Grameen Foundation : Resource Center : Print Newsletter : Winter 2004 : Realizing Microfinance in China
Realizing the Potential of Microfinance in China
During the recent China Microfinance Summit (see box on page 5), Grameen Foundation USA (GFUSA) President Alex Counts and Lynn Chia, Vice-Chair of a newly formed GFUSA committee on China and an Associate with Booz Allen Hamilton, presented a paper entitled “Microfinance Regulation and the Chinese Context: An Opportunity for Making a Major Impact on Reducing Poverty.” The article (a condensed version of which appears below) outlines steps for overcoming barriers to significant poverty reduction through microfinance in China.
Since the 1980s, Chinese microfinance programs have demonstrated the potential to significantly reduce poverty in China, a developing nation with a booming economy in some regions, but also 200 million living below the poverty line. With the adoption of best practices and the assistance of support organizations Grameen Trust and Grameen Foundation USA, and the financial support of Citigroup and others, practitioners such as Funding the Poor Cooperative have made promising starts. Yet in order to realize its promise and achieve meaningful scale, the Chinese microfinance industry will require a more supportive regulatory environment. Because China currently has no microfinance-specific policies, it has a unique opportunity to “leapfrog” other nations and emerge as a global leader in microfinance.
A well-thought-out system of regulation is important both to microfinance clients and the institutions that serve them. For clients, an inadequate regulatory framework means that there is no protection against predatory or unfair lending practices. Clients also need to be educated about the financial services they are being provided with, so that they understand the terms of their financial transactions and have assurance that their deposits are safe from bank failure or fraud. For the microfinance institutions (MFIs) themselves, being able to provide such assurances and to demonstrate credibility to depositors will allow them to mobilize funding from a wider range of sources (and grow accordingly).
Perhaps the most important issue at stake is that the current environment does not recognize a clear and unambiguous legal basis for MFIs to operate and plan for growth and sustained impact. Licenses and legal standing are often negotiated on an ad hoc basis, leaving MFIs vulnerable to changing political factors and “governance by interpretation.” The lack of a clear legal status also creates a perceived high risk of loss and can deter new investors from entering the microfinance marketplace. To avoid a “one size fits all” approach that could be detrimental to the diversity of the sector, a series of pre-approved MFI charters should be developed that would allow the government and banking authorities to more efficiently evaluate, compare and license MFIs.
In the current environment, there is a tendency toward creating interest rate ceilings on loan products. This practice is severely limiting to MFIs that are attempting to achieve full cost recovery in the medium term. The ability to adjust rates according to demand and to cover operating costs is crucial to allowing MFIs to serve the changing needs of their clients and deliver their services more efficiently. Rather than capping interest rates as a means of reducing the cost to borrowers, MFIs should focus on improving efficiency by implementing best practices and automated management information systems. Likewise, making low-cost funds accessible to MFIs during their early stages puts them in a better position to offer affordable interest rates and still pursue financial self-sufficiency.
By instituting formal policies and regulations to govern microfinance activity, China can pave the way for its microfinance industry to grow strategically and effectively, and to have a significant impact on the country’s poorest families. GFUSA — together with partners such as Grameen Trust, Citigroup, the Ford Foundation, PlaNet Finance and local MFIs – is dedicated to making this a reality.
Grameen Foundation : Resource Center : Print Newsletter : Winter 2004 : Realizing Microfinance in China
Grameen Foundation uses microfinance and innovative technology to fight global poverty and bring opportunities to the world's poorest people. With tiny loans and financial services, we help the poor, mostly women, start businesses and escape poverty. Our global network of 55 microfinance institution (MFI) partners including our Growth Guarantee partners has touched more than 34 million people in 24 countries. In addition, we introduced and now sustain technology initiatives (Mifos and Village Phone) in Cameroon, Kenya, Rwanda, and Uganda, bringing our total country outreach to 28.
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