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."

English Transcript for the Dialog Video

Instead of clogging the site, here is a text version of the transcript.
http://www.wuyibing.com/cache/grassroots_financing_dialog_mfi_micro_finance_dialog.pdf

I have been trying to add the English transcript to the video. But adding caption to a flash turns out to be a very time-consuming effort. It took me no less than 30 minutes to add a three-minute caption. And the program is over 45 minutes!

The job can be split up though. Any volunteer willing to help?

In Order to Be Relevant in China, Micro Finance Has to Adapt to Local Reality

You don't know enough about rural credit market in China if you thought:
1. There is only two types of financing available: large loans from state banks and micro-loans from NGOs
2. China doesn't have a healthy micro finance infrastructure
3. Since micro finance is so successful in Africa and Bangladesh, micro finance in China should closely follow the Grameen model

The fact is,
1. There has been a long tradition of small private finance in rural China
2. The Chinese state, since the early Song dynasty, has long recognized the role rural credit plays in peasants' well-being
3. There are a diverse set of channels already exist in rural China to dispense small loans to peasants.

In the following posts, I will try to make my point clearer. As a primer, I want my readers to watch this program.

It is a TV show first aired in last Dec. The platform is a talk show on CCTV (China Central TV), called "Dialog". This program is a popular show among serious viewers who are interested in in-depth discussion on many facets of the Chinese economy.

In this recording, the program invited to the show a group of officially chartered private lenders--a relatively new phenomenon, and a group peasants from poor areas in China. They sat face to face and discussed the needs for small loans in rural China, the functions and goals of private small loan lenders and how this new development may change credit market in rural China.

Currently, the program is only available in Chinese (Mandarin). I have been trying to add the English transcript to it since last month. For many reasons, this is still an ongoing project. But it will be here soon.