Some Coal Money Is Said To Be Flowing Into Microfinancing

This morning, read this article that says as coal mine owners exiting the industry, some of them are putting their money into private lending.

The article says that the global financial crisis has accelerated the coal industry consolidation, which also coincided with the mandate from Beijing to improve safety. As a result, many small coal mines are shutting down or being merged into larger operations. Their owners welcome the chance to wash their money clean and become stock-holding capitalist.

The article didn't cite a source but says that as much as RMB 300 billion ($40 billion) is looking for new investment targets. Some of that has ventured into private lending. According to this article, in the first half of this year, dozens of small-loan lenders have registered in Shan Xi province, bringing in about RMB 15 billion/$1. 8 billion. The majority of it is said to be from old coal money.

I think this is great news if it is true. Rural China needs credit, but the government's policy focus has been more on the fiscal side (tax, subsidy) than on monetary (credit market). At the same time, there are signs that rural China is rebounding after years of neglect and (land, labor) depletion (according to orthodox Chinese Reform-ology, the rural areas was the first to benefit from Deng's Reform in the last 70s. Then withered in the 1990s as industrialization intensified) As the central government trying to "bend the curve" on wealth gap between rural and urban areas, private capital should find it a hospitable environment in the country side.

There will be concerns whether those coal mine owners won't turn their blood money into a usury business, I am sure. But just having them registered, it bring some accountability to the table. Consider the alternative, say like AIG selling credit swaps but chose to be regulated as a pure insurer? Those poor, ignorant Chinese country folks still have long way to go :)

While the World Maybe Flooded with Microfinance Loans, China Has A Different Problem

Recently, there have been much discussion about whether a Microfinance (MF) bubble is brewing. Articles in the Wall Street Journal and the Economist pointed out that in some MF markets, there have been an excess of credits, distorted lending incentives (agents are paid by how much they lent out, not how much repaid) and an increasing portion of the loans being used toward non-productive activities (e.g. weddings).

This may be the case somewhere, but there is little evidence that there is an excess of private capital in China's MFI market. Despite the high profile stimulus spending the government initiated earlier this year (nominally $600 billion, a more conservative estimate put it below $400 billion), there is little sign that the money has trickled down to relieve the private credit market (at least, not so much as to jump out to me when I found time to scan the landscape). I would imagine that the government may have budgeted some of the money as a public-funded MF pool. Yet, I haven't heard anything concrete to backup this assumption.

The fact that I have not heard any voice of dissent over the lack of stimulus in MF in China tells me two things -
1. The credit market is till tightly controlled by the government
2. MF lacks its own advocate in the leadership circle

On the first point, my belief is that the 1997 Asian financial crisis has left a lasting impact among Chinese decision makers. Somewhere I read the story that Freud became who he was all because of an incident when, as a boy, out of curiosity or mischief, he hid in his parents' closet and witness "how babies are made", so to speak. I suspect the trauma of witnessing S. Korea going down on its knees slowed the financial marketing liberalization for several decades at least.

On the second point, it is just consistent with the fact that China, as a polity, is a strictly top-down society. Civic organizations--being professional, communal or financial--are always looked upon with suspicion and kept on the margin.

I don't know when I am going to post the next entry. It has been pretty busy recently. I always wanted to do a comparison between Wokai and Kiva. Just to see where Wokai could improve (e.g. user experience, communications, etc.)

Bai: Put Microfinance in Context

In this blog, "Don't Put Microfinance under a Microscope!", Mr. Bai argued that although globally MF loans have reached $6.5 billion, it is a misnomer to say there is "too much microfinance" already.

Referring to a Times Online article which challenged the promise of microfinance, Mr. Bai countered that:

• Given the overall size of global credit market ($270 trillion), $6.5 billion microfinance accounts for only 0.0024%, yet it serves close to 2% of the world population for their credit needs.
• One of the main theme in the Times article is that not every MF borrower will make it. Despite the growth and popularity of MF, it is the traditional way of expansion--globalization, industrialization, urbanization--that is doing the most in creating jobs and improving life for world's poor. Mr. Bai's argument is that "every tool has its own place" in helping the poor. MF is never a "silver bullet". It helps a group that is under-represented in today's global economy. Credit is just one piece of the puzzle for many micro-businesses, albeit an important one.

