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)