12 The Micro-Credit Company Pilot Programme, People’s Republic of China
The Micro-Credit Company Pilot Programme, People’s Republic of China
Review and Refine Policy
Geography: People’s Republic of China
Toolkit step: Review and Refine Policy
In Brief: To address the lack of financial services available to entrepreneurs in impoverished rural regions, the Micro-Credit Company (MCC) Pilot Programme began in 2005 to implement trials providing new financing resources in five Chinese provinces. In 2008, taking into consideration lessons learned from the trial provinces, guidance was issued for the development of MCCs throughout the country. Currently close to 6,000 MCCs in China are playing a crucial role in supporting the development of rural business and social enterprise in the country.1 As the programme develops and expands, the Chinese Government continues to evaluate its success and apply additional policy reforms to increase support for rural development.
The experience in China provides several considerations for policy-makers looking to the MCC Pilot Programme as an example of how to review and refine existing policies, including:
- Start small, developing new policy interventions in stages
- Identify policy overlaps and disconnects
- Allow for local adaptation while maintaining coherence
Policy Goals and Development
Rural farms and enterprises in China have historically received insufficient financial support and services.2 This lack of investment has, in part, contributed to the huge disparities in income between rural and urban communities.
In 1998, noting the success of microcredit initiatives of several non-governmental organizations, the Chinese Government began looking to microcredit as a tool to address rural poverty. Initial microcredit programmes through the Agricultural Bank of China struggled with poor loan repayment and performance, in part because the Poverty Alleviation Office managed the programme and many farmers treated the funding as donations rather than loans.3
Following these initial attempts, in 2003 new leadership brought a renewed focus to development in rural, impoverished areas. Recognizing the lack of existing financing options in these regions, in 2004 the Chinese Government issued policy directives known as “NO.1 Documents”. The directives emphasized the need to develop infrastructure for microcredit and encouraged the development of innovative models for rural finance.
As a result of the recommendations in the “NO.1 Documents”, the People’s Bank of China (PBC) launched a pilot programme of seven Micro-Credit Companies (MCCs) in five provinces in 2005. The individual MCCs were intended to provide financing to farmers and rural enterprises, while the pilot programme more broadly aimed to develop a financial and supervisory framework for the growth of private finance in rural areas. Loans provided by MCCs are very flexible, not requiring collateral from the rural entrepreneur and can be as large as 100,000 yuan (approx. US$ 16,000). To accommodate this flexibility, interest rates are typically around 20%; however, limits were set at four times the PBC rate so rates could not become predatory.4
The MCC Pilot Programme was an important first step to creating financial infrastructure that supported rural enterprise. However, the PBC framework was extremely strict. For example, MCCs could not generate funds to loan through the collection of savings deposits, nor could they borrow and leverage capital from other sources like a typical commercial bank. The majority of funds loaned by the MCCs were generated through private channels (i.e. investments or donations from individuals and companies), greatly limiting the number of loans that could be provided. Additionally, MCCs had no recognized legal status, creating uncertainty about how the model could be expanded and replicated.
Policy in Action
Working with the pilot regions to understand the issues faced by the MCCs, the PBC and the China Banking Regulatory Commission (CBRC) revised the MCC guidelines in 2008. Under the new guidelines, MCCs are still not allowed to take savings deposits, but they may now borrow from other banks as long as the total amount borrowed does not exceed 50% of the MCC’s total funds. The new guidelines also addressed the uncertainty around MCCs’ legal status, providing concrete designations and processes for their creation.5
Along with the issuance of these new guidelines, the PBC and CBRC expanded the geographic scope of the programme, responding to significant demand from private investors to develop MCCs throughout the country. These investors included individuals, non-profit organizations and institutions both from China and abroad. An example of how one international investor used the new guidelines to support rural enterprise is presented in the “MCCs on the Ground” box in this section.
With this expansion, the guidelines also decentralized the regulatory power and responsibility to provincial governments, a significant development towards a national regulatory infrastructure. Provinces now determine how the guidelines are implemented; each government has the freedom to place its own conditions for MCCs as it deems appropriate for the region. For example, the province of Inner Mongolia has adopted the PBC guidelines exactly, while the province of Zhejiang has imposed tighter regulations.
