The establishment of the first two microcredit firms, Shanxi Rishenglong Microcredit Co and Shanxi Jinyuantai Microcredit Co on December 27, 2005, was widely seen as the beginning of justification for private financing, whose development had been for a long time stifled as its status was not recognized. Since then, both decision makers and businesses have gradually accepted private financing as an alternative source of funding to substitute traditional bank loans.

A year later, with central bank support, another five microcredit firms were established in the provinces of Shaanxi, Sichuan, Guizhou and in the Inner Mongolian autonomous region.

Since the first batch of seven such lenders was inaugurated, microcredit firms have expanded to more provinces.

By the end of March, a total of 24 microcredit firms, with a combined registered capital of 1.05 billion yuan (US$153.33 million), had been set up in the Ningxia Hui Autonomous Region. Meanwhile, in Inner Mongolia, there are now 13 microcredit firms with combined registered capital of 670 million yuan.

Despite the small size of micro loans compared with commercial bank loans, microcredit lenders have given out a considerable total sum to fund a large number of companies, especially small businesses, which tend to find it particularly difficult to obtain bank loans. The first seven microcredit firms had outstanding loans of 470 million yuan as of March, while the banking system's total was 800 billion yuan in the first quarter, central bank statistics show.

The seven microcredit lenders also have very low non-performing loans ratios. Latest figures show that their overdue loans account for 0.63 percent of their total outstanding loans.

Take Shanxi Rishenglong Microcredit Co for example. The lender's rate of default on interest payments in the past three years averaged below 1 percent of all outstanding loans. By the end of 2007, the company's interest income totaled 5.81 million yuan and its profit was 4.69 million yuan.

Experts say the sense of urgency that small businesses' current financing problems evoked should speed up financial reforms and innovation to restructure the financial sector.

"People are becoming more aware of the fact that private capital is playing an increasingly important role in funding the growth of small enterprises, and more private capital is being pumped into small enterprises in the form of microcredit to help ease their capital shortage," Zhou Dewen, president of Wenzhou's council for the development and promotion of small and medium-sized enterprises, says.