My thoughts on this, as I wrote in a separate blog, is:

Wokai, as MF in China in general, is struggling to have its voice heard, due largely to an economy that is used to state intervention--those who think China is the ultimate success story of unbridled entrepreneurship don't know China at all. Even worse, such an economy--however unbalanced or exhaustive--is still doing wonders. As a result, such a development model crowds out other alternatives, such as grassroots financial self-help. I wouldn't be surprised that having heard others' success stories, even the poorest farmers in the farthest corner still pin their hopes mostly on the government.

Moving to Wokai's Main Blog Site

At the request of Casey, I am going to post directly to Wokai's blog site. However, I am leaning towards keeping a copy of my posts on this blog.

As of now, Wokai's blog entry doesn't carry a byline. I am not sure why. Not that I care for the credit as much as I want to have my own "brand": I am a volunteer of Wokai and I care about Microfinance in China. Yet I don't represent Wokai.

My attitude toward Wokai is complicated. Wokai is an ambitious grassroots organization started by two young social entrepreneurs (now mostly just Casey). It certainly identifies a niche--microfinance in China through foreign funding. The fact that it still exists today, given the limited resources it started with, is a strong testament of a need for such an organization.

However, Wokai, as MF in China in general, is struggling to have its voice heard, due largely to an economy that is used to state intervention--those who think China is the ultimate success story of unbridled entrepreneurship don't know China at all. Even worse, such an economy--however unbalanced or exhaustive--is still doing wonders. As a result, such a development model crowds out other alternatives, such as grassroots financial self-help. I wouldn't be surprised that having heard others' success stories, even the poorest farmers in the farthest corner still pin their hopes mostly on the government.

In this context, it is difficult for an organization like Wokai to gain traction, let along to expand. One critical issue is the lack of operational resource. We have a young founder who is working overtime, without pay, and has to rely on volunteers' good faith to get anything done.

But volunteers come and go. More than once, I have seen new volunteers joining Wokai with high hopes only to fade away months later. I myself am struggling to stay committed. But it is not because all the volunteers are hot-headed dreamers. Personally, I believe in microfinance, I believe that to many who want to "make it", to start is the hardest part. And credit is the biggest problem at that stage. Every bit of money helps. But compared to aid or subsidy, microfinance is about forging a social bond, is about the difference between a outsider and a participant.

In other words, I can see the logic, I can envision the end. But because of lack of operational fund, I do not see the results. Without results, there is a lack of sense of achievement. Without a sense of achievement, it is difficult to keep the troop marching, so to speak.

This is a long story to explain why I decided, despite the lack of time, to keep two sites for the same topic.

Disaster Insurance and Government Help Needed to Stablize Microfinance

This this blog entry, Mr. Bai argued that there needs to be a systematic and comprehensive mechanism to help microfinance institutions and borrowers during major disaster.

The Sichuan earthquake certainly brought extra urgency to this discussion. But the problem was first encountered by Grameen Bank during a devastating flooding in Bangladesh in 1998. 80% of the population were impacted by the disaster, many of the lenders couldn't keep up with their payments. Grameen had to reschedule a large amount of its loans. Consequently, its own credit standing took a hit.

Since then, many large microfinance institutions and their hosting countries have worked toward a more systematic approach to deal with emergencies, including trainings and emergency procedures for such situations.

Mr. Bai suggests that China has not done enough in this regard. Although, a week after the quake happened, the national banking agency did issue a policy guidance forbidding banks to charge late fees for quake victims, the guidance was inadequate to serve as a comprehensive, long term solution.

He further argues that, because natural disaster is a national tragedy and has traditionally been handled by the central government (vs. by the local community alone), the central government should take the lead in designing and implementing policies and regulations that will serve to stablize the financial industry--particularly the section that serves the poor--during emergency.

However, from this essay, it is not clear what Mr. Bai thinks the policies should be, although any policy changes will likely involve some kind of disaster insurance.

China Experimenting with Insurance Programs for Small Loans

Per this report through Mr. Bai's blog, a Chinese insurance company now has an insurance program for small loan lenders. A borrower with monthly income over 2000 RMB now may purchase a policy from Ping-An Insurance Ltd. that covers up to seven (7) times of the loan amount. The policy will kick in if the borrower cannot make the payment due to personal injury or other accidents.

Ping-An sells the policy through regional bank it partners with. The partner banks can now issue loans WITHOUT collateral if borrowers buys the insurance policy. The low qualification requirement is certainly a plus but the policy comes with a stiff fee: 14-35% of the loan amount (if I read the original article right) that has to be deducted in full from the loan upfront.