Alongside the MCC development process, in 2006 the CBRC also issued new regulations regarding the development of another rural financial institution, Village Banks.6 Village Banks are fully licensed and highly regulated, and are allowed to take savings deposits and provide financing, like a traditional commercial bank. Following these 2006 regulations, many large multinational banks such as Citigroup and HSBC began operating in rural China, providing additional financial services in those communities.7
While MCCs tend to lend to riskier, start-up rural enterprises, Village Banks face much stricter compliance requirements and are structured to make more conservative investments. Thus to attract greater investment, grow their operations and offer new products, certain MCCs showed interest in adopting the additional regulatory requirements to become Village Banks. Recognizing this potential overlap, guidelines issued by the PBC and CBRC in 2008 provided basic requirements for the conversion of an MCC into a Village Bank. These guidelines were clarified in 2009 regulations that detailed the full requirements and process for the conversion.
Impact to Date
In the eight years since their inception, MCC policies have evolved to address the needs and challenges of the market and have provided a clear path for private investment in underserved rural communities. Starting with just seven MCCs in 2005, close to 6,000 now exist, with 540 billion yuan (US$ 87 billion) in outstanding loans. In 2012 alone, MCCs provided 50 billion yuan (US$ 23.83 billion) in loans to support rural enterprise and development.8 Compared to the approximately 500 Village Banks operating or under construction,9 the scale achieved through the MCC model is impressive.
Room for improvement still exists, however. For example, a major challenge for MCCs is the tax burden they face. In the current structure, MCCs must pay a 5.6% business tax in addition to a 25% personal income tax on all returns paid to its investors. As a result, MCCs have had to rely on high interest rates on their loans to remain profitable. These high rates in underserved communities limit the scope of further rural development as well as the level of social impact they are able to achieve.
Another challenge faced by MCCs is raising funds to loan. Many groups recommend that the amount MCCs are permitted to borrow should be raised. Often an MCC will lend out initial funds within months of opening, threatening its financial stability and leading many companies to raise funds illegally, for example by taking savings deposits from their borrowers. These challenges can be addressed through ongoing policy review and refinement.
Policy Recommendations for Scaling Social Innovation
MCC policies have created an efficient way to develop wide-reaching financial infrastructure that can be adapted to China’s diverse regions. In addition, the MCC Pilot Programme provides several lessons for policy-makers interested in developing and refining financial infrastructure in underserved areas.
Start small, developing new policy interventions in stages
The small pilot in 2005 allowed the Chinese Government to develop a basic understanding of the structures and conditions required for MCCs to be successful on a larger scale. The revised guidelines of 2008 benefited from the policy’s initial experiences, leading to successful expansion throughout the county.
Identify policy overlaps and disconnects
Crafting guidelines that allowed certain MCCs to become Village Banks provided a seamless regulatory process for the development of rural financial institutions. However, gaps in the Chinese microcredit industry remain, which MCCs and related policy can help to fill. For example, the loans provided by MCCs tend to be too large and expensive to support more impoverished farmers and rural entrepreneurs. A policy opportunity thus exists to identify financial innovations that serve these particular communities.
Allow for local adaptation while maintaining coherence
The 2008 revised guidelines that allowed the decentralization of regulatory power and responsibility were important to the policy’s success as they allowed MCCs to be tailored to local investors and enterprises. In permitting local adaption, however, policy-makers run the risk of loosening a unified understanding of the policy. If policy coherence is not maintained, confusion and hesitancy on the part of potential investors can ensue.
MCCs On the Ground
ACCION Microfinance China
ACCION Microfinance China, one of the first foreign-funded MCCs in China, was launched by Accion International, a global non-profit organization whose mission is giving people the financial tools they need to improve their lives. Accion’s MCC operates in Inner Mongolia, where 40% of the population remains below the poverty line. Through its lending, Accion has been able to support entrepreneurs like Ya Rong Ma, who received a 12-month US$ 6,200 loan for her business, a shop that sells traditional items like Buddha statues and educational books. Accion’s loan not only helped Ya Rong Ma turn her struggling business around by allowing her to purchase additional inventory but also preserved an important cultural resource for her community.
The work of ACCION Microfinance China demonstrates the opportunity MCCs provide to a range of investors in rural communities. Prior to the PBC’s guidelines, no legal mechanism enabled international investors like ACCION to work in such areas as Inner Mongolia where their services create important social impact.10