Wu Xiaoling: Creating a favorable social environment for the development of
micro-credit business
Speech by Ms Wu Xiaoling, Deputy Governor of the People's Bank of China, at the Asia Pacific
MicroCredit Forum, Beijing, 22 March 2006.
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Ladies and Gentlemen,
Good morning!
Let me first express my warm congratulations on the opening of the Asia Pacific Micro-credit Forum. In
the past century, human beings created tremendous wealth and improved evidently the living and
welfare standards. However, we face many problems at the same time as economic aggregates grew
rapidly, such as environment pollution, resources constraint and polarization between rich and poor
etc. The common issues many countries face in the 21st century will be how to make the earth on
which mankind relies for existence much cleaner and how to give everyone an equitable development
chance in the process of economic growth.
Since the last century, China has achieved remarkable accomplishments in social and economic
development. But in terms of distribution, the income gaps between urban and rural areas and
between different regions have widened gradually and drawn more and more attention. Some
researchers pointed out that, development chances usually belong to people with certain capitals in
the period when financial intermediaries were underdeveloped or in countries where financial
intermediaries were less developed, while people lack of capitals are excluded from economic growth
and could not share the benefits of economic growth. However, with the innovation of financial
institutions and financial instruments, in a comparatively developed financial system, people lack of
capital but possess some production skills or entrepreneurships will obtain development chances
thanks to the available and suitable financial instruments. In recent years, micro-credit, as an available
and suitable financial innovation, has drawn many attentions from the public, international institutions
and international donors and even some explicit supports from governments in developing countries
because it can help people from low-income country who have willingness and development potential
to grasp the opportunity to increase income and shake off poverty. When the income gaps between
urban and rural areas and between different regions widen continuously, large low-income population
in rural areas and mid-western regions of China as well as numerous private producers and
microenterprises demand urgently for the suitable financial services including equity financing and
microcredit financing.
Since 2005, Chinese government has paid increased attention to micro-credit. First, reform of the rural
credit cooperatives has been underway smoothly and the number of rural households that have
access to micro-credits and joint guaranteed micro-credits from rural credit cooperatives (RCCs)
nationwide reached 71.34 million as of the end-September, 2005, accounting for 32.31 percent of the
total 220 million rural households. Given that around 120 million rural households of the 220 million
rural households had real borrowing needs, the micro-credit provided by the rural credit cooperatives
met 60 percent of their needs. Second, the CBRC issued the Guideline on the Credit Business of
Commercial Banks to Small Enterprises in July 2005, with a view to promoting financial services to
small enterprises through guiding banking sector to establish "six mechanisms", including interest risk
pricing, effective discipline and default information disclosure mechanisms. Many banks established
successively special units to manage small enterprises' loans. For example, the Industrial and
Commercial Bank of China and the Agricultural Bank of China established special units for credit to
small enterprises in pilot regions, Shanghai Pudong Development Bank, China Minsheng Banking
Corp. and China Everbright Bank established small & medium-sized customers department or small &
medium-sized enterprises servicing center, and some other city commercial banks and rural
commercial banks established special units or teams as well. Furthermore, China Development Bank
also joined in a special way, by signing a strategic cooperation agreement with Taizhou Commercial
Bank to conduct pilot credit business to micro-enterprises. As of end 2005, the outstanding balance of
micro-enterprises loans of the main banking institutions in China amounted to 2.68 trillion yuan,
increasing by 205.736 billion yuan from the beginning of the year. Third, apart from about 300
microcredit projects led by non-government organizations in China, 5 provinces are undergoing the pilot
commercialized micro-credit organization program. At end-2005, two private micro-credit institutions in
Pingyao, Shanxi province were established with approval to extend loans, and more similar institutions
will be established on a pilot basis in other regions.
But currently the development of micro-credit business has not fully met the social and economic
development needs. To advance economic growth in mid-western regions and vast countryside and
include low-income population in such regions into the general economic development track so that
they can enjoy the benefits of economic growth, micro-credit should play a more important role in this
regard. We have to cope with various challenges, such as the credit market in China is not fully
diversified, institution setup does not fit in with risk control requirements and credit culture and legal
environment need to improve etc. Therefore, we should create a better social environment with a view
to promoting the healthy development of micro-credit.
