China: The Big Financial Inclusion Frontier

Last week was a big one for those hoping to reach “full financial inclusion” by 2020. The President of the World Bank has signed on to the cause, and the Center for Financial Inclusion just rallied the troops in London at the Financial Inclusion 2020 Global Forum.

As with most really big global goals, success requires making strides in China. China is the last huge, untapped market for microfinance, but there are signs that that’s changing. The focus of microfinance in China is on credit, and the numbers of providers has been growing fast, with a big jump since 2010. At the end of 2010, the China Association of Microfinance had 2,614 formal members in 31 provinces and cities. The early members were mainly public-interest microfinance institutions focused on poverty reduction.

By 2012, the number increased to 6,090 microfinance companies, and the ranks are now filled with commercial banks and microfinance companies serving broader markets.  (We should really revert to the “microcredit” label, since they’re so focused on credit.)

The volumes are large in a global context. These companies lent approximately 200 billion RMB in 2012 (about US$24 billion) and had over 592 billion RMB in loans outstanding (People’s Bank of China, 2012).

In May 2013, The Mix Market, the microfinance data organization based in Washington, D.C., reported on a group of microfinance institutions in China that collectively had loan portfolios totaling US$ 13.3 billion (2011). Together they served 584,554 active borrowers and 7.6 million depositors.

This is all part of a bigger effort by the People’s Bank of China (the central bank) to raise awareness of the financing needs of small firms. Most of the big banks don’t have appropriate risk analysis methods, so private firms in China are often financed from retained earnings and through personal networks. There is also wide use of trade credit from other firms. These help, but there are still wide gaps which these microcredit providers are rushing to fill.

Most of the action, though, is not what is usually considered “microfinance” or “microcredit.” It’s what we’d call the SME (Small and Medium Enterprise) lending.

A simple calculation using the Mix data shows this. Divide the $13.3 billion of total lending by the 584,554 borrowers and you find an average (outstanding) loan size of $22,752. This is much, much larger than the average size microfinance loan in other countries, and it is far more typical of SME finance. The disaggregated data shows that some institutions in China make much smaller loans (under $1000 on average), but others make much larger loans. 

Perhaps as a sign of the times, the Chinese edition of the Economics of Microfinancehas just been released (translated by Yu Luo). My co-author Beatriz Armendáriz joined Yu Luo and a roster of microfinance experts at the Forum on Microfinance in China and book launch, held on November 3rd by Renmin University of China and Liangjing Publishing House.