Using Microfinance to Lift China's Poor to Prosperity: an IFC Viewpoint

Jul 2016
China, July, 01 2016 - China’s microfinance sector is still developing but has strong potential to reduce poverty and support local SMEs. What are the challenges and opportunities for microfinance institutions in the country? The International Finance Corporation’s country manager for China, South Korea and Mongolia, Simon Andrews, explains.

Globally, an estimated 2 billion adults do not have access to formal financial services. This limits their access to services and economic opportunity and makes it difficult for them to invest in education, manage risk and weather financial shocks. Participation in the financial system helps people start and expand businesses and is critical in the fight against poverty.

However, World Bank research indicates the number of unbanked people in Asia-Pacific is shrinking. In 2011, just over half of the population of China managed their finances through a bank account. In 2014, this number grew to 69%. Today, account ownership is more than 79%.

Meanwhile, owners of micro and small enterprises seeking to expand operations require a lot of upfront capital to cover costs of equipment, facilities, utilities and logistics. One way for them to gain access to critical capital is through microfinance. With small, manageable loans, businesses can grow, meet accelerating demand, support their domestic industries and create new jobs.

A short history

However, China’s microfinance history remains relatively short. The country experimented with microfinance in the mid-1990s, mostly relying on international grants. After a few years, local and national governments began to take notice of its success. But it wasn’t until the 2000s that rural financial institutions jumped on board and launched microcredit to support the unbanked and underserved populace.

Today, a robust microfinance ecosystem exists. It consists of service providers at the village, township and city levels, and infrastructure such as credit bureaus, microfinance training institutions, national and provincial level associations, and IT solutions providers.

Two types of microfinance institutions have emerged: village and township banks, backed by the China Banking Regulatory Commission in 2005, and microcredit companies, supported by the People’s Bank of China (PBOC) in 2006. Simultaneously, city commercial banks began adding microfinance to their portfolios with the support of the China Development Bank and the World Bank. In 2007, China Postal Savings Bank also entered the market as one of the first state-owned banks to be mandated to achieve greater financial inclusion. Digital technology and the emergence of non-traditional financial institutions such as Ant Financial and Tencent have helped accelerate access to finance for individuals and small businesses further.

But despite these achievements, a number of challenges lie ahead. There are a limited number of microfinance providers that have scalable outreach. In addition, levels of financial literacy in China remain relatively low and more remains to be done to promote responsible finance.

IFC supports microfinance

The International Finance Corporation (IFC) is dedicated to supporting the private sector and is one of the world’s largest institutional investors in microfinance. The IFC has been active in China’s microfinance sector since 2006. Working with the PBOC, the IFC helped establish a credit reporting system, which is now the largest credit registry in the world, covering 880 million individuals. According to a recent study by Tsinghua University, this credit reporting system facilitated the creation of 1.4 million jobs and $21bn in loans within four years (2009 to 2012).

The IFC also helped form a legal framework for non-deposit-taking lenders, which established the legal foundation for microcredit companies, and assisted microfinance institutions in accessing capital markets through its issuance of short and medium-term bonds.

With digitisation and growth in mobile services, traditional microfinance institutions (MFIs) have access to innovative and convenient services. Online services, such as peer-to-peer lending, allow borrowers and lenders to meet and make transactions instantly. Big-data technology enables MFIs to reach the right customers and issue credit within seconds based on customer mobile phone information.

These new market players have achieved massive growth in a relatively short time. This means there are now new risks and challenges related to market conduct, regulation and client protection. To help address these risks, the IFC hosted the Responsible Finance Forum in Xi’an in May 2016 with key market and regulatory players. But much remains to be done.

With China holding the presidency of the G20 and financial inclusion firmly on its agenda, it is time to consolidate efforts and build strong partnerships between the public and private sector, and global and local players, to create a banking system that serves the needs of the many and helps provide financial security, choice for consumers and the economic growth that creates jobs and reduces poverty.

Source : The Banker

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