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Source: Global Times Global Times

Mending micro-credit

Published: 02 Nov 2009 10:02:01 PST

A villager named Wu Yongliang is repaying the loans that he got the previous year at a rural credit association in Guizhou.Photo: Xinhua

By Wang Xinyuan

The pursuit of profits at the expense of poverty stricken individuals has the China Association of Microfinance (CAM) calling for improved industry self-regulation and a social performance assessment of the country's micro-credit institutions at a micro-finance forum held recently in Beijing.

The micro-credit institutions (MCIs) need to improve their social performance management and assessment systems to help the investors and regulators with better decision making and regulations, Bai Chengyu, secretary general of the CAM, told the China Microfinance Summit Forum 2009.

Currently the requirements that many small loan institutions have for low income customers to provide collateral for loans contradict their stated objective of providing financial services to the poor to eliminate poverty, said Bai.

If your target customers are low-income populations, you shouldn't take collateral as a necessary condition for granting the loan, Bai told the forum. The social objectives are indispensable to the overall performance of MCIs.

According to the People's Bank of China (PBC), of the country's first seven pilot micro-credit companies, non-collateral loans only accounted for 12.9 percent of total loans and collateral loans accounted for 87.1 percent as of the end of 2008. Their loan target customers were apparently not poverty stricken individuals.

The PBC's policy said it intended to let the poor enjoy the financial services. But the data suggests otherwise. The failure is partially due to PBC not setting performance assessment guidelines, specifically what percentage of non-collateral loans should be issued, Bai said.

Bai said that many micro-finance institutions are actually small loan companies, not true micro-credit organizations for social betterment and the MCIs need assessment ratings by independent companies serving as regulators to eliminate the problem.

Recently more scandals are happening in the microfinance sector worldwide, Dina Pons, an analyst for Planet Rating Asia, told the forum.

Some MCIs are not helping the poor the way they are claiming, or over-burdening their clients with collateral for the loans, Pons added.

A social performance assessment includes a management information system, a consistent incentive plan, customer satisfaction and rights protection, an internal audit system, and indicators of how your customers improved their lives through the MCIs products and services, Bai noted.


A better way

A person-to-person (P2P) lending model to fund the poor might be a better way to put the focus on the social good, said Bai.

(Mohammad) Yunus, believes that banking is a generally more efficient way than a P2P model. But in China, it's so hard to get permission to open a bank. Under the current law and regulations, P2P might be a way to help fund the micro-credit projects, Bai said, quoting Yumus's remarks during the father of micro-financing's recent visit to China.

Yunus founded the Bangladesh Grameen Bank back in 1970s as a micro-finance organization and community development bank that provides micro-credit to the impoverished without requiring collateral.

The traditional micro-credit is based on solidarity lending where small groups borrow collectively and group members encourage one another to repay. Yunus Grameen Bank model has been consistently sustainable with high repayment rate and he won the 2006 Nobel Peace Prize for his efforts to create economic and social development.

Yunus' bank model, however, has met a policy bottleneck in China where the government so far has not separated micro-credit organizations dedicated to poverty alleviation from flourishing private commercial small loan companies, and imposes the same stringent regulations on their financing for fear of loan risks going out of control.

These micro-finance institutions are required to finance up to 50 percent of their total assets from two other financial institutions, said Bai.


P2P business models

Under these circumstances, the P2P lending model has sprung up in recent years and it is not officially defined as a financial institution issuing loans and therefore not subject to the tough rules of the regulators, said Yin Fei, founder of Daybang, a China P2P lending platform.

In addition to Yin's Daybang running independently with its own credit workers, many of other P2P lenders like CreditEase, Wokai and 51Give take an indirect approach by working through local poverty alleviation organizations.

Through this P2P platform, potential lenders or interested sponsors can choose the person they would like to help. They can find the target customer's photo, name and information such as for what purpose this person needs to use the borrowed money. The sponsors then can decide whether or not lend the money and monitor the progress of the project.

The sponsor can divide 100,000 yuan ($14,645) into units of 100 yuan ($14.65) each and distribute the money to 100 farmers all across China and the default risk is highly diluted, said Tang Ning, founder of CreditEast, a P2P lending platform for both commercial and social business purposes.

They raise funds from sponsors, pass the funds to the MCIs to help those in need. In return, the MCIs find the customers, distribute the funds, manage the operation and risks, and allocate partial returns to the P2P and the lenders once the money is collected.

P2P is a sustainable model, unlike a donation in which the beneficiary can enjoy a free lunch. It creates added value and borrowers as the beneficiaries will repay part of the value back to the system to help others, according to Tang.

Another characteristic of P2P is transparency.

Lenders can choose whoever they want to help without incurring too much cost, unlike giving the money to an institution and having no clue of where the money is going, Tang said.

P2P as a way to help farmers in the middle and western regions fits well into the efforts to adjust Chinas east and west economic imbalance and decreasing the gap between the rich and the poor. Taking a little value from the economically developed east regions will greatly help the farmers in the poverty stricken west, Tang noted.

Another P2P model is 51Give, a for-profit model that wants to improve people's life by introducing environmentally-friendly technologies like wind and solar power to villages and also reducing carbon dioxide emissions, said Daniel Foa, co-founder of 51Give.

By helping to achieve the green house gas emission reduction in developing countries such as China, they sell the carbon credits or Certified Emission Reductions under the Clean Development Mechanism, an arrangement of the Kyoto Protocol, to industrialized countries, Foa told the Global Times.

And yet another P2P is Wokai, which targets poor people in China who are more than 40 years old and uses US donors.

Wokai is the first P2P platform linking US donors and Chinese customers, said Zheng Sheng, director of China Operations at Wokai. The American donors pass small donations to Wokai, and Wokai transfers the money to the beneficiaries via their MCI partners.

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