Hey Buddy Can You Spare A Yuan, Part III -- Is Micro-Finance China's Next BIG Thing?
A couple years ago, we wrote about small business and consumer lending in China, in posts entitled, "Hey Buddy, Can you Spare a Yuan? The Sorry State of SME and Consumer Lending in China." and "Hey Buddy, Can you Spare a Yuan, Part II -- The Sorry State of SME and Consumer Lending in China."
Since I wrote those two posts, lending in China has gotten marginally better and, among other things, China has loosened up a bit in terms of allowing foreign entities to engage in microfinancing. Microfinancing involves just what it implies: very small loans, usually to assist a very small, usually home based business. The big banks in China (and it is pretty much exclusively big banks in China) have no interest in small loans, which usually means small businesspeople must secure their funding from either family and/or friends, or from loan sharks.
I was recently invited to a Seattle networking event by Wokai (but unfortunately could not go) and have since learned more about that organization and what they are trying to achieve in China and how they are going about it. Wokai was formed by Casey Wilson and Courtney McColgan who met while studying at Tsinghua University. What makes Wokai interesting is that it has set up an internet interface between the lenders (people like you and me) and the borrowers (small businesses in mostly rural China). In the parlance of Web 2.0, it brings together social networking with web enabled philanthropy.
By way of example, there is a farmer in Chifeng, Inner Mongolia, who is seeking $600 for cattle feed and a butcher shop owner, also in Chifeng, seeking $600 to expand store inventory. Both of these potential borrowers have received some funding towards their goal, but still need more. Some (see here and here) have already begun repaying their loans.
Wokai is right now primarily in Inner Mongolia, but it will soon be rolling out operations in Sichuan and Ningxia as well. For more on Wokai, check out "Empowering the impoverished with Wokai" at Lost Loawai.
I have always liked the idea of microfinancing, but I since I have never been directly involved with it, I do not have a good sense for how well it works. Does it work? Does it make sense for China? Does it make more or less sense in these difficult economic times?
Comments (16)
Read through and enter the discussion by using the form at the endRenaud Anjoran - January 25, 2009 8:48 PM
What they are doing is awesome.
If they go alone in that project, they will never get to 97-99% repayment rate (which Dr Yunnus, the founder of Grameen bank in Bangladesh, sets as a condition to being called a microcredit organization). And China is suspicious of foreign NGOs. But from their website they select local partners that take care of everything and already have this type of repayment rate.
What I like is that they use best practices from charitable organizations ("see this person? you can help him now"), their operations are very scalable (online platform), and they go with the wind (developing rural areas of China? nobody will say no!)
Great project.
Clement Wan - January 25, 2009 9:56 PM
I think a good way to think about microfinance / finance in general is to see it as a catalyst or even as an accelerant to existing economic opportunities that exist for the working poor. It allows for small shop owners/traders to buy an extra level of inventory or something similar as in the example you note.
Microfinance is not the source of opportunity itself, so if economic opportunities do not exist for the working poor because of lack of stability, government policies / local restrictions, microfinance won't work either.
Where microfinance became economically viable was from Muhummad Yunus's group lending idea (microfinance as a general concept considerably pre-dated Yunus), for which Yunus won the Nobel Peace prize a few years ago. The viable concept being that instead of lending to any individual, you lend to a group of up to 80 people (sometimes even more!) who as a consolidated group make up one larger loan. They cross guaranteed each other making the risk considerably less. This also has the significant added benefit of reduced due diligence and transactional costs - as this group would generally also do banking/transactions together instead of separately.
Group lending itself however has its drawbacks including the fact that not everyone wants their neighbour to know their financial status. There have also been other problems.
For a more detailed overall conceptual look at microfinance, warts and all, I highly recommend this recent article from the FT:
http://www.ft.com/cms/s/2/8080c698-c0d2-11dd-b0a8-000077b07658,Authorised=true.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F8080c698-c0d2-11dd-b0a8-000077b07658.html%3Fnclick_check%3D1&_i_referer=http%3A%2F%2Fgrowthmatters.blogspot.com%2Fsearch%2Flabel%2Fdevelopment&nclick_check=1
As for whether not it's China's next big thing? I doubt it, for the simple reason that much of China's development has been and will continue to be fairly capital intensive - and big loans and industry are not what microfinance is about. Microfinance /entrepreneurship is often something of a last resort in developing countries. China however has had job opportunities up until recently for the bottom tier.
