Microfinance expert Kira Dubas talks with Women’s WorldWide Web about the challenges and opportunities of China’s changing microfinance landscape.
Kira Dubas is a microfinance expert who began her career as a Financial Analyst at Deutsche Bank in New York. While serving as a volunteer analyst for the bank’s microfinance fund, Kira was motivated to move to China to work as Director of Microfinance at Wokai, a start-up micro- finance lending platform. She later assumed the role of CFO at PlaNet Finance China, an NGO that provides technical assistance to microfinance institutions.
Currently a recipient of a prestigious Fulbright Scholarship (US Department of State), Kira has travelled widely in rural China, visiting microcredit companies, NGOs and village banks in order to evaluate the changing microfinance landscape in China, with the specific aim of understanding how the increasing commercialization of microcredit will affect the poor. Alongside her research, Kira seeks to improve financial capability in rural communities by offering financial training seminars for village banks. To read more about Kira and her inspiring work, please visit her website.
China has various types of microfinance institutions (MFIs), such as Village & Township Banks, Micro-Credit Companies, and Non-Profit Institutions. What are the differences between the main microfinance players?
Non-profits have been around since the early ’90s. The first kind of non-profit microfinance institution here was started by Professor Du Xiao Shan at the Chinese Academy of Social Sciences. He started a “Funding for the Poor Cooperative” in the 1990s and it has about 15 branches around China that are still functioning. At the time, there were around 300 ‘non-profit projects’ – they were called ‘projects’ because they didn’t have an official legal status. These were set up by a variety of international NGOs (or IOs) like the UNDP, UNFPA, etc. to provide funding for local partners –usually people working in the domain of poverty alleviation. These local groups tended to maintain very good relations with the government.
That was the situation until 2006. In 2006, the government decided to create a genuine legal status for private microcredit companies (MCCs). These are different from Village and Township Banks, institutions that are not only able to give out microcredit loans, but also to provide other financial services such as savings and ATM services. MCCs can be started by anyone who has enough capital. The official amount of start-up capital required depends on the province, but is commonly around 5m Chinese Yuan (RMB), or approximately $783k. However, the government is willing to lower the threshold if the company’s mission is poverty alleviation. Since most of the MCCs here are more commercially-focused, the government really tries to encourage those that are oriented towards alleviating poverty.
What are the functions of Village and Township Banks?
Village and Township Banks have a lot more flexibility in terms of what they can do. The microcredit companies can only lend money, while Village Banks can provide savings services. The only restriction placed upon the Village Banks is that they are required to have a 20 per cent equity ownership sourced from a financial institution. This is the government’s way of ensuring that those institutions offering savings accounts have strong, stable backing. From what I understand, the Village Banks are issuing fairly high loans, loans of approximately 1 million RMB—but I haven’t seen very many statistics published on this, and I haven’t had the chance to visit a Village Bank yet.
I hope to visit one when I go to Sichuan province. After the Wenchuan earthquake in 2008, a housing reconstruction program was set up by the China Association for Poverty Alleviation, which was originally an NGO and is now set up as a ‘Microfinance Management Company’. It isn’t a true MCC – it has its own status, because it receives a large amount of government investment. So it’s already reached 100m RMB in capital. It has a loan portfolio of 100m RMB with investments from Citibank and others.
Who are the investors in China?
KD: The investors of the MCCs range from individuals to foreign investors and companies, particularly large enterprises that have a bit of extra funding. There is also some government investment. For example, I’ve heard that Blue Orchard, a leading microfinance investment company, would like to come to China, but it’s been tricky for them because it’s hard to find an organization that is both focused on poverty alleviation and can offer returns – owing to China’s interest rate restriction. This is the ‘double bottom line’ of microfinance companies, which entails balancing profitability with poverty alleviation. I think different investors have different return requirements.
For NGOs and microcredit companies, the interest rate restriction is four times the base rate, which comes out to about 24 per cent annually. Most institutions that are targeting either the poor or micro-entrepreneurs charge well below this—in many cases 10-15 per cent. Other companies that want to charge higher interest rates do so by charging ‘consulting fees’, and thus the restriction does not actually have significant effects.
