Banking on the poor in China

10 March 2011

By Brendan Rigby, co-founder of and Chapters Associate at Wokai, a peer-to-peer microfinance organisation based in Beijing  

Earlier last week, it was announced by the central bank of Bangladesh that the Banker to the Poor, the Father of Microfinance, Professor Muhammad Yunus was being sacked. The details, motivations, and ramifications are unclear and it remains to be seen whether he will step down. It appears to be politically motivated and based on the legal technicality of retirement. It is the latest in a string of events that are shaking the very foundations of microfinance. If you want to catch up, I highly recommend following the Center for Global Development’s David Roodman.

Professor Muhammad Yunus, Bangladesh and India are synonymous with microfinance. The Microcredit Summit Campaign estimated as of 2006, over 3,100 microfinance institutions (MFIs) were providing financial services to more than 113 million poor people worldwide. Indeed, the Indian subcontinent accounts for the majority of the world’s MFIs and borrowers. However, where is the world’s largest microfinance market? Bangladesh? India?

It is well known that the majority of the world’s poor now live in Middle Income Countries (MICs), most notably China and India. In 1990, about 93% of the world’s poor people lived in Low-Income Countries (LIC). However, recent research suggests that three-quarters of the world’s approximately 1.3 billion poor live in MICs and the remaining quarter, about 370 million people, live in the 39 LICs, which are largely in sub-Saharan Africa. It is not that they have moved, but that consistent and stellar economic growth rates have pulled countries such as China up the World Bank’s classification system.

Poverty in China is often overshadowed by average annual GDP growth rates of 9%. According to World Bank and UN statistics, around 200 million Chinese live on less than US$1.25/day; Bangladesh has a total population of 162 million. Furthermore, 482 million people live on less than US$2/day; greater than the populations of the US, Germany and UK put together. Although many are quick to point to the number of people lifted from poverty in China over the past few decades, poverty reduction is slowing down and a gap is opening up.

The rural-urban divide is the new Great Wall and can be seen from space (see image below, the western regions are coloured).

The average income of one of the 750 million who lives in rural China is less than 1/3 of that of a person living in an urban area. Then there are the 35 million, who have an average annual income of US$176. That is equivalent to the population of Canada living on about $0.48 a day. 66% of these extremely poor live in the Western Region and only 5% in the Eastern Region. This rural-urban divide can be found not only in wealth distribution and income, but also across human development indicators in education, health, and gender.

‘Microfinance must be an enormous sector in China’, I hear you saying. Think again.

Microfinance in China is an extremely underdeveloped and overlooked sector that deserves more attention than it is getting. Despite the numerical demand for microfinance services, China has only 22 microfinance institutions (MFIs) with approximately 1.6 million borrowers. China’s financial and banking regulation makes it difficult for entrepreneurs and small business owners to access loan credit, especially in rural China. This data would seemingly make a strong case for continued and targeted aid programs to China. However, DfiD (UK aid) in light of its recent aid review, has cut aid to China, and Australia’s own aid review and program in China is relatively small.

Discussions of Australia’s aid review have been largely exclusive of China’s development challenges despite the above figures and Australia’s strong bilateral relations. Should Australia’s aid program be targeting pro-poor growth initiatives and poverty reduction strategies in China? In 2010-11, the total Official Development Assistance (ODA) to China will total about A$37 million or about 0.8% of the aid budget. The programmatic focus in China is predominately on health and environment. Not unsurprisingly, the overlooking of China’s rural poor by governments both east and west has created opportunities for social innovation from the non-government sector.

Gaps in the market, unseen opportunities and tough regulation spur innovation and entrepreneurship. Step in peer-to-peer (P2P) platforms in microfinance, which leverage online tools and global networks to connect contributors with borrowers. Some commentators on microfinance see P2P platforms on a precipice. It is predicted that by 2013, P2P lending will exceed US$5 billion. P2P microfinance was recognised in by Harvard Business Review as one of the top 20 breakthrough ideas of 2009. P2P has global demand, contributor confidence because of its transparency and accountability measures, lender interest and technological support through web architecture.

Such platforms are redefining where charity actually begins. Prior to advances in communications technology and globalisation, you could really only donate to organisations within your own community. Now, you can take matters of development assistance into your own hands and donate to organisations and projects across the world. Global communities, migration and social networks are also redefining where ‘home’ is. Wokai, a peer-to-peer microfinance platform for China, provides new architecture for mobilising people to decide how they want to address the world’s most pressing issues.

Although largely benefiting from contributors outside of China, Wokai is in the process of establishing a partnership with a Chinese foundation that will enable it to scale up, fundraise, advertise and leverage the potential of the Chinese market. More importantly, it will offer a South-to-South (or in China an east-to-west) model of development cooperation and participation, which mobilises civil society and enables Chinese to support China. Young Chinese professionals in Shanghai will be able to support low-income entrepreneurs in rural Sichuan, and watch online as businesses and well-being grow. Such organisations and platforms offer a way to bypass traditional aid flows and channels, allowing everyone the opportunity to participate in development assistance and see the results.



3/10/2011 10:36:42 PM #
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ohn D Conroy,The Foundation for Development Cooperation
ohn D Conroy,The Foundation for Development Cooperation
3/10/2011 11:57:24 PM #
Does anyone else think it piquant that a case is being made for funds to be channeled to China to support micro-lending? Isn't this the country whose own surplus foreign exchange reserves, flooding into Western capital markets, were a factor in the West's sub-prime lending financial crisis, and which have in turn helped to fund the excesses of financialized microcredit now painfully apparent in India and elsewhere? Perhaps we should encourage venture capitalists already active in India (Blackstone, Soros, et al) to invest in Chinese micro-lending as well, so that, in a great irony, Chinese capital could be returned to China via Wall St as well as going to India. (But perhaps I am too late, it may already be happening). Isn't this a country with one of the highest aggregate savings rates in the world (the cause of the 'great wall' of Chinese money flooding the West, by the way) and with quite enough financial resources to meet the financial service needs of its poor, if only the Chinese government could get around to the necessary reforms (institutional as well as regulatory) to raise its rate of financial inclusion sufficiently.
3/16/2011 11:45:09 PM #
The final blog countdown...

The final blog countdown...
4/19/2011 6:54:17 AM #
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