Policy Paper 15 (October 13) – Microcredit in China: Recommendations for Policy Makers

This is the first of a series of planned reports on microcredit in China. In this paper we offer our view of what is preventing microcredit from developing in China and offer a list of recommendations for Chinese policy makers that wish to promote this sector. Our preliminary analysis suggests that microcredit is not developing fast in China due to a set of regulations that need to be amended, the tight economic viability of a microcredit companies, the lack of access to both domestic and international capital markets as a source of funding, and lack of true microcredit service offered by Village Banks. Our main belief is that while the various initiatives of several NGOs operating on a non-profit basis in China are laudable and successful, even within the limited scope in which they operate, a true development of microcredit in China that can make a real impact on the vast number of mid-low income residents can only occur if a double-bottom-line approach is implemented. That is both serving the social mission of helping poor people and establishing financially viable lending entities. Therefore, we propose the creation of a new more flexible type of institution, regulated by a new body, independent from the China Banking Regulatory Commission. The new microcredit institution will be allowed to receive customer deposits, will not have strict minimum capital requirement, can operate across a whole province, is tax-exempt and can accept investment from both domestic and international investors. In exchange for these relaxed rules, such a new microfinance concern (that we will call ‘Microfinance Company Plus Deposit’, or MCC+D), will have to commit to serve the low-income population, and have maximum loan size capped, so that true micro-loan products are offered. This report is aimed at Chinese policy makers, in Central and Local Governments, People’s Bank of China, China Banking Regulatory Commission, as well as existing and potential practitioners and investors who wish to gain an initial assessment of the industry. The first section of the report briefly introduces some key relevant facts; in section two, we highlight current problems and, at the end, we offer some policy recommendations. Our conclusions are the results of field visits to the Association of Rural Development of Yilong county, in Sichuan province, plus several meetings and exchange of views with many organisations, including, UNDP, PlanetFinance, Chinese Academy of Social Science, HSBC, Grameen, GTZ, Graduate School of People’s Bank of China, staff and students at Zhejiang University and in London.

DOWNLOAD THE FULL POLICY PAPER HERE.

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