Microfinance in China : the postal bank and credit cooperatives as key players

Abstract

This thesis discusses microfinance in China. Microfinance is a subset of inclusive finance and for the purpose of this thesis is defined as loans of an average size of up to RMB 100,000. Microfinance is a proven poverty alleviation tool, but in China it is underdeveloped. Until 2005, China had no legal framework to enable the development of microfinance. To the contrary, the General Rules for Loans demand any entity conducting lending activities to be licensed as a financial institution. Nonetheless, by then, NGOs were operators of microfinance programs, strictly speaking operating illegally. Independent of the illegality, NGO-operated microfinance programs are generally considered to be not the future for microfinance in China, by reason of their lack of funding and management capability. Between 2005 and 2008, regulations were promulgated enabling the creation of new types of financial institutions targeted at serving rural areas better – Village and Township Banks (VTBs), Bank Wholly-owned Lending Subsidiaries (BLSs) and Rural Mutual Credit Cooperatives (RMCCs). During this period, a type of non-deposit taking microcredit company (MCC) was also enabled. In 2007, the Postal Savings Bank of China (PSBC) was incorporated with a mandate of providing for microfinance. Of all the enabled institutions, VTBs, BLSs and MCCs are more interested in loans of sizes larger than the defined scope of microfinance. That leaves PSBC and RMCCs, as the strongest candidates of potential. PSBC is already by far the largest microfinance operator in China and has the potential to keep that position. PSBC has the distant advantage of a large deposit base, providing the necessary stream of funding for microfinance. RMCCs are cooperatives in nature, with the benefit of having members’ deposits providing the funds needed for lending internally. With more than 800,000 villages and townships in China, the potential for RMCCs is huge, subject to the authorities reopening applications for RMCCs, which for unknown reasons stopped since mid-2012. This thesis also visits the Peer-to-Peer lending platform because the same has been misunderstood as an alternative to NGO-operated schemes. Such thoughts are dismissed but the possibility of employing the same platform for a government sponsored microfinance program is raised. One of the keys to better microfinance development lies in having adequate funding. PSBC and RMCCs are good in this respect. Microfinance is a sustainable business and if this fact is accepted by large commercial banks, the funding issue will in all likelihood be largely resolved. This thesis therefore proposes an apex fund whereby the 10 largest listed banks in China are to each have 0.10 percent of their loan portfolios applied in microfinance related activities. Any shortfall could be directed to go into an apex fund, for investment through PSBC. Another key to better microfinance development is the availability of know-how. This thesis sees this as the weakest aspect in China’s microfinance development and urges the apex fund to be responsible for the necessary training, funded initially by a PBOC contribution of RMB 1 Billion.