Poverty alleviation finance organizations to reduce commercial financial poverty reduction dilemma
By Bu Xintong
Original, GPIG, 02-17-2017
The need to combat poverty was given further emphasis at the 2016 Central Economic Work Conference. It was said during the meeting that we should tackle areas in need of reinforcement and help people who are living in poverty by solving practical problems. There should be targeted measures to alleviate and eliminate poverty. The CPC Central Committee, the State Council, and relevant departments of central government have also issued a number of documents in the past two years aimed at poverty alleviation through support from the financial sector.
In response to the Party Central Committee's request for help in alleviating poverty, policy-backed, commercial and cooperative financial institutions have taken relevant actions. However, the contradiction between commercial banks’ drive to pursue their own commercial interests, and the high cost, high risk and low profit nature of poverty alleviation work, is an obstacle to this process – it has been revealed in the banks' own research and reports. There are already some lessons we can take from theory and practice on how to deal with this dilemma. In general, we need a systematic framework which provides coordinated and integrated solutions. We need to truly understand, appreciate, and practice the idea of Inclusive finance.
When the idea of Inclusive finance was first introduced in China, it was seen as an important development by the CPC Central Committee and quickly featured in official documents. In November 2013, the Decision of the Central Committee of the Communist Party of China on Deepening the Reform of Certain Major Issues was adopted at the Third Plenary Session of the 18th Central Committee of the Communist Party of China. This contained a formal proposal that we would develop Inclusive Finance and we would encourage financial innovations as well as expanding the financial market with greater reach and more products. The Fourth Plenary Session of the 18th Central Committee of the Communist Party of China emphasized that we should extend the legal system’s attention to equal rights and opportunities. This heralded a brighter future for Inclusive finance. In November 2015, after the Eighteenth Meeting of the Central Leading Group for Comprehensive Deepening Reform, the State Council promulgated the 2016-2020 Plan on the Development of Inclusive Finance. It targeted inclusive financial services that increase the coverage, availability and adequacy of financial services so as to meet the growing financial needs of the people. It placed particular emphasis on providing reasonably-priced, convenient and secure services to farmers, small companies, low-income urban households, the poor, the disabled and the elderly. During the G20 summit held in Hangzhou September 2016, the Chinese government also proposed 8 High-Level G20 Principles for digital inclusive finance.
China's inclusive finance is still in its infancy. Through the concerted efforts of many parties, we now have diverse service, wide coverage, and high usage of mobile Internet. Basic financial factors such as the number of bank accounts held per capita and the density of bank outlets are of first-world standard. However, we should be very clear that as a macro, meso and micro-integrated system, inclusive finance in China still faces many difficulties and challenges.
The current target of the CPC Central Committee is to end poverty in China by 2020. To this end, we have to pay special attention to the low coverage of inclusive finance and the shortfall in financial services among low-income and poverty groups. This is the biggest obstacle to poverty alleviation through financial intervention. In addition to the contradiction previously noted, another contributory factor is the weakness of non-profit micro-finance organizations and cooperative financial institutions committed to both poverty alleviation and sustainable development.
The 2016-2020 Plan on the Development of Inclusive Finance requires that we should regulate new rural cooperative finance, support the development of rural micro-finance organizations, and continue to provide financial services to the poor in rural areas. We should also clearly define the niche of micro-finance organizations dealing with poverty alleviation through laws and regulations. President Xi Jinping emphasized the need to devote greater efforts to carrying out careful analysis, clarifying responsibilities and requirements, and implementing reform in the meeting of the Central Leading Group for Deeper All-Round Reform on December 30, 2016.
Years of observation, research, and participation in micro-finance organizations dedicated to poverty alleviation have led me to a series of conclusions on how to provide a sound and sustainable solution to the problem of low coverage of inclusive finance among low-income and poverty groups and the shortage of financial services. We need to build a solid financial infrastructure, adjust the structure of financial institutions, develop more micro and medium financial institutions, implement an inclusive finance policy in terms of both regulations and education, pay particular attention to providing services for the poor and the vulnerable, and develop inclusive finance at the macro level. Governments at all levels need to attached real importance to the role of public welfare-based micro-finance organizations (focusing on poverty alleviation and sustainable development) and the Midwest Poor Rural Mutual financial cooperative, and support their healthy development.
These two types of organization are, in essence, social enterprises in the financial sector. They are suppliers of inclusive financial services that are genuinely focused on serving low-income and impoverished groups. They differ from ex-gratia finance, which relies on external subsidies and guarantees (currently important but unsustainable), and from commercial finance and its pursuit of higher profits (which therefore struggles to provide ongoing poverty alleviation). Their ideals, aims, and actions are directed to poverty alleviation. The characteristics of these two types of organizations are very much in line with the requirements of inclusive finance, and their mode of operation is market-oriented, allowing them to support vulnerable groups while operating at breakeven or even achieving small profits, so that they can be sustainable and expand the scale of their operations.
