A vibrant type of private sector-owned financial institution that provides credit access to the under-served is slowly progressing in the People's Republic of China despite strict regulations and a conservative financial environment.

Providing lines of credit and financing to households and small businesses has been a challenge in the People's Republic of China for a long time. While the country's banking system provides a major bulk of corporate financing, many micro and small enterprises are having difficulties finding access to credit.

From seven micro credit companies in five provinces in 2005 this segment of the microfinance market has grown rapidly to more than 3,600 in all provinces and municipalities by end-2011. Micro credit companies predominantly focus on micro lending, targeting local farming households, sole proprietors, and entrepreneurs.

The reasons? Commercially sustainable microfinance is at an early stage of development in the PRC and only came into existence in 2004, when ADB partnered with the People's Bank of China - the central bank - to develop micro credit companies.  

Micro credit companies' lack of access to wholesale finance limits their growth and financial viability. In response to this challenge, ADB recently approved a Microfinance Wholesale Lending Facility in the PRC in the amount of CNY130 million. It will promote access to credit for households and micro and small enterprises, particularly those in rural areas.

Weakest link

"Financial services is one of the weaker links in the PRC. The primarily state-controlled banking industry serves the mostly state-owned economic sector which accounts for less than half of GDP in 2011," said Ying Qian, Director, Public Management Financial Sector and Regional Cooperation Division, East Asia Department in ADB.

While the banking regulator has taken a cautious stance on bank wholesale to micro credit company development, the market perception is changing. Commercial banks providing loans to micro credit companies have seen no defaults and are realizing the service is viable. While the wholesale credit market remains small, the key point is that something has begun.

"This segment of the commercial sustainable microfinance market is developing very well, and in the meantime, we are working on the regulatory framework to eventually help the micro credit companies convert to deposit-taking such as village and township banks," Qian said.

Slowly making progress

Developments are already evident. Micro credit companies have opened kiosks at local bazaars to provide timely short-term working capital for vendors, many of whom were women.

"We also visited micro credit companies which were concentrating their business on certain segment of the production chain, given their substantial local and industrial knowledge. They are also organizing themselves through associations to share experiences and adopt best practices," Qian said.

Qian says in the long-term, the aim is the successful establishment of a micro credit company wholesale lending market, with ADB's partner banks eventually developing a new niche product. By increasing resources to micro creditors and their borrowers, there will be greater participation of the private sector in economic growth, creating more employment opportunities and increased income. But most importantly, access to micro credit and other financial services helps the under-served  improve their incomes and withstand economic shocks.