Microfinance is a way to lift people out of poverty. The poor have little income and are often subject to credit constraints (liquidity constraints). So they cannot invest in production tools and are trapped in poverty. Microfinance provides the poor with small amount of loans and support their investments for the longer horizons.
I once talked with a friend who did her internship in Grameen Foundation in China last summer. The Grameen Bank founded by Mohammed Yunus in Bangladesh has been viewed as the successful prototype for small-scale credit, and has been duplicated and promoted in Africa, China. Here is a description of China’s microfinance industry by Wharton Business School at UPenn.
However, the status-quo of microfinance in China is not that optimistic. Sarah Tsien, a consultant with IPC, an affiliate of ProCredit in Germany, puts it more strongly: “Microfinance has been quite a disaster in China. Overall, it never achieved a scale of sustainability.”
According to UNDP, China’s microfinance project is faced with three major problems: legal and regulatory arrangements, capacity, and funds. China’s banking sector is closely related to the government, and interest rates have been kept at an artificially low level, allowing banks to reap great profits from lending. According to Wang Jun, senior research fellow at the China Center of Economic Research, Tsinghua University, it remains politically problematic for banks to place commercial objectives ahead of supporting poverty-relief policy objectives.
I’ll elaborate on this topic in my future articles.