MICROCAPITAL STORY: Microloans In China – Recent Experiences In The Ningxia Province

china microfinance

In a Bloomberg report date dated 16 June 2009, reporter Dune Lawrence highlights the impact of microloans in rural China. By way of illustration, Wang Shulian started a business producing mineral powder that is used for plastering by obtaining microloans equivalent to USD 146 from an organization that supports rural women in the Ningxia province. Her monthly income has grown from nothing to about USD 1460 in just over 8 years.

Microloans for farmers and entrepreneurs like Wang may be a more sustainable path to rural consumption and growth although such initiatives do not grab the headlines much like China’s recent 4 trillion yuan (USD 585 billion) stimulus plan to build housing and infrastructure. Many commentators agree that getting funds through to the lowest levels of the economy is critical for the long-term development of China. As many as 30 million migrant workers from China’s cities have moved back to rural areas in search of jobs since the global slowdown began. Whilst jobs may be found, rural incomes on average work out to be less than a third of urban income levels. Accordingly, the government believes that the provision of credit to fuel growth in rural China is a key priority.

Some of Wang’s neighbors also obtained equivalent loans to raise sheep, thereby expanding their village economy beyond subsistence farming. More families now make at least several thousand yuan a year. Wang’s lender is Ningxia Huimin Microfinance Co. (Ningxia) which does not currently supply data to the MIX Market portal, an online network which provides financial and other information on over 600 MFIs around the world. Accordingly, updated financial data about Ningxia is not currently available. Ningxia is an NGO that was founded in 1996 with a view to helping rural communities address the interconnected problems associated with gender inequalities, poverty and the environment. The non-profit microfinance organization Planet Finance is said to be a partner of Ningxia. Information on Ningxia’s Microcredit Program is provided on their website.

According to their website. the Microcredit Program provides initial loans of about USD 125 for specific projects which usually relate to the purchase of animals, animal feed or the upgrade of animal pens. Each loan lasts for six months with an annual interest rate of 12% (which is higher than that charged on conventional loans). Twice a month, the women are required to contribute 1% of their total loan amount into a savings account held by the Women’s Development Microfinance Center. The interest rate paid on the savings accounts is 7.2% annually. At the end of the six month term, the women are required repay the entire loan amount plus interest. This lump sum payment is especially well suited to animal breeding activities where periodic sales of animals generate a large sums of money but do not provide cash on a weekly basis. Women who successfully pay off their loans qualify to apply for larger loans, with the maximum loan size amounting to approximately USD 313. Before taking out loans, the women form small groups of five to six and agree to guarantee the timely repayment of each other’s loans. These groups combine to form credit committees. Each committee selects a leader (who also acts as the committee’s cashier) and an accountant who records the committee’s activities and keeps track of members’ borrowing and savings. The credit committees meet twice a month to collect payments, approve new loans, plan activities and receive training on topics chosen by the women themselves that are relevant to their economic activities. Ningxia’s methodology is not dissimilar to the approach employed by Grameen Bank to compensate for the lack or absence of collateral.

According to the Bloomberg report. for every 1,000 yuan (approximately USD 146) households borrow a year from Ningxia, income increases by 777 yuan (approximately USD 114), according to a 2007 survey of clients. It plans to almost quadruple its loans to 76 million yuan (approximately USD 11 million) by 2012 and serve 15,000 households, with the help from investment from companies, grants from international organizations and loans from banks, including the state-owned China Development Bank .

According to professor Yasheng Huang at Massachusetts Institute of Technology

in Cambridge, Massachusetts, China’s financial sector has changed dramatically since 1978 when farmers first led China’s first stage of market reform. Professor Huang observes that the financial sector now feeds large state-owned enterprises and urban households at the expense of the countryside, he says. The global crisis has caused China to focus on microcredit to combat the lack of credit in rural areas. In May 2008, the central bank and China Banking Regulatory Commission issued a directive to encourage the establishment of microcredit companies with a focus on rural lending in all provinces. That led to a dramatic increase in the number of microcredit providers (from 8 in May 2008 to 500 now) according to GTZ. the German development-aid agency, which is conducting a survey with the central bank. In March, the central bank and regulatory commission called on financial institutions to increase loans to rural areas and develop new microfinance programs.

Despite recent government statements and directives in support of microfinance in China, many non-profit organizations still do not know how to secure funds from banks or attract investors. Microcredit in rural China remains a low-profit enterprise because of the difficulties accessing rural borrowers in remote areas. Registration rules, requirements that vary by locality and a prohibition on taking deposits also limit the ability of microcredit companies to expand their operations and scale. Some commentators feel that the government should facilitate commercial-bank loans to these companies and institute tax relief and interest- rate subsidies for them.

This is an interesting time for the microfinance industry in China as increasing numbers of global and domestic microfinance organizations enter the sector. In a recent report dated 4 June 2009 on the China Daily entitled “Microfinance on way to China’s poor “, it was stated that yoghurt giant Danone will inject 20 million yuan (approximately USD 3 million) into microfinance projects in China, whilst Grameen Trust will offer technical assistance. The Group Office of Poverty Alleviation and Development of China is in charge of conducting the projects. The above Danone-Grameen collaboration is intended to target poor families and individuals in the earthquake-stricken areas in Southwest China’s Sichuan province, helping them to start their own business or rebuild their homeland. Microcredit programs have also been set up in other counties, including the poorer areas in Inner Mongolia and the Hebei province.

Hype aside, it is important to bear in mind that microfinance is not a proven solution to poverty reduction. In a recent article on Microfinance Insights dated 1 May 2009 by Sam Daley Harris entitled “Mission (Im)possible: Can Microfinance Really Change the Lives of the Masses “, the author reminds us that microfinance cannot always reduce poverty. If properly implemented, microfinance remains a powerful tool to help the poor start to climb out of the cycle of poverty. Outreach and sustainability may suggest that a particular MFI has been successful but that should not encourage a blanket conclusion that microfinance alone can always end a family’s poverty. The views raised in the Private Sector Development Blog dated 22 May 2009 entitled “The Verdict Is In On Microfinance ” provide further fuel for microfinance skeptics. The PSD Blog discusses results of a random survey conducted in the slums of Hyderabad which are set out in a report by the Poverty Action Lab entitled “The Miracle of Microfinance? Evidence from a Randomized Evaluation “. Among the conclusions reached were that “while microcredit succeeds in affecting household expenditure and creating and expanding businesses, it appears to have no discernible effect on education, health, or womens’ empowerment. Of course, after a longer time, when the investment impacts (may) have translated into higher total expenditure for more households, it is possible that impacts on education, health, or womens’ empowerment would emerge. However, at least in the short-term (within 15-18 months), microcredit does not appear to be a recipe for changing education, health, or womens’ decision-making.” That there are equally strong comments on the PSD Blog from proponents and skeptics of microfinance shows that the issue of whether or not microfinance really has an impact on poverty reduction will continue to be the subject of debate and discussion in the future.

Source: www.microcapital.org

Category: Payday loans

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