Based on my research, I feel that the restriction is actually a good regulation. From what I’ve seen, the only companies that want to charge higher rates are acting more as loan sharks. Thus, the restriction enables the government to crack down on usurious lending where necessary. In general, what kind of a business is able to pay interest rates higher than 24 per cent without having significant negative consequences on the business’s growth?
I think that the more pressing issue is that taxes for microcredit companies are very high, up to 25 per cent. This actually hinders the long-term growth of microfinance institutions, as it reduces profitability and makes investment in the institutions less attractive.
So are MCCs just another type of business structure?
In a way, yes they are, indeed. There are a couple of different definitions of microfinance, one of them being that it provides finance to people who wouldn’t normally have access to it—which doesn’t necessarily mean the poorest. What is happening here is that these small and medium enterprises (SMEs) are in the start-up stage, and banks are refusing to lend to them because a lot of them don’t have sufficient collateral. That’s where some of these MCCs come in. Even though the loan sizes seem huge, often it’s just that the banks won’t give the necessary 1m RMB to the start-ups.
What is your view on the commercialization of microfinance in China?
Since 2006 and the establishment of the legal status of MCCs and Village and Township Banks, 3,000 MCCs have been set up. Of these 3,000, there are probably only 10 or 20 that are focused on poverty alleviation—so that gives you a sense of the commercial nature of MCCs. This is the first time that private capital has been able to legitimately enter financial systems, so people are very excited to be able to lend money legally. There is a huge demand for the loans, and MCCs see the opportunity for making money—so they do.
The ones that do not prioritize poverty alleviation only lend to small and medium enterprises (SMEs) and the average loan size is usually around 1 million RMB for these microcredit companies. There is no definition for ‘micro’ in China, so the government doesn’t specify the amount. The only restriction is that MCCs cannot lend more than 5 per cent of their registered capital, but, if their registered capital is 1 billion RMB, then they can still lend 50 million RMB.
You say that in China there is no definition for « micro ». What about the microfinance sector, globally? Social mission-microfinance practitioners like Muhammad Yunus have long called for a clearer definition of microfinance, since the conflation of radically different types of microfinance can entail reputational risk for poverty alleviation MFIs. Can you share your view on this?
This is a major issue in China, where SME lending and micro-lending are often called the same thing: xiaoexindai. Globally, there seems to be a shift towards the concept of ‘financial inclusion’, which encompasses microlending, SME lending, and all other types of lending that are excluded from a country’s financial system. To me, the concept of financial inclusion is more compelling, as SMEs are really core to economic development. Through my research I discovered that because SMEs employ more people, and are able to grow quickly, financing SMEs can actually have a much more substantial economic effect than funding individual poor people.
You mentioned that out of the 3,000 existing MCCs, there are 20 or so that are solely for poverty alleviation. Why do you think this is? Is this the case in other countries, such as India or Bangladesh, too?
Poverty alleviation-focused MCCs are quite rare, because people just don’t see how they would be able to cover their costs. In India and Bangladesh, they can charge really high interest rates but then that leads to situations like the crisis we’ve seen in the past couple of years (notably the crisis in the microfinance sector in Andhra Pradesh in India, with allegations against MFIs of unethical collections, poor governance, high interest rates, and profiteering) —so it’s difficult. I think that many of the companies attaining this new legal status were originally NGOs and have now evolved into companies. Despite being very ambitious, they remain focused on poverty alleviation. These innovative companies, such as the China Association for Poverty Alleviation and a company in Ningxia, central China, called the Ningxia Yanchi County Association for the Advancement of Women (NXCEPA), will be able to have a huge impact as they grow. When I visited them in 2008, I think they had a loan portfolio of 8m RMB. Now they have one of 70m RMB.