Some thoughts from reading this story:
1. This is a three-way-winning development. First, it offers a way for borrowers without collateral a means to get loans. Secondly, it reduces the default risk (especially that from accidents or illness) for banks. Lastly, it gives the insurance agency a piece of lending profit.
2. However, to a borrower, it means one has to pay higher rates for loans without collateral. The higher rate may render some business opportunities unattainable.
3. The silver-lining for the needy may be in the competition among financial institutions. According to the report, Ping-An is both a bank and an insurance company in its originating province, Guangdong. Being a private company, it is barred from having branch offices outside of that province. Therefore, although Ping-An is able to offer direct loans at a higher rate for collateral-less customers in Guangdong, it has to separate the insurance business from the lending business in other parts of China, and has to partner with other banks.

Apparently, Ping-An believes the market has good profit prospect because it hired away an industry veteran away from Citi Bank Korea and set a goal of selling more than 260 million RMB worth of service in 2009.

Introducing China Association of Microfinance and Mr. Bai Chengyu

My friend and fellow Wokai-er, Sam, sent me a link to a Chinese blog on Microfinance: http://microfinance.bokee.com/

I was really impressed by the articles posted there (disclaimer: I am not in a competition to promote that site). The author, Mr. Bai Chengyu (白澄宇), is the director of a semi-government MF trade group, China Association of Microfinance (CAM).

Reading from its website, CAM is supported by Citibank, China Academy of Social Science and Ministry of Commerce's International Center for Economic and Technical Exchanges. Besides Mr. Bai, Mr. Du Xiaoshan, a well-known pioneer in MF in China, is also a board member.

The mission of CAM, roughly translated, is to:

• Coordinate on policy issues, develop a conducive policy environment to promote the growth of microfinance, offer policy consultations
• Assist State financial regulators to provide industry census data, help to develop best practices and guidance for the industry
• Provide services for information exchange and human resources development
• Provide training for MF practitioners, raise level of competence
• Seek international cooperation to cultivate capital and other resources to expand the industry

(excerpts from http://www.chinamfi.net/intro_aboutsite.asp)

The site has a English link but it is broken. So in the following days, I will post some of the news, updates and reports I found on the site. I will also translate and summarize some of the essays Mr. Bai wrote on his blog (http://microfinance.bokee.com)

Answering the Call to Compete in a Blogging Contest

This posting is to help Wokai in a blogging competition. Apparently a social marketing company is doing a online marketing campaign to draw attention to various social causes (and perhaps itself), the NGOs got blogged about the most will receive a cash award from the company.

Although I wouldn't call this a win-win situation, I feel obliged to answer the call. The following blurb is what is suggested by the HQ. And I approved the message :)

What is Wokai?

Wokai delivers an internet microfinance platform that allows individuals to provide Chinese microentrepreneurs with loan capital. Our organization acts as an intermediary in this process, transferring funds from contributors abroad to microentrepreneurs in China through our field partners.

Who does Wokai support?

A typical Wokai microentrepeneur is a female rural inhabitant, living on less than $1/day. Her microfinance loan, ranging from $150-$300 dollars, provides her with the capital to start a small business. Her business varies by location, raising sheep in a rural grassland or operating a small fruit stand in a city center.

With her income, she accumulates savings, which allows her to allocate money towards long-term investments like education and health. By the end of her loan cycle, she has experienced increased financial independence, bolstered self-confidence, and a strengthened sense of community.

Learn more and contribute today at http://www.wokai.org.

This blog post is part of Zemanta's "Blogging For a Cause" campaign to raise awareness and funds for worthy causes that bloggers care about.

Another Report from Field Practioner: Microfinance Is a Viable and Effective Program for China

Found another article from the local government of Baotou City. It is filed by people from the government's Poverty Alleviation Office (“扶贫经济合作社”, or “扶贫社”，FPC）.

This article reviews a microfinance program started in 1994 in local area and documents some lessons learned. This is not a case study like in the last article I filed, yet it still contains some interesting points:
1. The authors concludes that the microfinance program can sustain itself
2. Microfinance is an effective tool to help alleviate poverty in rural China
3. The program was originally modeled after the Grameen Bank. A decade later, some practice proves more durable than others, such as targeting women borrowers, banking-in-the-fields, etc. But others, such as group lending (mutual guarantee), weekly center meeting, didn't work in China as well as it did in Bangladesh.
4. Microfinance program needs governmental buy-in at all levels
5. Because official policy limits capital sources for this program, it has loaned out every penny and is now run out of money--a victim of its own success.
6. The program needs a better information technology infrastructure to help improve efficiency and reduce risk.

