China’s non-for-profit microfinance institutions face difficulties

Wokai(wiki), the biggest microfinance website in China was faced with a shutdown. The original news article (in Chinese) is here. Wokai adopts a P2P (person to person) platform for contributors to register and lend small amounts of money to rural people in need. It is like farmers’ facebook.

The logic of microfinance is to lend farmers small amounts of money and enable them to invest in production facilities and boost output, in turn improving their living standards. In Yongji Village in China’s Shanxi province, there’s a microfinance company founded by two economists, Mao Yushi and Tang Min. The microfinance company lent money at very high rates, 21% now. But the loans are still in great demand. The lending rate is the cost of the capital, so this reflects how hard it is for farmers to lend through formal channels. Lending through family members is an alternative, but paying back is more than merely monetary compensation. Credit between familiar people often indicates more complex payments and helping each other in other circumstances. By contrast, micro credit evades the troubles of personal ties and provides a straightforward way of financing.

A sales manager at the Yongji microcredit company said that this business is more about people than about money. In a village setting,  information is mobile and easy to spread. Sales managers often know the farmers in person. They go to families to know more about their investment needs and offer tailor-made programs. In addition, the sales managers reduce their risk exposure by choosing relatively “stable” families. Another reason for the low default risk is the high value of reputation in the rural areas. People do not tend to turn against their promises as this labels them “unreliable” and might prevent them from receiving help in other difficult situations.

An important difference between the Yongji company and Wokai is that the former has a stable pool of investors while the latter relies on scattered investors worldwide. Credibility of the loan receivers is harder to assess for people who are browsing the information of the farmers and this can discourage potential loan contributors.

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