That being said, if you believe that this recession will result in structural changes in China's economy, then maybe. But I have difficulty believing that China's government will allow too much by way of informal financial institutions to grow. And without the allowance of a more moderate policy in their financial services ownership, it will be considerably difficult for foreign expertise to enter while still spending the presumably sums required to maintain compliance stifling growth.
Damjan - January 26, 2009 2:58 AM
Microfinance is an interesting concept that has many uplifting benefits on communities that have scarce resources, the empowering of women being a much broadcast example.
Of course, microfinancing has many pitfalls; for example, what happens when someone cannot pay back a loan, no matter how small? At this point the person has to borrow from another source, like a relative, or a loan shark.
Moreover, contrary to its name, a good microfinance scheme must have deep pockets. If you are a client, then what incentive do you have to pay back the loan? As Casey Wilson, Wokai CEO, points out, its your relationship with the lender. If your lender, however, takes sixty days to gather enough donations to provide a loan, or is not able to do it at all, then what does that do for the trust factor? Telling the loan seeker that her idea was just not good enough to get money from internet philanthropists is not going to mean much, especially when its translated from English to putonghua to whatever local dialect is spoken in the borrowers neighborhood. Someone with deep pockets can give money on the spot (after a background check) and create the trust with the transaction.
A successful microfinancier,also must have a strong system of checks in place to minimize the number of people that default on their loans, or con their way into money (ex. a husband forces his wife to make up a heart wrenching story and post that, along with a business idea up on a microfinance site like Wokai). A second key to good regulation is ground presence. When microfinanciers have a physical presence on the ground, they can regularly check up on their investment and build good relationships with borrowers. When the system attempts to cover a large place, like Kenya ( http://ipsnews.net/news.asp?idnews=31010 ) exploitation is much easier because the regulation and relationships just are not there.
Wokai, which is foreign run from the United States, depends on Chinese field partner organizations to provide background checks on would-be-micro-entrepreneurs. Wokai's offices, however, are in Beijing, and their staff, who I've met on occasion, are rather young, somewhat Chinese proficient, and have no backgrounds in finance. So when you're talking about covering farmers from Chifong in Inner Mongolia, down to Yilong County in Sichuan, a distance of 1000+ miles, the net, from a regulations standpoint, has been cast wide and is hard to pull in; while, on the other hand, the skill level needed for anyone to manage that is rather high. The organization does not have deep pockets, and unless they have helped more than 1000 entrepreneurs this year with a loan of 500 dollars or less, their operating budget of USD 49,000 (the website says this was raised in 2008) is greater than their social impact.
Unless they are willing to work with the Chinese government as a Government organization non-government organization (GONGO) or find financial and administrative support some other way, then they will always be struggling for money, and spreading more hope than seed money.
Ryan Calkins - January 26, 2009 5:05 AM
Microfinance is a breakthrough innovation in development work because it recognizes that the capacity of the individual to solve his or her own problem is better than any organization, business, or government's ability to do so. It embodies the dictum "teach a man to fish and he'll eat for a lifetime." There is a vibrant microfinance community here in Seattle.
Ryan
www.seattlemicrofinance.org
madmilker - January 26, 2009 7:29 AM
People in America need to realize jus what got America in this shape...cheap... yes so-call cheap items from a foreign land.
quote*Wal-Mart firmly believes in local procurement. We recognize that by purchasing quality products, we can generate more job opportunities, support local manufacturing and boost economic development. Over 95% of the merchandise in our stores in China is sourced locally. We have established partnerships with nearly 20,000 suppliers in China. *end quote!
Now! if there be 182 country's making items for the world to buy and they have only 5% of the pie in China...duh! This company makes the nice people of China support their currency(yuan) by keeping it in their country working for the people there.... but with the yuan going up in value and the US dollar going down...all the foreign items that the American consumer buys thinking it is cheap has went up in price.