Pan Gongsheng, vice president of the People's Bank of China, has stated that there is a clear consensus in the international community that micro-finance and inclusive finance should be market-oriented, based on government and policy support, and to develop sustainably they must achieve breakeven or generate a small profit. He has also pointed out that principled commercial organizations need to strike a balance between their pursuit of commercial interests and social responsibility. The internal performance evaluation systems and authorization systems in commercial banks should reflect such a balance. This will contribute to the development of micro-finance.
I would like to offer some observations on the current situation with regard to the two types of organizations in China. There is much evidence to indicate that China's public welfare-based micro-finance organizations are successful, just like other similar organizations at the micro-level elsewhere in the world. The Midwest Poor Rural Mutual financial cooperative is also successful at the micro-level (as are similar organizations in other provinces). So why has it not expanded to a larger scale in other poor areas? The main reason is that we cannot say that it is successful at a macro level, and that is because different local governments and different departments have different attitudes and polices. These two types of organization have not continued to expand; in fact their overall rate of growth is now shrinking for a number of reasons. These organizations are genuinely capable of alleviating poverty and are willing to conscientiously implement the Party Central Committee’s goals, but relevant departments and some local governments lack understanding of their needs and lack regulations and policies to ensure their healthy and sustainable development, and so they do not get proper support.
At present, people on low incomes and poor farmers generally struggle to access loan services. Loans to the poor are costly, risky, and low-profit. Commercial banks limit their involvement for both subjective and objective reasons. It is also difficult for rural credit cooperatives and other financial institutions (including new rural financial institutions approved by the CBRC and the central bank over the past two years) to address these problems because of the profit-oriented nature of commercialization and commercial restructuring. However, public welfare-based micro-finance organizations and Poor Rural Mutual financial cooperative projects / organizations can make up for this deficiency. Market-oriented operation and the pursuit of public welfare are their defining characteristics and their strengths. Their development has also helped to form a competitive rural credit services market, and to curb private usury activities. Moreover, micro-finance targeting poverty alleviation can have a crucial practical impact, by changing the traditional approach to poverty alleviation by financial measures (rely on external subsidies, or focus on profits), by establishing an inclusive financial system, by achieving social equity, and by promoting common prosperity. It should be strongly supported.
The vast majority of China's public welfare-based (non-profit) micro-finance organizations dedicated to poverty alleviation have been established in the key national and provincial counties requiring poverty-relief and development. There are about 100 these organizations now. Most of these have drawn lessons from Bangladesh’s "Village Bank" (Grameen Bank) and have had anything between five and twenty years to develop. Some of these structures have been established by mass organizations (many relying on government agencies). Accessing finance through social channels, they then offered microcredit services, mostly loans of a few thousand RMB, to low-income groups and poor households (largely women). These organizations function only as lenders; they do not accept deposits. The social benefits are significant. Each county's project covers low-income groups and poor households ranging in number from several thousand to tens of thousands of people. Most of them are still searching for the right path to sustainable development, although many have achieved their basic goals of both poverty alleviation and financial sustainability. Like Poor Rural Mutual financial cooperative projects and organizations, public welfare-based (non-profit) micro-finance organizations are helping the poor both consciously and actively. With the passage of time, their services are becoming more professional. Outstanding people help them to move forward. But they still faced with difficulties in accessing finance and they lack the appropriate legal status.
The Poor Rural Mutual financial cooperative project began in 2006, led by the State Council Leading Group Office of Poverty Alleviation and Development of China and the State Ministry of Finance. It now covers about 20,000 poor villages, mainly in the central and western rural areas, and has a turnover of nearly 10 billion yuan. The funds come mainly from central and local financial investment and farmers' shares. The cooperation is real and valuable. In most areas, these projects have been successful. They have already created a financial model under which farmers own their shares, manage their projects, and enjoy their achievements, under government’s support. However, many of them are experiencing problems, whether seen from the perspective of effective external regulation or from the perspective of internal operating standards. More than 20,000 Poor Rural Mutual financial cooperative projects must be handled properly by adapted to local conditions, treated differently, guided accordingly. They should not be left to fend for themselves. We can use the foundations we have and develop the movement into a compliant, promising, sustainable organization. Establishing the projects in poor areas makes them more significant. Moreover, if they can regulate their operating modus, the relevant state departments can define the policies while asking banks to provide the funds. For example, the poverty alleviation cooperative financial organization could place the members' shares in the bank as collateral, and the banks could finance the loans at the appropriate leverage.
The author Du Xiaoshan is a researcher from rural development institute Chinese academy of social sciences and the director of China association of Microfinance.