Normally, microfinance companies have a restriction that dictates that they cannot expand beyond the boundaries of a county, but because NXCEPA has fostered good relations with the government, it has been able extend its reach to two more counties in Ningxia. In the second of these, the aim is to provide support for the minority group of local Muslim women.
It has often been said that microfinance achieves its best results with women. Can you tell us a little about MFIs in China that are targeting women borrowers and the impact of microfinance on women in China, both in terms of poverty alleviation and in terms of the wider objective of women’s empowerment?
I definitely agree that microfinance is a powerful instrument in assisting poor women to escape poverty. I guess there are a couple of distinctive factors involved in China. If you look at the other countries that serve the ultra-poor, often their interest rates are huge, because it costs so much to reach the poorest and the risk is so high. In China, there is this cap on interest rates of 24per cent. Also, there are no real policy incentives for people working towards poverty alleviation. It is more a question of: you take the initiative, then the government recognizes it, and you start getting tax breaks, etc.
In a lot of situations in China, organizations have said, “We only want to lend to women,” but it ends up being the household or the family that borrows as a unit. Having loans directed only to women in China doesn’t seem to be that advantageous. That is not to say that women are equal to men, and this is especially not the case in rural areas.
In China, many organizations in the 1990s started out focusing only on female clients, but today only a few still have such a mandate. This is because many women have left the rural areas for the cities in order to find work. In many cases, one family member will leave while the others will stay home to take care of the children. Thus, microfinance institutions simply give loans to those who are left at home, and this could be either the husband or the wife.
While I think that those organizations, such as Ningxia Huimin MCC, that target women, certainly have great impact, I wouldn’t necessarily suggest that institutions only focus on women. Each region in China has a different culture, and my sense is that gender equality varies significantly by region. In some areas, such as Sichuan, you will enter a gambling hall, which in other countries may be limited to only men, and find both men and women at the table. In other areas, you hear stories of domestic violence and gender inequalities in the legal system, and in these regions I think focusing on women is extremely important.
In the case of the Muslim women, I certainly felt that the experience of being organized within a group structure was, for them, an extremely powerful one. They could get together and talk, and then actually go out and buy another cow, for instance.
In China, people have drifted away from this model of microfinance and village banking targeted specifically at ultra-poor women, probably because it costs more money to organize these meetings. However, NXCEPA has really remained faithful to this approach. For example, even if the organization loses money, it will still spend 100,000 RMB on crucial training. As I see it, the training and other services they run are essential. For example, of the Muslim women in the second county, half of those whom I interviewed had never gone to school and were illiterate—so the organization runs literacy programs. It also provides services such as agricultural training, technological training, and financial and business education. The NGO-based poverty alleviation programs usually organize agricultural and financial training programs at the very least.
Can you elaborate on the problem of mission drift in microfinance? What is the current need for microfinance targeting the ultra-poor and what are possible ways or incentives to encourage such microfinance models as NXCEPA (Ningxia Huimin MCC), and to ensure their sustainability?
In China, the non-profit institutions established in the 1990s generally have stuck to their mission, targeting poor borrowers in rural areas. However, these institutions have had trouble growing because they have no legal status, and thus cannot attract commercial capital. I feel that it is important for these institutions to try to become commercial entities, as did Ningxia Huimin. However, of the approximately 100 non-profit institutions in China today, only Ningxia Huimin has transformed into a microcredit company. This is because the institutions have trouble transferring the assets into a commercial entity, as these institutions generally have government funds and donations with unclear ownership. In other cases, NGOs don’t have enough capital to meet the minimum capital requirement for registering a company. Ideally, the government could issue advice specifically for these NGO institutions on how to transfer these assets, and make special exceptions on capital requirements for NGOs wanting to change their status.
How is the social impact of microfinance measured in the different institutions you have visited in China?
It varies. Among the original 300 non-profit microfinance institutions, about 200 have disappeared. Of those 100 that are left, there are around 20 that are fairly innovative, that participate in international conferences and have an idea of how to run effective systems, etc. Only those 20 or so really well-run NGOs have an understanding of what they should be doing in terms of monitoring; for example, to what extent beneficiaries have increased their income. Another problem is that a lot of these organizations are just so preoccupied with monitoring their financial risk, making sure their loan portfolio is stable, and so forth, that they don’t have much time to measure their social impact.
