Written by ZHOU Mingming
In December 2014, Muhammad Yunus visited Grameen China in Lu Kou village of Jiangsu province. During the visit, on the seminar hosted by the China Foundation for Poverty Alleviation (CFPA) Microfinance, Professor Yunus confirmed his opinion that commercial microfinance is against the core spirit of microfinance which is to alleviate poverty with financial instruments. Several months before that, on the 4th Asia Microfinance Forum, Chairman of CFPA, Duan Yingbi, also appealed to the audience that there should be clear distinction between microfinance for social welfare and microfinance for profit.
In the past decade, microfinance witnessed rapid growth in China and a great number of Microfinance Institutions (MFIs) was established in the rural and less developed regions of China. Referring to an article written by Chairman of Board of Directors of China Association of Microfinance (CAM), Du Xiaoshan, there are three major types of microfinance institutions in China:
The first type is registered as non-governmental organizations (NGOs) which are financially supported by international organizations and philanthropic foundations. Many projects under the Funding the Poor Cooperative (FPC) of China Academy of Social Sciences (CASS) and United Nations Development Program (UNDP) belong to this group.
The second type is developed by commercial banks. As an important part in financial inclusion, many commercial banks in China begin to participate in microfinance. They either open branches and operate in the rural areas, or cooperate with other organizations to provide microcredits. Examples can be found in Rural Credit Cooperatives and the partnership between China Development Bank and CFPA.
The third type is more recent explored by microfinance companies such as CFPA Microfinance and YiNongDai of CreditEase. These companies are dedicated to poverty reduction instead of maximizing profit.
Three types of development patterns have different operating models and financing channels. When selecting a microfinance project to fund, investors should consider the pros and cons of each pattern.
Non-governmental MFIs need a legitimate status to provide microcredits in China’s financial market. Financial laws in China only allow registered financial institutions to undertake borrowing and lending activities. In th*eory, MFIs that are registered as NGOs in China cannot legally give loans to individuals. However, aware of the situation, the People’s Bank of China does not openly forbid such activities. The absence of regulation makes institutional investors less willing to fund non-governmental MFIs. On the other hand, the main source of fund, which is donation from foundations or international organizations, is not sustainable. Right now the number of operating non-governmental MFIs has reduced from around 300 in 2003 to less than 30.
Commercial banks and Rural Credit Cooperatives are capable of giving out large quantities of loans but they are not well targeted to solving social problems. Considering the scale of microcredits they grant to disadvantaged community, commercial banks are the backbone of microfinance. However, lending services in rural and less developed areas are not welcome to them, as it has higher risk but lower return. To make up for the problems, commercial banks are reluctant to lower the lending floor or simplify risk evaluation for farmers. In contrast, farmers usually only need a few thousands RMB but in a couple of weeks, which doesn’t make them qualified for microfinance from the banks. Fortunately, in recent years, large commercial banks begin to follow successful cases from foreign banks. For example, instead of granting microcredits directly, China Development Bank establishes partnership with CFPA, in which it gives wholesale lending as much as 1 billion RMB to CFPA while CFPA is responsible of distributing the microcredits to farmers. The partnership between banks and foundations or MFIs is becoming more popular these years and it is supported by the Chinese academia.
MFIs organized as companies usually have stable and legal resource of fund, with clients being low-income groups in less developed areas, especially rural areas. Although categorized as one group, CFPA Microfinance and YiNongDai of CreditEase derive from two different business models.
CFPA Microfinance used to be the Department of Microfinance of CFPA, but around 2008 it became an independent company. It receives constant support from the local government and other government bodies. The Ministry of Finance and the State Administration of Taxation both endowed it with tax reduction policies; the People’s Bank of China allowed CFPA Microfinance to access its Credit Reference System; China Development Bank and Agricultural Bank of China etc. also provide financial support to CFPA Microfinance for years. According to its 2013 Annual Report, up to December 2013, CFPA Microfinance has granted loans as much as 5.56 billion RMB, with 1.18 billion RMB of loan balance, the ratio of NPL 30 (Non-performing Loans as of 30 Days Past-Due) less than 0.8% and annual revenue of 21.5 million RMB. There are 175,000 existing clients whose average lending quota is 10,279 RMB and 69% of loans are less than 10,000 RMB. The statistics prove that although backed by strong governmental support, CFPA Microfinance has shown the ability to gain profit and cover losses independently. On the other hand, the small lending quota shows it is effectively decomposing quantity loans into microcredits for the benefit of farmers.
In 2009, CreditEase launched a P2P (Peer-to-Peer) microfinance platform for farmers, called YiNongDai. The platform connects urban residents to rural women with low income, where lenders can loan units of 100 RMB to borrowers. As a member of CAM, YiNongDai benefits from the diverse channels of fund from CAM. There are 17 MFIs in rural and less developed regions that are in long-term cooperation with YiNongDai. They are all members of CAM and they are responsible for risk control for YiNongdai. Local borrowers need to pass the evaluation of these MFIs in order to present themselves on the P2P platform. According to its 2013 Annual Report, YiNongDai has microfinanced 9,748 farmers in 2013 and the number of lenders has reached 100,000, with total loans of 580 million RMB. YiNongDai demonstrates a healthy balance sheet and the potential to bring greater impact. P2P platform might be a promising development type for microfinance.
Among the three development types for microfinance, NGO MFIs have problems that can only be solved by obtaining government’s permission to enter financial market. However, it is unpredictable whether and when Chinese government will loosen control on the financial activities of NGOs, so investors need to keep an eye on government’s attitude on the relevant matter to decide whether NGO MFIs can survive in such a legal environment. As long as commercial banks find the right path in participating in microfinance, they will be significant contributors of microcredits in China. At the same time, microfinance companies have great potential to grow independently and continuously. They are expected to provide core momentum for microfinance in China. But the market should still be aware that these companies might divert from its original mission toward commercialization. Investors can refer to the information on annual reports such as client composition, lending quota and NPL 30 to check the financial condition of a MFI company and to decide whether the company is working for social welfare.
This article was originally published in China Green Finance Newsletter (January 2015) -- a monthly newsletter highlighting green finance as well as ESG trends and research relevant to sustainable investment in China.
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