Its original unabridged version was published in Chinese and translated by Bu Xintong
By Bu Xintong
Original, GPIG, 02-17-2017
The need to combat poverty was given further emphasis at the 2016 Central Economic Work Conference. It was said during the meeting that we should tackle areas in need of reinforcement and help people who are living in poverty by solving practical problems. There should be targeted measures to alleviate and eliminate poverty. The CPC Central Committee, the State Council, and relevant departments of central government have also issued a number of documents in the past two years aimed at poverty alleviation through support from the financial sector.
In response to the Party Central Committee's request for help in alleviating poverty, policy-backed, commercial and cooperative financial institutions have taken relevant actions. However, the contradiction between commercial banks’ drive to pursue their own commercial interests, and the high cost, high risk and low profit nature of poverty alleviation work, is an obstacle to this process – it has been revealed in the banks' own research and reports. There are already some lessons we can take from theory and practice on how to deal with this dilemma. In general, we need a systematic framework which provides coordinated and integrated solutions. We need to truly understand, appreciate, and practice the idea of Inclusive finance.
When the idea of Inclusive finance was first introduced in China, it was seen as an important development by the CPC Central Committee and quickly featured in official documents. In November 2013, the Decision of the Central Committee of the Communist Party of China on Deepening the Reform of Certain Major Issues was adopted at the Third Plenary Session of the 18th Central Committee of the Communist Party of China. This contained a formal proposal that we would develop Inclusive Finance and we would encourage financial innovations as well as expanding the financial market with greater reach and more products. The Fourth Plenary Session of the 18th Central Committee of the Communist Party of China emphasized that we should extend the legal system’s attention to equal rights and opportunities. This heralded a brighter future for Inclusive finance. In November 2015, after the Eighteenth Meeting of the Central Leading Group for Comprehensive Deepening Reform, the State Council promulgated the 2016-2020 Plan on the Development of Inclusive Finance. It targeted inclusive financial services that increase the coverage, availability and adequacy of financial services so as to meet the growing financial needs of the people. It placed particular emphasis on providing reasonably-priced, convenient and secure services to farmers, small companies, low-income urban households, the poor, the disabled and the elderly. During the G20 summit held in Hangzhou September 2016, the Chinese government also proposed 8 High-Level G20 Principles for digital inclusive finance.
China's inclusive finance is still in its infancy. Through the concerted efforts of many parties, we now have diverse service, wide coverage, and high usage of mobile Internet. Basic financial factors such as the number of bank accounts held per capita and the density of bank outlets are of first-world standard. However, we should be very clear that as a macro, meso and micro-integrated system, inclusive finance in China still faces many difficulties and challenges.
The current target of the CPC Central Committee is to end poverty in China by 2020. To this end, we have to pay special attention to the low coverage of inclusive finance and the shortfall in financial services among low-income and poverty groups. This is the biggest obstacle to poverty alleviation through financial intervention. In addition to the contradiction previously noted, another contributory factor is the weakness of non-profit micro-finance organizations and cooperative financial institutions committed to both poverty alleviation and sustainable development.
The 2016-2020 Plan on the Development of Inclusive Finance requires that we should regulate new rural cooperative finance, support the development of rural micro-finance organizations, and continue to provide financial services to the poor in rural areas. We should also clearly define the niche of micro-finance organizations dealing with poverty alleviation through laws and regulations. President Xi Jinping emphasized the need to devote greater efforts to carrying out careful analysis, clarifying responsibilities and requirements, and implementing reform in the meeting of the Central Leading Group for Deeper All-Round Reform on December 30, 2016.
Years of observation, research, and participation in micro-finance organizations dedicated to poverty alleviation have led me to a series of conclusions on how to provide a sound and sustainable solution to the problem of low coverage of inclusive finance among low-income and poverty groups and the shortage of financial services. We need to build a solid financial infrastructure, adjust the structure of financial institutions, develop more micro and medium financial institutions, implement an inclusive finance policy in terms of both regulations and education, pay particular attention to providing services for the poor and the vulnerable, and develop inclusive finance at the macro level. Governments at all levels need to attached real importance to the role of public welfare-based micro-finance organizations (focusing on poverty alleviation and sustainable development) and the Midwest Poor Rural Mutual financial cooperative, and support their healthy development.
These two types of organization are, in essence, social enterprises in the financial sector. They are suppliers of inclusive financial services that are genuinely focused on serving low-income and impoverished groups. They differ from ex-gratia finance, which relies on external subsidies and guarantees (currently important but unsustainable), and from commercial finance and its pursuit of higher profits (which therefore struggles to provide ongoing poverty alleviation). Their ideals, aims, and actions are directed to poverty alleviation. The characteristics of these two types of organizations are very much in line with the requirements of inclusive finance, and their mode of operation is market-oriented, allowing them to support vulnerable groups while operating at breakeven or even achieving small profits, so that they can be sustainable and expand the scale of their operations.
