China: Serving Frontier Regions Through Sustainable and Prudent Financial Inclusion
This case study uses recent projects in China to show how responsible finance is breaking new ground for IFC in microfinance, enhancing IFC’s relationships with its existing partners, and providing demonstration results to share with potential new partners, within the microfinance sector and beyond.Download Full Report
Background
More than 600 million Chinese people have moved out of poverty over the past 30 years. From 1981 to 2008, the number of people living on the equivalent of $1.25 or less per day decreased from 835 million to 173 million. However, inequality—of income, consumption, assets, and opportunity—is increasing, with the gap between rural and urban populations wide and growing. And it is even starker at the bottom of the pyramid.
The Gini index, measuring income-distribution inequality, increased from near 0.30 in 1985 to about 0.47 in 2007—the most sustained increase in the world, placing China at the high end of income inequality among Asian countries. Although this increase has leveled off, thanks in part to more transfers of public resources to poor rural areas, other dimensions of inequality—such as asset ownership, particularly housing—continue to rise and are mirrored and exacerbated by large disparities in opportunities to access quality social services and social protection.
Over the last several years, the Chinese government has adopted many initiatives to promote financial inclusion. Since 2005, when China’s central bank launched a microfinance initiative in five provinces, the Chinese microfinance market has experienced explosive growth. Over 8,000 microcredit companies now provide more than $100 billion in loans to micro, small, and medium enterprises, and these numbers are constantly increasing. Yet the majority of China’s poorest, especially in rural and frontier regions, remain largely underserved, making the case for continued growth in the sector.
However, microfinance crises around the world have shown the often disastrous results of aggressive growth combined with diluted focus on clients—demonstrating the need for consumer-centric practices. The Chinese financial market is establishing ground rules for responsible finance and consumer protection to manage this rapid growth, avoid market overheating, and avert future crises. For financial institutions to effectively serve lower-income populations and assure long-term sustainability, they must “build in” responsible lending practices into operations.