2004 Annual LAEBA Conference The Emergence of China:

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

2. Introduction • Microfinance and Poverty • Modalities of Microfinance Delivery • Microfinance in the People’s Republic of China • Challenges for PRC in Developing a Microfinance Sector • Conclusions

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

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

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

6. II. Microfinance and Poverty graduate out E Return X C r M B A drop out Risk

7. III. Modalities of Microfinance Delivery • The Credit Union Approach • The NGO Approach • The Banking Approach

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

9. III. Modalities of Microfinance Delivery • The NGO Approach • Non-profit • Non-governmental organization • Examples: • Grameen (Bangladesh) • Banco Sol (Bolivia)

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

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

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

13. NGO Credit Union Commercial Bank III. Modalities of Microfinance Delivery 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.

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

15. IV. Microfinance in the PRC • Agricultural Development Bank of China (ADBC) • 1994 took over role of ABC in policy lending • Now finances state-owned food enterprises

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

17. IV. Microfinance in the PRC • 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

18. IV. Microfinance in the PRC • Microfinance • Government Financed Programs • NGO Sponsored Programs • Rural Credit Cooperatives

19. 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

20. V. Paths for Developing a Microfinance Sector • The Credit Union Approach • The NGO Approach • The Banking Approach • ABC/ADBC • RCCs

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