2004 Annual LAEBA Conference The Emergence of China: Challenges and Opportunities for Latin America and Asia 3-4 December 2004 Beijing, PRC Modalities of Microfinance in Asia and Latin America: Lessons for the People’s Republic of China Heather Montgomery and John Weiss

I.Introduction II.Microfinance and Poverty III.Modalities of Microfinance Delivery IV.Microfinance in the People’s Republic of China V.Challenges for PRC in Developing a Microfinance Sector VI.Conclusions

II. Microfinance and Poverty The Poor Transitory Poor Chronic Poor Core Poor / Destitute

Micro credit for ‘promotional’ or ‘protective’ purposes Generalization that core poor benefit relatively little from micro finance II. Microfinance and Poverty

Higher transaction costs Higher default rates Credit rationing Lower marginal returns on investments Risk preferences II. Microfinance and Poverty

Risk A r Return E X M B C drop out graduate out

1.The Credit Union Approach 2.The NGO Approach 3.The Banking Approach III. Modalities of Microfinance Delivery

1.The Credit Union Approach Registered Subject to commercial law No banking regulation/supervision Member owned Non-profit institutions May affiliate with apex institution III. Modalities of Microfinance Delivery

Non-profit Non-governmental organization Examples: Grameen (Bangladesh) Banco Sol (Bolivia) 2.The NGO Approach

III. Modalities of Microfinance Delivery Regulatory limits: Cannot access capital markets Cannot offer savings services Limits on scale of operations 2.The NGO Approach

III. Modalities of Microfinance Delivery 3.The Banking Approach Transformed NGOs State-run Development Banks Reformed State Banks Diversification of commercial banks Specialized commercial banks

III. Modalities of Microfinance Delivery Commercialization of Microfinance WOCCU’s commercially oriented approach Transformation of NGOs to Banks Commercial Banks expanding into Microfinance

III. Modalities of Microfinance Delivery NGOCredit UnionCommercial Bank Target Clients The poor, especially disadvantaged groups MembersAll small clients, particularly microenterprises and traders Primary Source of Funds DonorsMembersDepositors, Investors Strengths Deep outreach (strong poverty focus), Credit combined with training and support Participatory, Access to remote rural areas Savings mobilization, Access to commercial funds, Prudential Regulation Weaknesses Limited sources of funds for expansion, Governance issues, Management standards Governance issues, Managements standards, Outreach limited to members Mission drift and exclusion of poor, Constraint on expansion due to prudential requirements.

Sources of Financing for Rural Households 1.Informal Finance 2.Agricultural Development Bank of China (ADBC) 3.Agricultural Bank of China (ABC) 4.Rural Credit Cooperatives (RCCs) IV. Microfinance in the PRC

2.Agricultural Development Bank of China (ADBC) 1994 took over role of ABC in policy lending Now finances state-owned food enterprises

IV. Microfinance in the PRC 3.Agricultural Bank of China (ABC) Commercial bank Agricultural loans about 10% of portfolio

IV. Microfinance in the PRC 4.Rural Credit Cooperatives (RCCs) Established 1950s Part of state-owned banking system 1996 operate directly under central bank Large number of rural outlets Important source of rural finance

Microfinance 1.Government Financed Programs 2.NGO Sponsored Programs 3.Rural Credit Cooperatives IV. Microfinance in the PRC

Microfinance through Rural Credit Cooperatives 2001 experiment in Jiangsu province 2003 expanded to 7 other areas Now majority of RCCs provide microfinance Only nationwide microfinance program Coverage still below potential demand IV. Microfinance in the PRC

V. Paths for Developing a Microfinance Sector 1.The Credit Union Approach 2.The NGO Approach 3.The Banking Approach i.ABC/ADBC ii.RCCs

Continued reform of RCCs Bank Ryakat Indonesia’s Unit Desa Reaching the core poor? V. Conclusions