over 8 million vendors, with the vast majority small and micro-sized enterprises. Alibaba tracks the incidence of “Taobao Villages,” where nearly all the households are using the marketplace in some capacity.
To help the Taobao Marketplace vendors grow their businesses, Alibaba offers loans through the AliFinance platform. To date, AliFinance has provided loans to over 230,000 clients with an accumulated loan portfolio exceeding 80 billion RMB (US$13 billion) and an average loan size of 23-30,000 RMB (US$3,500 to $5,000). The platform employs an alternative credit scoring methodology based on the client’s activity on TaoBao and other Alibaba platforms.
The payment service used on Alibaba platforms, which hosted over 300 million registered users at the end of 2013, is called AliPay. Predominantly used for online transactions and growing for mobile, AliPay is connected to over 100 banks in China as well as major global payment providers like Visa and Western Union. The platform can be used to pay for goods and services, utilities, airtime, investment products, microloans, and donations to nonprofits, among other purposes.