I. Developing micro-credit that provides services for private producers and micro
enterprises should center on developing regional financial institutions.
Private producers and micro-enterprises are characterized by weak production stability, unsound
financial situations and hard to standardize relevant credit registration, therefore the direct contact
between lenders and clients becomes crucial, and accordingly micro-credit is a labor-intensive work.
The successful micro-credit activities in China rooted in the diligence of credit issuers and the good
customer relationships they have established. One credit issuer of Agricultural bank in Siyang county,
Su Qian of Jiangsu province has issued more than 60 million yuan of rural household's loans in 16
years, involving thousands of loans without any bad ones, thanks to his visit to every household.
Taizhou Commercial bank has high quality loans because the client managers paid tremendous visits
to farmers to obtain many "soft information". They said, "Once an old client comes to us, we could
basically tell why he comes to the bank today; if one client asks for credit, we can reply promptly
whether we will extend loans and how much we can. Sometimes our clients joked that the client
managers in Taizhou Commercial Bank are able to read faces."
If a national big bank directly conducts retail business in micro-credit field, it will face high costs of risk
control and transaction. On one hand, big banks will find out that they don't understand the risk
profiles of those micro and seemingly irregular clients, at the same time, such clients may not be able
to provide enough qualified mortgages or pledges so as to put big banks in such a plight when they
encounter problems as pre-loan "adverse selection" and "moral hazards" after loan issuance. On the
other hand, negotiating individually with numerous micro-clients is likely to incur high transaction costs
while the financial services requirements of those clients are not complicate enough to bring benefits
of economic scale for big banks. Accordingly, there are no technical advantages for big banks to
directly conduct micro-credits.
Economic development in China is not balanced judged from many aspects. Multi-layered economic
development level and complicated economic structure require multi-level financial institutions to
provide relevant services. Accordingly, various financial institutions should divide the credit market
according to "cost-efficiency" principle and comparative advantages to precisely choose their target
markets and development strategy. Contrast to national big banks, regional financial institutions have
comparative advantages in regards of micro-credit fields that target private producers and
microenterprises. Apart from having more natural advantages, regional financial institutions could also
resort to some flexible measures that regular financial institutions lack of to deal with information
exchange and transaction costs. Regional financial institutions are located in communities, so their
client managers understand more about the risk characters of potential micro-credit clients in the
community as well as control credit risks through some "social assets" of their clients except their
economic assets or in virtue of some informal guarantee and mortgage that is hard for big banks to
take. As a result, developing micro-credit business that provides services for private producers and
micro-enterprises should focus on the development of regional financial institutions and community
financial institutions.
II. Create a moderately competitive financial environment to improve financial services
and reduce service fees.
In order to enhance the quality of county-level economy and rural financial services, we should strive
to create a moderately competitive financial environment. While big commercial banks including the
ICBC, BOC and CCB gradually cut down their branches in county-level economies due to cost and
risk control factors, Agricultural Bank of China and Agricultural Development Bank of China should
persist in the direction of serving for agricultural development and establish organizational structures
and function mechanism suitable to the development of agriculture through reform. We should
encourage big commercial banks to restructure their outlets in counties and encourage private capital
to participate in such restructuring of financial institutions in order to reduce shocks from restructuring
and strengthen their services for county-level economies. We should also create much eased policy
environment for the newly established financial institutions with independent legal status in a county.
Credit cooperatives have become an important financial service provider in counties and wide rural
areas of China. We must deepen the reform of rural credit cooperatives by persisting in the direction of
serving for agriculture and farmers. We should pay proper attention to the external constraint of rural
credit cooperatives' operation, such as market competition and possible M &A activities apart from
focusing on reestablishing effective internal control system, namely, reasonable corporate governance
structure. We propose to reform the traditional "one RCC in one township" arrangement by liberalizing
cross-region operation and competition of the RCCs and removing the restriction that only one RCC is
allowed to establish in one township to encourage establishing new institutions and stimulate RCCs to
provide service for the rural economy.