The article is 发展小额信贷促进脱贫致富, can be found at here.

A Case Study That Measures the Success of a Microfinance Program in Henan Province

I found a case study that measures the success of a microfinance program in Henan province.

The case study followed a microfinance program run by a government agency, China Poverty Alleviation and Development Center, in the late 1990s and early 2000s. The program covered one entire county in Henan province and was designed to closely follow the Grameen Bank model.

The follow-up survey shows measurable change microfinance has brought about in peasants' life. It also reveals several areas that need improvement.

When the success is measured by the sustainability of a microfinance program and the positive change it brought to people's life, the report leaves little doubt that microfinance is a viable and effective tool in reducing poverty in rural China.

For example, since 1996, the program grew at an annual rate of 46%, borrower base grew at a pace of 39%. Loan turnover rate was 1.69 (times lent out in a year).

An agent on average managed 255 borrower's accounts, average total loan amount was RMB 190,000 (1996 RMB), or roughly RMB 745 per account. The profit from the program more than covered operating expense (even after remitting some profits to government agencies, it still covered 96% of expense).

The change this program brought to the community and individual borrowers is obvious:
In three sample villages, in five years between 1996 and 2001, 2.5 times more people (257/96) lived on incomes other than farming thanks to help from this program. Average per per capita income grew from RMB 700 to RMB 1500. Nonfarming small businesses grew from 5 to 12 (10 out of the 12 benefited from micro-loans). Rates on loans offered by private lenders lowered by 2% (from 20% to 18%). The number of automobile purchased nearly tripled (from 3 to 8).

When comparing individuals who benefited from this program with those who did not, the study compared several indicators (such as monthly household income, asset stock, number of household appliances), the former all come out clearly higher than the latter group.

The study also reported some of the problem came out of the program. Such as high operating cost, lack of complementary support to peasants who started businesses, lack of focus (the program was constantly torn between conflicting directives from operators and government sponsors), and lack of resources (capital, experienced staff and other support infrastructure).

The report, 河南虞城扶贫社小额信贷扶贫案例, can be found at here.

It was hosted by 中国扶贫信息网,
， a website managed by 中国扶贫发展中心

Wang Anshi (王安石) and Micro Credit in Song Dynasty

Call me a sino-centric pig ... but I just found out that micro credit was the subject of a famed reform in the Song dynasty (960-1172)

According to Wikipedia:
1069年宋神宗時，王安石任參知政事，推出了青苗法、農田水利法和募役法等新法。1070年升任宰相。由於新法中關於土地改革影響到地主與相關的官僚，變法遭到他們的強烈抵制，在民間由於改革推行難度大，反而對一般民眾的生活產生不利影響，又遭到知識分子的敵視

The so called 青苗法 was actually a credit-lending program design to help the poor. It requires local governments to set up mechanism to disperse surplus capitals and lend to peasants in need before planting and harvesting season.

The borrowers must come in a group of 10 with different grade of income yet providing guarantee for each other. The rate of the loans were between 20%-40%, comparable to micro credit loans today.

Again, thanks to Wiki:
規定凡州縣各等民戶，在每年夏秋兩收前，可到當地官府借貸現錢或糧穀，以補助耕作。借戶貧富搭配，10人為保，互相檢查。貸款數額依各戶資產分五等，一等戶不超過十五貫、二等戶十貫、三等戶六貫、四等戶三貫、末等戶一貫五百文。當年借款隨春秋兩稅歸還，每期取息２分，實際有重達４分（利息40%）的

Sadly the reform failed after just 10 years and Wang was widely condemned as a techno-hot-head.

However, I think the story just says how important rural credit is for Chinese peasants for centuries.

By putting up land as loan collateral, poor peasants risk being deprived of their only resource

Ketty L sent out this very informative article 土地承包经营权抵押应慎行

Key summary:
By putting up land as loan collateral, poor peasants risk being deprived of their only resource.


Context:
Recent policy change that allows peasants to transfer land usage right (the right to cultivate land, or the defacto land/property right)

The English translation roughly goes like this:

Caution Needed When Demanding Land Usage Right as Credit Collateral

"Currently, there is a trend that subjects peasants to giving up their land usage right. This may increase the risk for the peasants to loose their land", according to Chen Xiwen, deputy director of China Central Financial Leadership Group, during a news briefing held by State Council's Rural Development Economics Research Department (RDERD). He argued that under current condition, the practice of using land usage right and housing land quota as collateral should proceed with great caution.

