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
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.
- Establish core responsible finance standards as a management tool to inform decisions.
- Conduct a widespread transparency campaign for clients to encourage responsible client decisions and avoid issues of over-consumption of credit and potential over-indebtedness.
- Train staff on the client-centric mission and vision and align staff incentives with client protection.
- Build client protection into audit guidelines and train auditors to monitor compliance and capture red flags, including through client interviews.
- Partner with local institutions to introduce microfinance as a career path and begin to build a cadre of trained, qualified resources for the sector.
- Deliver investment jointly with performance-based advisory services to achieve a multiplier effect toward greater financial inclusion.
- Introduce responsible finance at a nascent stage to build client protection in the DNA of an institution.
- Introduce good practices and share results—for a vibrant demonstration effect.
- Leveraging existing microfinance good practices through knowledge sharing and successful South-South investments, contributes towards developing the whole sector.
The experiences and lessons learned from MC Nanchong in China are being documented for implementation across MicroCred’s entire operations in other subsidiaries in Africa and Asia. CFPA Microfinance has a stable senior management team, the majority of whom joined before its commercial transformation. Its NGO background and commitment to responsible finance and client impact has allowed CFPA to mature into a large, commercial, sustainable institution with a strong reputation. To demonstrate its commitment to responsible finance, Xinjiang Tianrong MCC has appointed a social and environmental manager/ coordinator. It also has plans to establish a responsible finance working group, under which a monitoring team and an implementation team will be set up to integrate responsible finance throughout the organization, building a quality institution to serve one of China’s poorest rural areas.