Micro credit is widely regarded as one important way to alleviate poverty.
It refers to the extension of very small loans (micro loans) to those in poverty and is aimed to promote self-sufficiency and entrepreneurship.
Yet for over a decade, the development of micro credit in China is far from satisfactory.
Because of relatively high costs and small profits, large commercial banks are reluctant to grant micro loans.
Meanwhile, few micro credit companies in China are successful due to the lack of policy incentives.
One major obstacle for those companies, as economist Mao Yushi figured out years ago, is that they are not allowed to absorb deposits.
Mao is a micro-credit pioneer in China. In 1993, he founded a micro-credit loan service, a foundation, in Shanxi Province to provide financial aid to poor farmers.
After Mao's 15 years of effort, the foundation has expanded from 500 yuan (US$73) in 1993 to 1.3 million yuan in 2008, according to Mao who was interviewed on International Channel Shanghai (ICS) last November.
It is by charging high interest rates - 18 percent annually, much higher than the current 5.31 percent benchmark interest rates for loans in China - that the foundation manages to make small profits.
In China, micro credit companies are allowed to charge at most four times the benchmark interest rate.
Mao is unsalaried. Much of the office equipment was donated. The financing costs and staff training costs are not included in the profit calculation. Otherwise, there would be no profits.
Grameen model
Hence Mao's observation: over 90 percent of the micro credit companies in China could not survive without donations as they have barely any other sources of capitals.The government's concerns are not unfounded: as most micro credit companies are run by individuals, there is a possibility they might abscond with the deposits.
China might learn, however, from the famous Grameen Bank in Bangladesh that gives credit to the poorest of the rural poor, without any collateral.
The bank and its founder, Muhammad Yunus, jointly won the Nobel Peace Price in 2006 for their efforts in grassroots economic and social development.
The clients of Grameen Bank, mostly women, are also the owners. They buy shares of the bank.
Dipal C. Barua, a founder and deputy managing director of Grameen Bank, explained the workings of the bank during his visit to China Europe International Business School on June 5.
Borrowers own 90 percent of its shares, the government owns the rest, thus ensuring the safety of the capital.
Barua suggests that China "needs a new law for micro credit banks for the poor people so that they (the banks) can give loans to the poor people and they (the poor) can buy shares of the banks."
Though acknowledging the success of the Grameen Bank, some experts doubts the practice can be duplicated in China.
Social bias
Shi Qinghua, management professor at Jiao Tong University, says the Chinese government should be responsible for granting micro loans.
"Unlike many other countries whose economic development is mainly driven by private sectors, China's economy is mainly driven by state-owned or state-controlled enterprises," Shi told Shanghai Daily.
Besides, given the non-for-profit nature of micro credit, it is inevitable that private micro credit companies strive to make profits to survive, said Shi.
The widespread negative perception of the poor is a major obstacle to development of micro credit.
"There is usually social bias against poor people in rural areas, who are presumed to have poor credit."
Yet the experience of the Grameen Bank demonstrates this assumption is unfounded. The repayment rate is around 98 percent, according to its official Website.
Instead of requiring collateral or mortgage, Grameen Bank lends to the poor based on group responsibility; individual access to credit depends on group repayment.
Indeed, China must find a way to foster mutual trust between the lender and the poor borrower in the countryside.
(Shanghai Daily June 18, 2009)
