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.

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.

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.

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

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

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