Since the recent policy shift which allowed peasants to transfer land usage right, more and more people turn to land usage right as a solution to lack of capital liquidity in rural area. However, according to Chen and others experts who share his concern, using land usage right as a collateral is fraught with risks. In everyday practice, it tends to depress land value, deepen the inequality peasants often found themselves into.

Therefore, Han Jun, director of State Council Research Center Rural Office, suggested that the solution to rural credit problem may be found in micro/small credit programs and building a rural mutual credit guarantee system. Other alternatives include enhancing rural credit associations' fund raising abilities.

Based on recently reported cases, Chen thinks that the practice of using land usage right as collateral is not always fair to peasants.

For example, in April 2009, Liao Ning province started a pilot program that allowed using land right as credit collateral. The Chili Pepper Cooperative in the Fa Ku county Gangzi (township) subjected 900 mu land (150 acre) to appraisal by financial companies and was told that its one-year land usage right was worth 600,000RMB (US$85,000). However, after obtaining a series of certificates and licenses, the coop was only able to get a loan of 300,000RMB from the Rural Credit Union.

"When the land prices is suppressed like that, the risk is entirely shifted onto the peasants", Chen argued, "Is there not a better way to get a loan than putting up land usage right?"

In recent years, peasants have been increasingly vocal about the problem of obtaining credits. However, commercial lenders still shy away from rural areas, citing the lack of credible collateral as an excuse.

"Do the peasants have collateral?" Chen points out that, since 2007, the government has announced the policy that small loans in rural areas can be guaranteed up to 300,000RMB (without collateral). Because most peasants are tied to land or blood relatives, there exists the right social basis and conditions for easier credit.

"It is inexcusable if the reason of rejecting loan request is the lack of physical collateral." Chen posits.

While arguing for the small loan approach, Chen emphasized over and again that using land usage as collateral incurs social risk. Judging by the history of East Asian rural development, there is no precedence of using land as collateral.

"The problem of obtaining credit in rural areas still widely persists. Agri-enterprises have been affected by the financial constrain" This is an excerpt from the book, "Surveying China's Rural Area", compiled by scholars from the State Council's Research Center. The book contains the research reports from this organization over the last decade. For the first time, it reveals the results of a large scale survey of 1979 rural families, 180 villages, 216 enterprises, 103 Credit Unions and 340 rural commercial lenders, and 15 grassroots level financial institutes in 29 provinces.

The survey reveals that only a handful of rural enterprises have received credit from banks. 50% of the enterprises complained that the size of loan is always too small. In terms of meeting the credit needs, only 15.48% reported as satisfied (vs. aggregate credit needs).

The report also shows that funds raised among friends and family account for 58.11% of total credit sources. Those from Rural Credit Union accounts for 37.34%. A clear pattern in rural credit market is that due to limited sources of credit from official channels, unofficial sources play an important role in rural credit. According to the surveys, rural enterprises received 38.8% of their funding from friends and family, 16.4% from private lenders, mutual credit associations and other unofficial sources.


"Rural finance is a weak link in our rural policy", Han said. In his policy research paper, he proposed policy changes based on this observation. Like Chen Xiwen, Han considers rural small credit industry as a leading player in vitalize rural finance.

"Small lending meets peasants credit needs, we are just starting to see its impact." Han Jun said. The next step is to continue refining policies regarding small credit. For example, as of now, most of the small lending come as a result of policy initiatives that lacked commercial sustainability.

Therefore, Han suggested that, in order to ease the tension between the borrowers need for low-rate loans and the high operating cost of small lending, governments ought to learn from successful practices in other countries, and be innovative in policy design. For example, establishing channels to return some of the postal deposits back to rural area, training for grassroots level credit agents and to establish credit histories for rural borrowers.

Han also brought up another topic, which is "grassroots banking". Han suggested that we should re-evaluate our approach to rural finance reform. The central government has pumped in close to RMB 200 billion ($30 billion) to restructure rural credit unions but so far there is little to show for.

"We should encourage peasants to build their own organic credit market," Han pointed to several local cases as an example. With the help from poverty-reduction agencies and money from them, 1600 poor villages in Anhui province started their own credit unions, "which are managed by the peasants themselves."