Microfinance–Everyone is doing it!

Everyone is getting excited about microfinance in China. What’s there not to like? It’s “micro” (aka grassroots and chic) and its finance (yay, money!). If someone can win a Nobel Peace prize for it, it has to be good right?

Photo Credit: FXCaliber

Photo Credit: FXCaliber

The Chinese government is so eager about it, it has tried to promote it (by my count) seven different times: Rural Credit Cooperatives, Agricultural Development Bank loans, Microcredit Companies, Village Banks, Rural Mutual Credit Cooperatives, Small Loan Companies, and Postal Savings Bank loans.

The private sector is also excited with thousands of registered guarantee companies and small loan companies. Not to mention the hundreds of companies registered with consulting / management licenses that engage in lending-like business model.  With the latest round of government push for microfinance to help the rural poor and the unemployed, even web entrepreneurs are jumping in for some action.  Many of these online sites are throwing around the word “microfinance” along with “P2P lending” and “social responsibility” for added chic.

But are they really microfinance?

A quick browse through their websites demonstrates otherwise.  While most might associate microfinance with loans for the poor farmer, these Chinese “microfinance” websites tend to target the urbanites and youth of China.  Instead of funding income generating activities like animal husbandry or farming, their loans are mainly for consumption.  One website encourages loans for purchases of digital products, home appliances, piano, home renovation, tuition, and even gym membership!  Another website, called “ChinaMFI.com”, makes loans for hawkers, taxi drivers, study abroad, tuition, vehicle purchases, and bank loan collateral. How did sub-prime lending start again?

The misuse of the word “microfinance” probably has to do with the lack of a clear definition in the Chinese context in combination with the market demand for credit in China.  Many view microfinance as providing credit to those who lack formal access to credit often referred to as the “unbanked.”  Due to marketing, serving the “unbanked” became synonymous with microfinance.  In many developing countries, the unbanked and the poor are often the same group.  In China, however, it is often not the case.  The Chinese poor are indeed unbanked, and outside of mortgages and car loans, so is the Chinese middle class and its entrepreneurs.

As one of the final few industries that have yet to go under serious market reform, the banking sector is still heavily dominated by the state.  The state-owned banks account for 53% of total bank assets.  Moreover, the state-owned banks prefers to lend to state-owned enterprises, who dominated over 80% of bank loans.  This predicament has left everyone else from small and medium enterprises to micro-enterprises and individuals starved for credit.

The loans from these supposed online “microfinance” companies is just meeting the demand for private credit which is severely undeserved .  However, calling them “microfinance” is inappropriate.  They should be called SME loans or individual loans instead.  As an industry stand, microfinance as defined in the CGAP Microfinance Consensus Guidelines is “the provision of banking services to lower-income people, especially the poor and the very poor.”

By calling what they do microfinance, these online loan companies severely damages the credibility of microfinance in China.   It would be seriously tragic if people associate microfinance with someone’s gym membership instead of a farmer’s needs to buy a few chickens to make ends meet.

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