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Microfinance: The Untapped Chinese Market


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Microfinance in China has the potential to be one of the leading, innovative approaches to alleviating poverty and boosting rural and regional economic development. This report will take a closer look at how the current Chinese microfinance model came about, the current outcomes of the model, and lastly the problems and solutions of the potential market, which has yet to be tapped by foreign investors.

The current market
Despite the rapid economic growth in China, much of the country’s development and wealth are inequitably partitioned across the country. According to PlaNet Finance China, a non-profit organization aimed to promote and support the microfinance sector, “an estimated one third of [China]’s people do not enjoy access to any kinds of financial services. ” Most traditional banks in rural areas view the offering of financial services to those who lack individual ownership of land as an unattractive business opportunity. An individual without land ownership is unable to offer proper collateral, providing him financial services is seen as a high risk, unmanageable asset.

This barrier to financial services has lead to a shortage of working capital loans for single-owner business proprietors, farmers, and small agri-business (i. e. lower links of the supply chain). Speculative financing is needed to run and expand business, and its absence has led to a slowdown in rural and regional growth by diminishing the capability of small businesses to compete with more modern companies.

Microfinance has yet to reach its potential. Not because of a lack of demand, but because of the incomplete regulatory environment and a misconception of the industry.

China’s microfinance institutional models
Currently, China hosts a wide range of microfinance institutions: the informal ones, such as borrowing and lending among relatives and moneylenders with low rate of interest or interest free; and the official ones, intended by the government to be conducting microfinance-related transactions. There are two types of them in China:

Micro-credit Companies (MCCs)

* Began in the mid-2000s;
* Local government plays the role of MCC in some counties;
* Operate in more remote, local regions, limited to one county;
* Composed of 100 percent private equity;
* Only provide lending services, cannot accept deposits;
* Offers loans under RMB5,000.

Village and Township Banks (VTBs)

* Began in 2006;
* Operate in small towns, limited to one county;
* Composed by one or more financial institutions with no lower than 20 percent equity each and other non-bank shareholders with a maximum of 10 percent equity;
* Provides lending services, can accept deposits as it is a financial institution;
* Offers loans as high as RMB500,000 and as low as RMB5,000, in practice.

By the end of 2006, the China Banking Regulatory Commission and the People’s Bank of China jointly released guidelines allowing the transformation of MCCs into VTBs, in order to provide incentives for more public financial institutions to take part in developing the rural economy. The new guidelines require licensed domestic banks to have a 20 percent minimum ownership of VTBs, and further states that the remaining shares cannot be more than 10 percent for individual non-financial institution investors.

To read the rest of this article by Sophie Cerny and Jessica Tou, please visit the website,

For please visit, both these sites are published by the publishers, Asia Briefing.


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