From what I have seen in China, people don’t measure impact in the same way we do in the West—they don’t have all of the reporting and accountability requirements. They simply note, “This person has bought a much bigger house since we’ve started lending to them.” They sit there and talk to them, and have a more subtle, implicit understanding. Every time I go in and try to administer my surveys, they tell me, “You can try to get these numbers, but you’d do better to just talk to them.”
Was the social impact measuring and capacity training something you did when you worked at PlaNet Finance?
Since I previously worked in banking, I’ve always offered financial training to the organizations I visit, and that’s what I’ve continued to do here. Now, with the Fulbright Program, our objective is not only to take the research we are doing and learn from it, but also to give something back. For example, when I was carrying out village visits, I provided two days of such training. I think this is helpful: since most beneficiaries don’t speak English, they can’t just visit, for instance, Microfinance Gateway, and learn about how to collect and analyze data, etc. The training I do depends on what the organization is looking for. For example, when I was in Mongolia, the financial company I visited wanted to hear about international experience, so I told them about companies that have gone public and how they managed to do so.
What are the best practices in the sector in terms of ensuring effective social impact?
In terms of best practices, globally there is now increased pressure on organizations to define their missions clearly and to make them specific enough to be successfully achieved. They have to say: “I want to contribute to development by doing this or that.” This has been an international trend that has arrived in China, and organizations there have started to offer training on how to be more specific in their mission statements.
Does this include the MCCs that are not poverty alleviation-focused?
No, their mission is normally to make money. It is usually something along the lines of: “To promote the model of individual capital,” or “To promote and provide capital to small and medium enterprises.” I tell them when I go in to train that, in fact, by contributing to these SMEs, they are contributing a great deal to the economy by providing a lot of employment opportunities for people who normally wouldn’t have a job. Very often they fund start-up businesses, so it’s a huge contribution – it’s the only way to keep an economy growing. But they still won’t say that that’s their mission. Also, I think if you tell your employees that your mission is to contribute to economic development – a larger, philosophical concept that is better at motivating people than the simple prospect of money – that can help retain people.
What are the most surprising things you have learned from your research and on-site visits so far?
So far I’ve been to two very commercially-focused MCCs, one in Shanghai and one in Inner Mongolia, as well as to one non-profit institution in the rural Shaanxi province. On each of these visits, I have been both surprised and frustrated by the drinking culture. You go to a village, they give you lunch and then you are obliged to drink for two, or perhaps three, hours. It tends to be only men sitting at the table. That’s why, to me, the women seemed to be considerably more productive. Another surprise was on a tea farm in Shaanxi. In most cases, it is the women who pick the leaves, occasionally with the help of the rest of the family. It was incredible, and I found myself thinking, “What’s the role of men there?”
In rural Shaanxi, I visited the Women’s Development Association, or Fu nu fa zhan xie hui, which was started by Plan International (a US-based NGO) in 2006. All of the NGOs there were set up in collaboration with the All-China Women’s Federation. This particular NGO was adamant that I should talk only to women, but it was very hard to find the women, because they were never at home—it was typically the men who were at home.
Another interesting thing on my last trip to Shaanxi was that I became really good friends with one of the women who works at the NGO. She told me that in that local area, at least half of the people she knew had experienced some form of domestic violence. When I asked her what her household situation was like, she admitted that even though she was unhappy, she would never get divorced. She has witnessed too many situations in which divorce has led to women never seeing their children again – there is simply no protection. After that discussion, we went to meet a young client who was only 25 years old but had already been divorced and had never since seen her child. In spite of this horribly difficult situation, she persevered and, with the help of her loans, opened a convenience store, which then developed into a pet store. She is now able to make 5,000 RMB per month.
