2004 Annual LAEBA ConferenceThe Emergence of China:
Challenges and Opportunities for Latin America and Asia3-4 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
II. Microfinance and Poverty
Risk
A
r
Return
E
X
MB
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
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 NGO Credit Union Commercial
Bank
Target Clients
The poor, especially disadvantaged groups
Members All small clients, particularly microenterprises and traders
Primary Source of
Funds
Donors Members Depositors, 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
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