People...its all about the currency and to keep a currency strong you got to keep it floating around the country you live in so it can work for you. For the past 12 years all them US dollars are being shipped overseas to a foreign bank and with the American worker not making anything for the foreigner to buy the "we the people" have to turn to the "second" largest employer in America(Uncle Sam) to sell "we the people" debt in order to get all them dollars back!
50 years ago a foreigner would had given their left nut for a US dollar or a Hershey's chocolate bar and today the same foreigner has got Uncle Sam and the American consumer by both all the while Hershey is moving the chocolate factory to Mexico. Wake up! America and think "MADE IN AMERICA."
Carlton Willey - January 26, 2009 10:22 AM
Small world, Dan, I know Casey in Beijing and I've been to their cool hutong office a number of times.
I'm most impressed that they were able to receive government approval for their work, b/c I know it's not easy for a foreigner trying to start something relatively unprecedented in China.
Has anyone linked wokai's blog? It's a good read: http://wokai.typepad.com/
David Li - January 26, 2009 9:48 PM
Well, there are a couple models of microfinancing in terms of securing funding. Kiva and Wokai mainly secure the funding through individuals, Grameen Bank started with philanthropic donation and later government while several in South America got their funding from Wall Street. Some are run as philanthropies and some are run as business.
It's hard to lump "microfinance" all together. I can see the Grameen Bank model work out in China. Hey, Indian got a Nobel for it and government fund the project. No brainer for the Chinese government to cook up a couple with the stimulus packages.
Kiva and Wokai depends on microfunding via credit card and Paypal from Western individuals, mainly US. This is the hard time for them. First, the source of funding is shrinking with the economy downturn. Second, at the Western perception, China doesn't really echo as a "poor" country even tho it is. A China based "Slumdog Millionaire" won't fly. Third, Obama is pointing at China as sources of some problems and strawman for others.
With that, it won't be easy to secure funding from individuals for project like Wokai.
So, microfinance will be big but life is going to be tough for Wokai getting caught with the finance situation and geo-politics.
James G - January 27, 2009 5:10 AM
What I don't like about some "micro-finance" initiatives is that the interest rates are sometimes unreasonable, I guess the logic goes that with such a small amount, you can jack it up there? These success stories gloss over some alarmingly high interest rates; and they gloss over the fact that with interest rates that high, you are kinda approaching feel-good loan sharking or predatory lending.
But of course, nothing like that would ever happen in China. :-)
Also, successful micro-finance programs run by those with altruistic (i.e. not profit driven) motives are now attracting bigger players who wrap traditional loans up in the feel-good terminology of micro-lending.
More information here:
http://www.businessweek.com/print/magazine/content/07_52/b4064038915009.htm
and here:
http://www.newyorker.com/talk/financial/2008/03/17/080317ta_talk_surowiecki
The idea that microlending is a way out of poverty is potentially troublesome. Giving additional debt to people with limited knowledge of finance and good biz management skills... and should they go under, what then?
Many might be better served with another way to become small business operators. Those businesses that fail, that is additional debt to someone often not ready to deal with it. I favor things like tax breaks for (certain, not all) businesses in certain areas; collectives like in the colonias of Peru; non-interest bearing loans, etc.
The problem with that then becomes that people scream "socialism!" or "welfare state", and demand that these people be issued boot-straps with which they can pull themselves up. Funny how the boogeyman of anything that doesn't smack of good-ole "pure market capitalism" (whatever that exactly entails) is enough to put people off good ideas.
As far as micro-loans being empowering for women in particular, I am torn on that. I think that women in developing nations are more likely to be less educated and out of the workforce anyway, so in that way they might help. But then, the inequalities behind women not participating in the marketplace more, wouldn't it be better to address those?
Rachel - January 27, 2009 5:19 AM
What I understand from the grameen bank model is, a key factor in microfinance is the organization being based within the communities it finances and putting a very strong emphsyse on "Know your borrower".
Not sure how the Wokai people do it
Daniel Shi - January 27, 2009 8:02 AM
This is a great discussion. Generally I've been 100% gungho about Wokai in Beijing, but the points raise here do give food for thought.