We should, through tax policy, guide the financial institutions to provide financial services for rural
areas and transfer funds to countryside so as to promote the modernization of the agricultural industry
and urbanization of countryside.
III. Create a good social environment for the development of formal financial institutions
through guiding rational development of the informal financial services
Informal financing exists since long time ago. If private funds participate in lending activities in
accordance with relevant rules on interest rate, informal financing is unlikely to damage social
economic order rather it could be a beneficial supplement to formal financing and even a barometer of
social financial demands. Judged from past experiences, problems in informal financing stemmed from
illegal public financing activities without permission. I believe, a good policy to prevent social and
financial disorder should focus on establishing a governing mechanism that guide its healthy
development while imposing harsh punishment on irregularities.
Regular informal financing is usually based on kin relationship or community relationship, so it features
in high efficiency but low financing amount due to the low credit registration cost and hash punishment
on credit slippage. Informal financing should be a normal phenomenon in terms of laws and
regulations given that we should respect the rights of a citizen to treat his or her own wealth and the
freedom of signing agreement with other citizens. But sometimes informal financing may be taken
advantage by some bad men, so it is necessary for the government to guide and regulate informal
financing activities to protect public interests. For example, although the Usury Act in South Africa has
clauses to punish usury activities, registered micro-credit activities are not subject to the restrictions in
the Usury Act.
A practical choice to guide the development of informal financing will be to allow individuals or special
companies to provide micro-credit under regulations stipulated by local governments and restrictions
of the Contract Law and the individual credit registration system when credit environment in China is
not much healthy. Facilitating citizens' financing activities and cutting down the threshold of conducting
legal financing activities will reduce the probability of illegal financing actions in essence, and
effectively crack down criminal activities as well.
The No.1 document of the central government in 2004 called to "continue the effort to expand
microcredits and the joint-guaranteed loans to the farmers. Efforts should be made, through attracting social
and foreign funds, in setting up financial institutions with diversified ownerships to directly provide
services for the rural economy. The No.1 document of the central government in 2005 already clarified
that regions in good conditions could explore to establish micro-credit organizations close to the needs
of farmers and villages and launched by natural persons and enterprises. Furthermore, the No.1
document of the central government in 2006 pointed out that, establishing community financial
organizations in counties with diversified ownerships were encouraged, and private as well as foreign
capitals are allowed to invest in such entities. Efforts should be made in fostering micro-credit
organizations launched by natural person, enterprises and associations with legal person status.
Farmers will be guided to develop credit unions. Informal financing should be regulated." In fact, the
No.1 documents of the central government in following 3 consecutive years all put emphases on
encouraging institutional innovation in rural financial system, while in recent two years it clarified that
micro-credit should be developed greatly as an appropriate financial innovation. Obviously, a micro-
credit organization is unlikely to become an important component of the rural financing system, but it is
indeed a catalyst to activate rural financing. One of the responsibilities of the government is to
maintain the social and economic order and make citizens responsible for the consequence of their
own behaviors while respecting citizens' economic freedom. Once a citizen hands his money to a third
person for collective usage, the government should point out the potential risks and conduct prudential
supervision over the fund receivers, which is the function of financial supervision authorities. We will
not allow the proposed micro-credit company to absorb public deposits but only use its equity from
several limited shareholders and wholesale financing from other institutions to conduct relevant
business. The shareholders of the micro-credit company and the institutions that provide funds should
bear relevant risks from funds operation. Once the micro-credit company failed, it would not bring
external damages to our society. On the contrary, a well-functioned micro-credit company will win
trusts of the society and therefore has more diversified financing channels or create conditions to
establish a new form of financial institution. To regulate the lending activities of the micro-credit
companies, the central government or local government should stipulate the Rules on Management of
Creditors, in which the industrial and commercial administrative authorities should be responsible for
registration management; the individual credit registration system should require lending information to
be registered and provide basic financial knowledge training program for both the borrowers and
lenders, and the court should be able to adjudicate borrowing contract disputes.
Regulated informal borrowing and lending activities could change the society into a financial university.
In this university, public risk awareness and credit profile will be improved and people who are
interested in financial business will have a chance to practise. We are expecting our society to reach
consensus in this issue.