Las month I was invited by the EU Delegation in China to participate as an expert in a workshop, designed in collaboration with the China Banking Regulatory Commission (CBRC), to deepen China’s understanding of how rural microfinancing works in the EU, and the EU regulations and policy support that guide this approach.
The location of Chengdu, Sichuan Province was chosen for the workshop due to the fact that Sichuan Province was the site of China’s first township village bank. Township village banks specifically cater to farmers and other small customers in the rural sector.
CBRC Deputy Director General Qi Jianming, CBRC Sichuan Office Deputy Director Cheng Keng and the EU Delegation to China Financial Counsellor Javier Arribas Quintana took part in the workshop, which was also attended by around 40 participants from the CBRC Sichuan Office and regional banks.
I have summarized below the main findings and included my presentation. You can also find more information in the EU- China Trade Project website.
1. Mission´s objective
Although much attention has been given to China’s rapid urbanisation, nearly half of the country’s population still lives in rural areas. Rural finance, e.g. the ability to buy tractors or seeds for farming, is thus critical for raising incomes and spurring rural growth in these areas.
Despite these necessities, rural financing in China is complicated by several factors:
- Collateral: Chinese farmers only own land-use rights, preventing them from putting up land as collateral and making itriskier for banks to lend to farmers.
- General factors: Agriculture is risky, e.g. crops may fail because of freak weather or farm produce prices may fall; farmers may lack financial literacy and records, making it hard to gauge their credit worthiness.
The main objective of the mission was to exchange lessons learned on the development of the microfinance sector in rural areas in Europe and its applicability in China. According to this objective, there was a one day workshop where I presented the different schemes applied in Europe to support microfinance in rural areas, mainly those managed by the European Investment Bank, European Investment Fund and the European Bank for Reconstruction and Development.
I presented and discussed the support provided by these institutions, its programmes and specific cases. During the discussions, participants asked questions about the due diligence and I explained how these organizations assess microfinance intermediaries.
The second day I visit, together with the EU Delegation, a representative of EU-China Trade Project, another expert and the Chinese delegation , the Bank of Leshan as well as a local cooperative that works with rural farmers. We discussed their challenges and explained how similar issues are faced in other countries.
You can find and download my presentation below. Both in English and Chinese
2. Summary of findings
Despite China’s strong and sustained economic growth, poverty is still persistent, especially in remote rural areas. Income inequalities between eastern and western China have broadened, and the income gap between rural and urban residents has widened considerably since the late 1970s.
Urban incomes are now more than three times higher than rural incomes. China’s government is taking strong measures to correct this trend by increasing investment in rural areas, especially in infrastructure, irrigation, education and health and improving access to finance for rural households. Demand for credit is high in rural China, even at higher interest rates. Many resource-poor households are constrained not by limited capacity to borrow but by insufficient supply and availability of credit. It is estimated that up to 75% of rural residents in China do not have access to financial services.
NGO financing (micro-credit and microfinance programs) represent insignificant scale and performance to be considered a widespread vehicle for broad-based pro-poor financial services at this point. Rural Credit Cooperatives (RCCs) have been identified as a key vehicle for the delivery of financial services to the small-scale entrepreneur/consumer.
Rural Credit Co-operatives (RCCs) are the mainstay of the rural financial sector; their savings mobilisation is impressive. Yet their lending or contribution to rural development is limited; they only reach 20% of the poorest households. These is due to a number of challenges that are discussed below.
3. Major challenges faced by China
China’s rural finances face four key problems: asymmetric information and lack of adequate lending, monitoring and risk management procedures, lack of collateral and the mismatch between the current range of products offered by RCCs and the products required by resource-poor households. Regulatory issues are also a key challenge for the sector. Chinese microfinance intermediaries lack adequate policies for screening, selecting and approving loans, which affects their capacity to properly select creditworthy clients. Working with intermediaries to strengthen their internal policies (especially the credit and risk management procedures) would reduce their credit and operational risk. Lack of collateral is one of the main risks involved in rural finance. Pro-poor lending activities could include modifying collateral and guarantee requirements by permitting joint liability, credit-history based lending, and structured repayment plans.
Yet, without a credit history or a demonstrated ability to use credit effectively, poorer households will still be excluded. Another challenge relates to the mismatch between the current range of products offered by RCCs and the products required by resource-poor households. It is essential that RCCs be permitted to design products that meet the requirements of resource-poor households while yielding the required spread to RCCs to cover the cost of funds, transaction costs, credit risk and reasonable profit.
- Flexibility in activities for which loans can be provided. There needs to be complete flexibility concerning activities for which a loan can be made available. Households should be able to borrow for a broad range of activities, including consumption.
- A ladder approach to develop credit history. RCCs need to focus on developing a credit history for clients by providing small loans initially and allowing clients to graduate to larger loan amounts.
- Pro-poor lending policies. Lending policies such as requirements for collateral and guarantees need to be modified, adopting instead joint liability concepts and credit-history-based lending. RCCs need to move away from ‘bullet’ repayment practices that lump all payments at the end on the loan period, to more structured weekly or monthly repayment plans Lack of proper regulatory and supervision framework.
Although China has a large number of MFIs, a complete framework and system has not yet been formed to regulate and supervise those MFIs. There exist the issues of over-regulation as well as lack of supervision, furthermore, lack of flexibility and differentiation is also one problem of regulation and supervision. Regulatory issues increasingly become a major challenge for the future sustainable development of MFIs in China.
4. Suggestions of follow-up activity
- Proposing and promoting pilot interventions: Pilot interventions demonstrating good practices are more likely to spark the interest of local and central governments than long-term processes.
- Training for regulators on how to assess intermediaries (due diligence workshop). The job of supervising RCCs across this vast and varied land is the work of an army; inconsistencies and non-standardization in the system make this job all the more impossible. There is a need to be very efficient in sculpting a national strategy for regulation and supervision for the “next generation” RCCs. Other strategies to improve the regulator´s work are:
- Drawing fully upon experience (particularly failure and success cases) from other countries
- Integrating the experience of the last three years of RCC reform
- Encouraging high participation among key stakeholders at the CBRC’s Rural Cooperative Finance department.
- Aiming quickly toward a working strategy paper that can be worked upon internally by supervisors and other stakeholders
- Organising a multidisciplinary task-force and promote partnerships and collaboration among partners: Collaboration with like-minded partners and networking among country experts are critical to the success of any project.
- Rural poor people need to have access to training. RCCs are more likely to give loans to rural poor people that have attended functional literacy or technical skills training.
- Focus on women: women tend to be better borrowers than men, and are more likely to repay their loans.