Thursday, October 26, 2006

Microcredit in China

Like India, China also has regulatory problems which is preventing growth of Microfinance.

There are two articles of interest. One, an article by You Nuo in The Brunei Times on how there was a state controlled experiment in microcredit in China in the 11th century which failed resulting in the Prime Minister Wang Anshi who introduced it almost destroying the dynasty he was working for.
Wang Anshi (1021-86), the reform-minded prime minister of the Northern Song Dynasty (960-1127), practised it when he began to tinker with the imperial financial system and render credit to all farmers.

Wang had a plan of changing his office into some sort of a national agricultural bank. What a good thing, he thought, if the empire could, by rendering credit to its subjects, reap a healthy inflow of interest income to finance the defence and the endless need for luxury by the court.

He failed, of course, and the failure shattered both his career and, to some extent, the empire. The idea was noble. Farmers or any other grassroots-level business owners deserved financial support. However the failure occurred in converting a clumsy bureaucracy into a direct service to millions of farmers and small business owners. It was mission impossible. By the logic of bureaucracy, there can be a banker of the poor but never a finance minister of the poor.
Cut back to modern times. Muhammad Yunus is on a touring spree and was in Beijing, China to attend the Grameen International Conference on Microcredit in China.
Some pioneering institutions, mostly domestic or overseas non-government organizations, have experimented with microcredit in China for 10 years.

But they are not sustainable because of policy and legal restriction, and insufficient funds, said Du Xiaoshan, a pioneer of microfinance research and practice in China, and also deputy director of the Rural Development Institute affiliated to the Chinese Academy of Social Sciences.

Seven private microcredit companies in China also face the same problem, as they are only allowed to provide loans but cannot accept deposits.

Yunus said not allowing micro credit companies to take deposits would greatly hinder their development, and stressed the importance of a clear and proper legal environment and supervision mechanism. Currently, China has no laws or regulations in this field.

Jiao Jinpu, deputy director of the research bureau of the People's Bank of China, said the central bank is working closely with the China Banking Regulatory Commission, the Ministry of Finance and the Ministry of Commerce to give microfinance providers a clear legal environment to boost the development of microcredit in China.

Yunus suggested that under the current circumstances, establishing a fund from which microcredit companies could draw money might be a more practical choice.

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