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