Microfinance and Rural Financial Sector Reform
China faces an east-west, public-private and urban-rural divide in the financial services offered by its banking sector. Rural areas are currently experiencing a massive decrease of financial services. More than 30.000 branches have been closed down and only a small spectrum of formal financial institutions still operates in rural areas.
Farmers have very limited access to formal financial services. Micro, small and medium enterprises have difficulties in realizing their investment opportunities. This has led to an expansion of informal credit provision by moneylenders, pawnshops, relatives and informal groups. This growing informal financial sector limits the ability of the Chinese central bank (People’s Bank of China – PBC) to enforce its credit and monetary policy, which in turn negatively influences the stability of the Chinese financial sector as a whole.
The Chinese Government has developed and started a reform agenda for rural finance and the development of microfinance. Microcredit will be promoted in specialized Microcredit Institutions and as a line of business in existing institutions such as City Commercial Banks, Rural Credit Cooperatives, Postal Savings Bank of China, and others.
Objective
The formalization of the microfinance sector results in an increased ability of PBC to apply its instruments to influence economic development. This significantly contributes to the stabilization of an already over-heated economy. The rural population and rural enterprises benefit from the new microfinance policy. When formulating new policy and regulations, PBC draws from international experiences. Due to the higher degree of formalization and subsequent regulation of the rural financial sector, its transparency and stability are increased. This not only has positive influences on low-income households as users of financial services, but is also in the interest of the international community due to the growing interdependency of financial markets. Additionally, the project promotes the private sector within the financial system, which is so far almost entirely state-owned.
Approach
GTZ supports central PBC in its policy formulation for the development of a microfinance sector and the rural financial sector reform. PBC has selected five pilot provinces for the implementation of a new provisional regulation which allows the establishment of formal specialized Microcredit Institutions (in Shaanxi, Shanxi, Sichuan, Guizhou and the Inner Mongolia Autonomous Region). In these provinces GTZ provides technical assistance to define a provincial microfinance regulation and to establish the appropriate structure to implement and enforce the regulation. Advisory services, consultancies, training, research and international exchange will facilitate these activities.
In close collaboration with the German Development Bank (KfW) the piloting of new microcredit institutions in selected provinces will be supported. The focus of the technical assistance is on the range and design of credit products, human resource development, refinancing, internal procedures, including risk management, liquidity management, costing and software usage.
GTZ provides assistance to the People’s Bank of China by following a comprehensive multi-level approach of assisting China not only in direct piloting, but also in strengthening institutions to reach sustainability.
The German Ministry for Economic Cooperation and Development (BMZ) and GTZ are active members of the multi donor group CGAP (Consultative Group to Assist the Poor) which tries to harmonize the standards of the development and support of microfinance world-wide.