There's also a very good article by Bordreaux and Cowen in the Wilson Quarterly about microfinance that is somewhat contrarian to the positive attitudes towards microfinance, specifically microlending.
www.wilsoncenter.org/index.cfm?essay_id=361250&fuseaction=wq.essay
However, I would like to address the issue of high interest rates. I think that it is important and necessarily responsible to point out that microlending is supported by high interest rates (in areas of Southeast Asia, anywhere from 30-70%).
However, this is not necessarily verging on loan sharking. Two reasons why:
1. It is a matter of cost. For every loan made, whether by a microfinance institution or a commercial bank, there is a fixed cost associated with processing and servicing the loan. In the case of MFIs, these costs also tend to be labor intensive as loan officers often have to travel to remote rural locations to set up repayment meetings. Meanwhile, there are also operating costs which must be covered. For a commercial bank, the fixed costs represent a much smaller proportion of the loan amounts on a per unit basis. MFIs also cover their fixed cost through interest. However, since the per unit size of their loans are much smaller, the amount charged as interest is higher. However, I'd imagine the absolute value of interest, when compared with commercial banks, would not be out of this world. There is a paper by the Asian Development Bank in defense of these lending practices.
(Perhaps, this ultimately is not a question of ethical conduct, but finding a better business model that reduces the cost of servicing loans)
2. In the Boudreaux and Cowen paper, there is a very interesting section comparing the practice of money lending (aka loan sharking) with that of the microlender. There are very interesting comparisons of enforcement (violent vs. understanding) and availability (immediate vs. requiring documentation).
The New Yorker article was particularly enlightening. It described the difference between the need for microfinancing and the need for SME financing.
Daniel Shi - January 27, 2009 8:09 AM
An interesting point made about controversial Mexican microlender Compartamos, which was at the heart of the high interest rates discussion (and was blasted by Yunus in an interview).
The Compartamos leadership, and I believe backed by people from ACCION International, said that high interest rates were also good for the microlending industry. Interest and profits could possibly encourage further entrants into the space, and the old microeconomics thinking goes, improve the services and pricing for the microfinance borrower, which are the rural poor entrepreneurs.
Of course, this is assuming drawing further capital into microlending and/or more microfinancing activity is beneficial overall. Obviously, more money is not always better in the absence of proper regulation and understanding of the financing mechanisms and outcomes.
Up to this point, I've also been using microfinance and microlending interchangeably, but it should be pointed out that there are other aspects of microfinancing beyond credit. Ultimately, there are many financial services which are unavailable to the underdeveloped such as insurance and fund transfers. Also, much of the microfinancing activity that has been highlighted is entrepreneurial, but there is also a gap in credit for education.
James G - January 27, 2009 2:29 PM
1. It is a matter of cost. For every loan made, whether by a microfinance institution or a commercial bank, there is a fixed cost associated with processing and servicing the loan. In the case of MFIs, these costs also tend to be labor intensive as loan officers often have to travel to remote rural locations to set up repayment meetings. Meanwhile, there are also operating costs which must be covered. For a commercial bank, the fixed costs represent a much smaller proportion of the loan amounts on a per unit basis. MFIs also cover their fixed cost through interest. However, since the per unit size of their loans are much smaller, the amount charged as interest is higher. However, I'd imagine the absolute value of interest, when compared with commercial banks, would not be out of this world. There is a paper by the Asian Development Bank in defense of these lending practices.
___________________________________
I disagree with both points. First, about processing a loan being labor intensive: that assumes that the lender always bears the responsibility of traveling to meet the loan holder, and that the distance covered is lengthy, expensive, and must be covered repeatedly. I am intimately familiar with travel costs in much of Andean Latin America, and there is no way that these costs dictate rates being as high as many are. I doubt Mexico, India or Indonesia (for example) are that much more expensive for travel, given their much better developed infrastructures.
Furthermore, microloans aren't all given to the distant rural poor; many go to people in urban areas or suburbs. Looking at Peru, at about half of the country's population lives well within the Lima metropolitan area, and in fact one of the earliest examples (detailed in the media) I recall of successful microlending was to a women's collective in Lima proper. So, if lenders were factoring travel costs into interest rates, I imagine there would be a greater variance in the rates, no? People near urban areas would demand lower rates; the rural poor would complain that loans targeted at them were simultaneously penalizing them for being rural.