Pan Gongsheng, vice president of the People's Bank of China, has stated that there is a clear consensus in the international community that micro-finance and inclusive finance should be market-oriented, based on government and policy support, and to develop sustainably they must achieve breakeven or generate a small profit. He has also pointed out that principled commercial organizations need to strike a balance between their pursuit of commercial interests and social responsibility. The internal performance evaluation systems and authorization systems in commercial banks should reflect such a balance. This will contribute to the development of micro-finance.
I would like to offer some observations on the current situation with regard to the two types of organizations in China. There is much evidence to indicate that China's public welfare-based micro-finance organizations are successful, just like other similar organizations at the micro-level elsewhere in the world. The Midwest Poor Rural Mutual financial cooperative is also successful at the micro-level (as are similar organizations in other provinces). So why has it not expanded to a larger scale in other poor areas? The main reason is that we cannot say that it is successful at a macro level, and that is because different local governments and different departments have different attitudes and polices. These two types of organization have not continued to expand; in fact their overall rate of growth is now shrinking for a number of reasons. These organizations are genuinely capable of alleviating poverty and are willing to conscientiously implement the Party Central Committee’s goals, but relevant departments and some local governments lack understanding of their needs and lack regulations and policies to ensure their healthy and sustainable development, and so they do not get proper support.
At present, people on low incomes and poor farmers generally struggle to access loan services. Loans to the poor are costly, risky, and low-profit. Commercial banks limit their involvement for both subjective and objective reasons. It is also difficult for rural credit cooperatives and other financial institutions (including new rural financial institutions approved by the CBRC and the central bank over the past two years) to address these problems because of the profit-oriented nature of commercialization and commercial restructuring. However, public welfare-based micro-finance organizations and Poor Rural Mutual financial cooperative projects / organizations can make up for this deficiency. Market-oriented operation and the pursuit of public welfare are their defining characteristics and their strengths. Their development has also helped to form a competitive rural credit services market, and to curb private usury activities. Moreover, micro-finance targeting poverty alleviation can have a crucial practical impact, by changing the traditional approach to poverty alleviation by financial measures (rely on external subsidies, or focus on profits), by establishing an inclusive financial system, by achieving social equity, and by promoting common prosperity. It should be strongly supported.
The vast majority of China's public welfare-based (non-profit) micro-finance organizations dedicated to poverty alleviation have been established in the key national and provincial counties requiring poverty-relief and development. There are about 100 these organizations now. Most of these have drawn lessons from Bangladesh’s "Village Bank" (Grameen Bank) and have had anything between five and twenty years to develop. Some of these structures have been established by mass organizations (many relying on government agencies). Accessing finance through social channels, they then offered microcredit services, mostly loans of a few thousand RMB, to low-income groups and poor households (largely women). These organizations function only as lenders; they do not accept deposits. The social benefits are significant. Each county's project covers low-income groups and poor households ranging in number from several thousand to tens of thousands of people. Most of them are still searching for the right path to sustainable development, although many have achieved their basic goals of both poverty alleviation and financial sustainability. Like Poor Rural Mutual financial cooperative projects and organizations, public welfare-based (non-profit) micro-finance organizations are helping the poor both consciously and actively. With the passage of time, their services are becoming more professional. Outstanding people help them to move forward. But they still faced with difficulties in accessing finance and they lack the appropriate legal status.
The Poor Rural Mutual financial cooperative project began in 2006, led by the State Council Leading Group Office of Poverty Alleviation and Development of China and the State Ministry of Finance. It now covers about 20,000 poor villages, mainly in the central and western rural areas, and has a turnover of nearly 10 billion yuan. The funds come mainly from central and local financial investment and farmers' shares. The cooperation is real and valuable. In most areas, these projects have been successful. They have already created a financial model under which farmers own their shares, manage their projects, and enjoy their achievements, under government’s support. However, many of them are experiencing problems, whether seen from the perspective of effective external regulation or from the perspective of internal operating standards. More than 20,000 Poor Rural Mutual financial cooperative projects must be handled properly by adapted to local conditions, treated differently, guided accordingly. They should not be left to fend for themselves. We can use the foundations we have and develop the movement into a compliant, promising, sustainable organization. Establishing the projects in poor areas makes them more significant. Moreover, if they can regulate their operating modus, the relevant state departments can define the policies while asking banks to provide the funds. For example, the poverty alleviation cooperative financial organization could place the members' shares in the bank as collateral, and the banks could finance the loans at the appropriate leverage.
The author Du Xiaoshan is a researcher from rural development institute Chinese academy of social sciences and the director of China association of Microfinance.
Its original unabridged version was published in Chinese and translated by Bu Xintong
