Based on my research of CFPA Microfinance, this will be CFPA Microfinance’s third wholesale loan agreement.  The first was with the China Development Bank back in December 2006 for 100 million yuan and the second was a revolving credit facility with Standard Chartered Bank in January 2008 for 20 million yuan.

Such wholesale loan agreement is a win-win for both parties.  CFPA Microfinance gets additional funds to expand its loan capital and ABC meets the three agricultural dimensions policy loan requirement (三农) mandated by the government.  Moreover, ABC doesn’t have to waste its time making microfinance loans on its own, which it has done poorly in the past.  Depending on how much leeway ABC with its auditors on how to classify the loan (whether it is considered to be implicitly government backed), it may only need to be put up minimum capital reserve requirements.

This agreement not only increases CFPA Microfinance’s loan capital, it solidifies the MFI’s lead in China’s microfinance sector.

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.

Happy Fry Tofu Seller in Beijing

China’s State Council just issued a draft ordinance that allows street vendors and other microentrepreneurs to register for permits and recruit employees legally. The draft ordinance, titled “Individual and Household Business Ordinance (Draft)” / “个体工商户条例(征求意见稿)“, will allow micro-enterprises to get access to loans from alternative sources such as small loan companies and village banks.

Previous requirements only allow business to be registered at its place of operation, which is impossible for street vendors and hawkers. Under the draft ordinance, entrepreneurs would be able to register their business under their place of domicile, no matter where they operate. The permission to register will be delegated to the local State Administration of Industry and Commerce (SAIC).

If registered as a “personal business,” the person and his/her personal assets will be liable for the business. If it is registered as a “household business,” then the entire household, including the household’s assets are liable for the business.

According to statistics from China’s State Administration for Industry and Commerce, individual and household business registrations have been raising rapidly. In the first quarter of this year, there were 1.5 million newly registered individual and household businesses, a 28% increase year on year. As of March 2009, there are 29.5 million individual and household businesses registered in China, which employs roughly 58.1 million people in total.

The individual and household businesses will be allowed to engage in various industries, including wholesale, retail, hospitality, food and beverage, manufacturing, transportation, warehousing, post, agriculture, fishery, animal husbandry, construction, mining, and services.

Under the proposed draft ordinance, individual and household business will also be able to recruit employees legally. In the past, these businesses were only allowed to have one to two assistants or three to five apprentices if skilled labor is involved. Such measures would help migrant laborers get employed at small and micro-businesses with some protection.

Along with the proposed ordinance, there is a stipulation that no one can collect “management fees” or “bazaar fees” from individual and household businesses. Associations fees are allowed as long as it is voluntary. I wonder if this clause is included to snub existing extortion that commonly affect street and market vendors.

Yet not all of it is rosy. Along with registration, is responsibilities: taxes. After microentrepreneurs register they must also keep proper books and file for taxes like other businesses. Or else, fines can range from 100 to 1,000 RMB.

More information on the ordinance, in Chinese, can be found here.

Standard Chartered Flyer

The hype around Village Banks is finally delivering something real.  Standard Chartered Village Bank in Inner Mongolia made an announcement yesterday that it will offer unsecured credit to farmers.

Established in August 2007 by the CBRC, Village Banks (VB) were seen as the path to bring credit to China’s rural areas.  Like microcredit companies, VBs can only mobilize deposit and make loans within their county of incorporation.  Three foreign banks have established local branches under the VB structure: HSBC, Citigroup, and Standard Chartered.  Of the three, HSBC is the most aggressive with five branches in the rural counties of Hubei, Chongqing, Fujian, Beijing, and Guangdong provinces.  Citi established its branch in Gong’An and Chibi counties in Hubei (areas not served by the HSBC branches).  Standard Chartered opened its branch in Helingeer County in Inner Mongolia.  Up until yesterday, Standard Chartered’s operation was limited to only deposits and remittances.

It is excellent to hear that Standard Chartered is offering loans to farmers without the need for collateral, especially in a poor county. Despite HSBC and Citi’s move into rural lending, they’ve only incorporated in wealthier counties with export-led industries.  One of HSBC’s branches caters mostly to industrial mushroom “farmers” who produce fungi for export.  Standard Chartered’s venture into unsecured lending is a breath of fresh air for rural financial development.  It will be interesting to see what the loan sizes are and how loans are disbursed, collected, and monitored.

(Click on the thumbnail above for the flyer.)

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.