MICROCAPITAL.ORG STORY: Founder And Officer Of India-Based SKS Microfinance Comment On Prospects For Microfinance In China In A Wall Street Journal Report

A recent article entitled ‘Microfinancing China’ in the Wall Street Journal [1] by Mr Vikram Akula and Mr Tarun Khanna discuss the scope for microfinance in China and explores why the concept of microcredit has a ‘notably minimal footprint’ in a mammoth economy such as China. Mr. Akula is founder and chairperson of India-based MFI, SKS Microfinance [2]. Mr. Khanna, the author of the book ‘Billions of Entrepreneurs’ [3] is Jorge Paulo Lemann Professor at Harvard Business School and serves on SKS Microfinance’s board of directors. The view taken by Mr Akula and Mr Khanna is that ‘it will take hard work and reform to grow microfinance in China’ but that millions of poor people in the world’s third largest economy could derive benefits from microloans.

Despite it’s apparent economic prosperity, the report notes that China has the ‘second-largest number of poor after India’ with approximately 254 million people living on less than USD 1.25 a day in 2005 (as measured in purchasing power parity dollars), according to World Bank [4] assessments. Furthermore, it is stated that the income gap is widening between rural and urban areas and has today reached a historical high. The writers note that microfinance could be a tool that may reduce ‘entrenched poverty’ in China and observed that ‘loan sizes would be larger than in India’ because GDP at purchasing power parity per capita in China is higher at USD 5,962 versus USD 2,972 in India, according to 2008 World Bank figures. Such loans could be used for income-generating activities such as raising livestock, buying materials for micro-businesses and farming, and setting up small trade and services. This, as noted by the writers, is especially pertinent as the Chinese government seeks to create a “harmonious society” in part through poverty reduction and human development.

The writers observe that it is currently ‘very difficult’ for China’s poorest citizens to obtain loans. The absence of civil society in China until recently means there are few established poverty-reduction programs and the role that they can play is relatively new. Furthermore, there is no coherent government policy on microfinance nor a clear regulatory framework governing the industry. Chinese MFIs are allowed to operate only in the county where they are registered, thereby inhibiting expansion, and obtaining licenses is a highly bureaucratic process. The article also notes that the ‘neediest are left out’ in China. Government rural credit co-operatives exist and are intended to serve the poor in the countryside yet ‘co-op loans tend to be too big, cumbersome and bureaucratic for the poorest citizens to access, and bank branches are not conveniently located’.

In response to these challenges, some Chinese MFIs have started to consider partnerships with foreign groups ‘to learn their methods and put operations into place’. The authors note that the efforts of these MFIs ‘will be limited’ unless a favourable regulatory environment is put in place for Chinese MFIs. They added that the Chinese government could ‘boost’ microfinance through private village banks by ‘dropping investment restrictions on foreigners and loosening local license requirements’.

China’s cautious approach to microfinance is understandable given the failure of Chinese rural cooperative funds, which were depository institutions established in the 1980s to funnel lending to rural areas. A ‘lack of effective supervision and meddling from local governments’ led to their demise in 1991 with many peasants losing their deposits. This is a risk that could be avoided if MFIs are initially restricted from taking deposits.

More information on microfinance in China can be found in previous Microcapital.Org stories, some of which are referenced in the Bibliography section below [5] – [11].

By Chinq Yee Chong, Research Assistant

Bibliography

[1] Article entitled ‘Microfinancing China’ in the Wall Street Journal: http://online.wsj.com/article/SB10001424052748703298004574457922639779290.html

[2] SKS Microfinance: www.sksindia.com/

[3] ‘Billions of Entrepreneurs’ by Tarun Khanna: http://www.amazon.com/Billions-Entrepreneurs-China-Reshaping-Futures/dp/1422103838

[4] The World Bank: www.worldbank.org/

[5] NEWS WIRE: United States: China Needs Microfinance, Say Vikram Akula of SKS and Tarun Khanna of Harvard Business School in Wall Street Journal

[6] MICROCAPITAL.ORG STORY: Grameen Trust of Bangladesh Partners with Alibaba Group to Create Grameen China, With Initial Focus on Bringing Microfinance to Sichuan Province

[7] MICROCAPITAL.ORG STORY: Grameen-CPAD-Danone Micro-Credit Initiative Aids Post-Quake Reconstruction in Sichuan, China

[8] MICROCAPITAL.ORG STORY: Wokai Uses Kiva-Like Approach To Channel Funds From US Contributors To Microfinance Clients In Rural China – A Reversal In The Creditor-Debtor Relationship Of Both Countries?

[9] MICROCAPITAL STORY: Small Business And Rural Finance In China – Low Leverage Ratios

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

[11] MICROCAPITAL STORY: State Council Leading Group Office of Poverty Alleviation and Development of China (CPAD), Grameen Trust, and Danone Group Create Danone Microcredit Foundation to Aid SiChuan Earthquake Victims

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