2004 Annual LAEBA Conference

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Modalities of Microfinance in Asia and Latin
America Lessons for the Peoples Republic of
China Heather Montgomery and John Weiss
2004 Annual LAEBA Conference The Emergence of
China Challenges and Opportunities for Latin
America and Asia 3-4 December 2004 Beijing, PRC
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• Introduction
• Microfinance and Poverty
• Modalities of Microfinance Delivery
• Microfinance in the Peoples Republic of China
• Challenges for PRC in Developing a Microfinance
  Sector
• Conclusions

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II. Microfinance and Poverty

• The Poor
• Transitory Poor
• Chronic Poor
• Core Poor / Destitute

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II. Microfinance and Poverty

• Micro credit for promotional or protective
  purposes
• Generalization that core poor benefit relatively
  little from micro finance

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II. Microfinance and Poverty

• Higher transaction costs
• Higher default rates
• Credit rationing
• Lower marginal returns on investments
• Risk preferences

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II. Microfinance and Poverty
graduate out
E
Return
X
C
r
M
B
A
drop out
Risk
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III. Modalities of Microfinance Delivery

• The Credit Union Approach
• The NGO Approach
• The Banking Approach

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III. Modalities of Microfinance Delivery

• The Credit Union Approach
• Registered
• Subject to commercial law
• No banking regulation/supervision
• Member owned
• Non-profit institutions
• May affiliate with apex institution

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III. Modalities of Microfinance Delivery

• The NGO Approach

• Non-profit
• Non-governmental organization
• Examples
• Grameen (Bangladesh)
• Banco Sol (Bolivia)

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III. Modalities of Microfinance Delivery

• The NGO Approach

• Regulatory limits
• Cannot access capital markets
• Cannot offer savings services
• Limits on scale of operations

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III. Modalities of Microfinance Delivery

• The Banking Approach

• Transformed NGOs
• State-run Development Banks
• Reformed State Banks
• Diversification of commercial banks
• Specialized commercial banks

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III. Modalities of Microfinance Delivery

• Commercialization of Microfinance
• WOCCUs commercially oriented approach
• Transformation of NGOs to Banks
• Commercial Banks expanding into Microfinance

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III. Modalities of Microfinance Delivery
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IV. Microfinance in the PRC

• Sources of Financing for Rural Households
• Informal Finance
• Agricultural Development Bank of China (ADBC)
• Agricultural Bank of China (ABC)
• Rural Credit Cooperatives (RCCs)

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IV. Microfinance in the PRC

• Agricultural Development Bank of China (ADBC)
• 1994 took over role of ABC in policy lending
• Now finances state-owned food enterprises

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IV. Microfinance in the PRC

• Agricultural Bank of China (ABC)
• Commercial bank
• Agricultural loans about 10 of portfolio

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IV. Microfinance in the PRC

• Rural Credit Cooperatives (RCCs)
• Established 1950s
• Part of state-owned banking system
• 1996 operate directly under central bank
• Large number of rural outlets
• Important source of rural finance

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IV. Microfinance in the PRC

• Microfinance
• Government Financed Programs
• NGO Sponsored Programs
• Rural Credit Cooperatives

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IV. Microfinance in the PRC

• Microfinance through Rural Credit Cooperatives
• 2001 experiment in Jiangsu province
• 2003 expanded to 7 other areas
• Now majority of RCCs provide microfinance
• Only nationwide microfinance program
• Coverage still below potential demand

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V. Paths for Developing a Microfinance Sector

• The Credit Union Approach
• The NGO Approach
• The Banking Approach
• ABC/ADBC
• RCCs

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V. Conclusions

• Continued reform of RCCs
• Bank Ryakat Indonesias Unit Desa
• Reaching the core poor?