Usually, people keep borrowing. The organizations will start out offering a very small loan, such as 500 – 2,000 RMB ($78-$313) which slowly grows to 5,000 RMB, because there’s no way to measure credit. They feel that within the 500 – 2,000 RMB range, families could cover themselves if something happens.
Can you summarize the development of the microfinance sector in China in recent years?
The change in legal status for the MCCs and Village Banks is by far the biggest development. It has created a really dynamic situation, in which the non-profits that were previously holding onto their 1m RMB (or whatever amount of funding they were able to get through initial donations) for ten years or so, can now finally expand. Moreover, they already have the operational history to expand successfully.
I understand that there has been a recent boost in policy support for microfinance growth. According to Grameen Foundation China’s report: “Financial institutions, especially state-owned banks, have become increasingly interested in microfinance.” Do you see this as a boon or bane for microfinance?
It’s definitely a boon. The government is undoubtedly encouraging microfinance. A lot of banks have a portfolio or department for microfinance. For example, the Bank of China is partnering with a Singaporean investment company in order to achieve their goal of setting up 400 Village Banks this year. There are currently only 400 in existence, so it’s a lofty goal.
What do you wish to see for the future development of microfinance in China? What do you think will be the forthcoming developments?
I think there is so much that needs to be developed in the financial sector here. The latest development, the creation of 2,000 companies, is something that needed to happen and that is important for the development of the sector. However, I also think it’s vital to focus on the areas that haven’t yet received funding and remain untouched by NGOs, like rural Gansu or rural Ningxia (two of the poorest areas in China)—there’s nobody out there.
The other thing I’d really like to see, and that I think is already occurring in other countries, is for these microfinance companies and NGOs to build partnerships with the private sector—which would be really beneficial to their clients. For example, in Ningxia, most of the clients raise lambs. I would love to see some kind of partnership in which they could build a shearing factory that could help people get higher prices for their lambswool. Similarly, those who sell tea could develop cooperatives and ways of working together, instead of working as individual, less-productive farmers. When you go to Ningxia, it feels so far away from everything. But if you could find a way to capitalize on the market situation in Beijing and other places, you would be able to bring a lot more money to this isolated area.
I thought microfinance would have reached a lot more people in China.
In the places we go to, the Local Rural Credit Cooperatives and Postal Savings Banks definitely have a presence. There are Mutual Guarantee Funds in most places that I visit, too. It’s an interesting model: each person contributes a little bit, and the government offers some funding to match it. It seems like it can be pretty effective because it reduces risk and, at the same time, it makes people bear some of the risk.
Reading the Chinese government’s 2011 Plan for Rural Development, I found that they are really encouraging different types of innovation in the rural finance structures and seeking ways to give preferential tax policies to MCCs that offer micro-lending services. There seems to be a lot of momentum behind microfinance, and it’ll be interesting to see what happens—it will take on a lot of different forms. However, I hope it doesn’t develop into the situation faced by Rural Cooperatives, which ended up assuming a lot of non-performing loans, partly because a lot of people saw the loans as government funding and didn’t feel that they needed to pay them back. On the other hand, it seems that individual capital can really give people an incentive to pay back the loans.
What is your view of the role that microfinance is playing—and can play—in promoting women’s empowerment, especially in light of the recent research suggesting that the social impact of microfinance has sometimes been overstated? (For example, Grameen Foundation’s 2010 report, “Measuring the impact of microfinance: taking another look,” by Kathleen Odell?)
What I’ve found through my research (from my surveys, in particular) is that the amount by which people increase their income has no relation to their original income. In other words, it doesn’t really depend on their original situation, but rather on how well the person is going to run his or her business. It’s difficult to say whether microfinance works or doesn’t work. It’s the same thing as asking whether businesses work or don’t work—sometimes they do; sometimes they don’t. It just depends on how well the individual is carrying out their business operations and how well they are branding themselves. You can’t simply say, “These people desperately needed money and if we didn’t give them money there would be no way they would develop.” It really depends on each individual’s capabilities.
Interview conducted by Chenni Xu.
© Women’s WorldWide Web 2012