And charging higher interest because the loan is smaller... that strikes me as equally nutty. Imagine buying a $20K car to save money, and then having to pay a much higher interest rate since you didn't opt for that Lexus! There are myriad aid/development/"empowerment" agencies and I personally would take Dan's jaundiced, cynical approach to anything they published.
In the last two decades, we've seen increasingly exotic forms of lending, investing, and ways to reach/generate new consumers, and many of them have been shady, as we are all finding out these days! Perhaps microloans and microfinance didn't start out as one these, but if not regulated, it could certainly move in that direction.
Here is an interesting discussions about it, in Spanish but I guess most can get the gist, more or less.
http://archivo.eluniverso.com/2006/11/14/0001/9/95DD4F860F8D40348516DEE68BD8B48F.aspx
Frank Rizzo - January 27, 2009 4:50 PM
Microfinance has some fundamentally flawed premises. One is that becoming an entrepreneur is the best way out of poverty for poor people. In fact, successful entrepreneurs are a small minority, and most people's skills, education, and personalities are better suited to being an employee. Another flawed premise is that loans are the most important financial product that poor people don't have access to. In fact, access to savings accounts with a reasonable interest rate and access to affordable insurance are far more important and often lacking in developing countries.
Leslie Forman - January 30, 2009 12:25 AM
Hi everyone,
Thanks Dan for facilitating this fascinating discussion about Wokai and microfinance in China. I'm Wokai's Marketing Director and I really appreciate all your detailed comments. I've read through your links and I'd like to respond specifically to a few points.
@Clement Wan, this clip from CCTV describes how microfinance fits into the Chinese government's rural development policy. I invite you to watch it here on our blog: http://wokai.typepad.com/my_weblog/2008/10/chinas-development-policy-goes-rural.html (I moved from San Francisco to Beijing in December for my role.)
@Damjan, we are working on building partnerships to maximize our impact.
@David Li, yes, the finance situation and geo-politics that surround our work form an interesting backdrop for microfinance.
@James G, you might be interested in Google.org's initiative to catalyze financial services for the "missing middle." Also, I read your article from El Universo and I don't think the distinction between socially-focused MFIs and commercially-oriented ones entirely applies in the Chinese market. First of all, commercial microfinance has been tightly regulated by the government, and only recently was Citigroup allowed to start two rural lending institutions in Hubei province. We wrote about this on our blog: http://wokai.typepad.com/my_weblog/2008/10/citigroup-enters-china-microfinance.html Also, Chinese monetary policy does not allow RMB to be taken out of the country. I believe that this has serious implications for international investors.
@Rachel, I agree that it's important to know your borrower in microfinance. Our Field Partners' loan officers know their borrowers personally, having worked together for many years. Our first Wokai Fellow, George, wrote about this here on our blog: http://wokai.typepad.com/my_weblog/2009/01/chifeng-revelations-what-i-learned-in-inner-mongolia-.html
@Everyone else, thank you for sharing your comments and opinions and here is a concise and well-researched article gives a great overview of the current state of China's microfinance sector: http://www.cibmagazine.com.cn/Features/Economy.asp?id=782&giant_steps.html
Leslie Forman - January 30, 2009 7:52 PM
P.S. Here's one more link I'd like to share. The Wall Street Journal published this blog post the other day, about the financial potential of microfinance in China:
I posted about it here on our blog too: http://wokai.typepad.com/my_weblog/2009/01/happy-year-of-the-ox-news-from-yilong-county-sichuan.html
Let me know if you'd like the full version. Thanks again for the great discussion, both here and on Twitter.
Ryan - February 7, 2009 6:35 AM
The worry with microfinance in China is the banks who lend the money out. At any point, they can charge interest on this money. The money is coming in from different sources due to payment issues in China so payments being made by Wokai to banks (acting as Guarantor) is still subject to interest. Since there is no legal NGO outside of the middle kingdom, this leaves a bridge in the repayments.
How are people being repayed? Are they being repayed? Will repayments constitute compound interest with the bank?
I don't know what deal went on to enable the flow of money, but for sure the Bank is winning here. If $600 is being given, how much is being received at the other end?
I can assure you it's not $600.