Recent Microfinance Activity in China-Grameen Bank, SKS, and HSBC

Sorry I haven’t been posting much lately.  Classes and midterms at SIPA seem to be getting in the way.  If only I could count my blog posts as papers for class!

Lately, there has been a few noteworthy news pieces on China’s microfinance development.  Dr. Yunus announced at the Clinton Global Initiative that it will be starting a bank in Sichuan.  Jack Ma’s Alibaba is said to contribute $5 million to kick start lending.  Dr. Yunus has been trying to start a true Grameen Bank in China since 2006.  I am not sure if the small loan company license (小额贷款公司) has been issued yet, but you have to give them credit for trying.  Perhaps the announcement is to increase pressure for the government to hand over licenses quick.

Vikram Akula of SKS recently wrote an Op-Ed in the WSJ about opening up investments in MFIs in China.  He is definitely correct in pointing out that most casual observers who sees China as ‘developed’ and don’t need microfinance is wrong.  He is also correct that the sector needs to open up.  But I would have like to see what his ideas are in terms of liberalizing the sector.  Allowing foreign investment is definitely one option (which he is, of course, interested in), but what else can China do domestically?  Are there different models that he can share given India and SKS’s experience?  As he pointed out, current regulations do not allow MFIs to take deposits.  What then, are the risks of the MFIs?  What should MFIs who do not take deposits be aware of in terms of managing risks?

Lastly, a press release from from HSBC came out yesterday that it has partnered with Women’s World Banking (WWB) in provided microloans through its rural banks in China, specifically in Hebei’s Suizhou branch and Chongqing Dazu branch.  According to a Caijing article, the product is called “Happy Loans” (”贷款乐”).  The product has been piloting for 3 months in Suizhou and is currently being expanded.  What is WWB’s role in this partnership?  Is it providing operational expertise?  If so, does this mean that WWB (and perhaps MFIs in general) is better at assessing credit worthiness of low-income borrowers than a large multinational bank such as HSBC?  Or is HSBC simply outsourcing it’s operation activities to WWB?  From previous research, it seems that HSBC Rural Bank’s branches tend to focus only on export oriented areas (mostly exporting mushrooms actually), specifically for SMEs.  Are they moving away from SME finance and moving towards ‘real’ microfinance?  What are the terms of the loans?

Questions to ponder during my midterms.

Bookmark and Share
  1. Jason says:

    Hi Yam,

    Great summary of the recent MF news over the past week! Have you heard of Wokai (www.wokai.org)? Two days ago we were featured on a China Youth Daily Piece: http://money.163.com/09/1013/15/5LGVQQ0H00253DCA.html

    Cheers,
    Jason

  2. Yam Ki says:

    Hi Jason,

    Thank you for your comment. Yes, I have definitely heard of Wokai. I have attended Wokai’s NY Chapter Events and have interviewed Casey in Beijing. They are doing good work there!

    Yam Ki

  3. Daniela says:

    Wokai is a great microfinance non-profit for China which you should feature on your blog.

  4. Fiona says:

    An mature and developed microfinance business need not be and should not be NGO. Though social responsibility and community service is part of the mandate, making profit still stands as the first priority of a microfinance business. I think, the business model of a microfinance business is largely the same as that of a normal credit & leasing business. The major difference which sets apart microfinance from normal credit & leasing business is, more added service, involvement, and expertise is needed to earn a higher margin. For example, relationship managers of a microfinance business may provide supply chain assistance, coaching and closer monitoring to the counterparties. Otherwise, the default rates of such high risk, unsecured facilities will shoot to sky high.

    In this regards, PE funds (small size of course) could be a better solution for microfinance sector.

  5. Fiona says:

    Please ignore the previous post.

    A mature and developed microfinance business need not be and should not be NGO. Though social responsibility and community service is part of the mandate, making profit still stands as the first priority of a microfinance business. I think, the business model of a microfinance business is largely the same as that of a normal credit & leasing business. The major difference which sets apart microfinance from normal credit & leasing business is, more added service, involvement, and expertise is needed to earn a higher margin. For example, relationship managers of a microfinance business may provide supply chain assistance, coaching and closer monitoring to the counterparties. Otherwise, the default rates of such high risk, unsecured facilities will shoot to sky high.

    In this regards, PE funds (small size of course) could be a better solution for microfinance sector.

    • Yam Ki says:

      Thank you for your comment Fiona. You brought up many interesting points.

      I agree that a mature and developed microfinance business need not be an NGO, but I disagree that it should not be an NGO. There are many NGOs that make great MFIs, FINCA, Accion, and WWB come to mind. There is also a growing movement of credit unions which are ‘non-for-profit’ and whose goals are to maximize sustainable credit to its members and provide a venue for savings. Of course, there are also ‘for-profit’ credit unions as well, though I think profit-maximization isn’t the goal of most credit unions.

      There is an inherent question of what the ‘first priority’ of a microfinance business is. While some may argue that profit is important, my person opinion is that MFIs should be ‘profit optimizing,’ by which I mean that MFIs should, at minimum, seek break-even so they don’t lose money and can stay in the business long term. Beyond that, its goal isn’t to maximize profit, but to maximize impact given no loss. MFIs may make ‘reasonable’ profits in the short to medium term which could be used to build up additional reserves for potential future shocks or to build up a ‘war chest’ for future investments acquisitions. All of this of course, depends on the MFI’s mandate from its shareholders and its board.

      My concern with the maximizing profit directive is that MFIs will be left with two options: A) increase interest rates for borrowers or B) move up market into larger loans with lower servicing costs. Unfortunately, option A minimizes the benefits for the client and options A and B minimizes the number of needy clients being served.

      Of course, these are just opinions and they are, and have been, up for debate in the microfinance world for a while.

  6. Dan Feldman says:

    In a blog post titled “Advocating Economic Restructuring Would Help Paul Krugman Close the Chinese Disconnect” I argue that Krugman poses a strong argument for why China must raise the value of its currency to a reasonable level, but he fails to address the serious challenges facing China’s economy and society.

    China must first expand its domestic consumption, and to do this it must liberalize its financial system, in particular it must liberalize rural microfinance. Only after China liberalizes and increases the income of the 700 million plus rural residents can it afford to appreciate the yuan aggressively.

    Unfortunately I argue that China will unlikely liberalize rural finance due to political reasons. And hence it will only continue to appreciate the yuan slowly at a rate of about 5 to 6% a year. This rate of appreciation will be too slow to help the world economy to rebalance and recover, meaning the global economy will remain weak for a long time.

    You can read the post here: http://www.chinamanufacturingblog.com/2009/10/advocating-economic-restructuring-would.html

    Because I am not an expert in microfinance I would really appreciate the comments of you all.

    Thanks.

  1. There are no trackbacks for this post yet.

Leave a Reply