ADB TA to Help Improve Financial Services to Rural Poor in Two PRC Provinces

MANILA, PHILIPPINES (1 March 2005) - ADB will help improve and expand financial services to the rural poor in underdeveloped areas of Guizhou and the Inner Mongolia Autonomous Region (IMAR) in the People's Republic of China (PRC), through a technical assistance (TA) grant approved for US$1 million.

The TA, from the Poverty Reduction Cooperation Fund, financed by the Government of the United Kingdom, will restructure and improve the regulation of existing rural credit cooperatives in the two regions, and promote the development of microfinance institutions as an additional mechanism for delivering rural credit.

In IMAR, one of the PRC's largest provinces and autonomous regions, rural households account for 64% of the population and about half of the rural counties are classified as either national or regional poverty counties. In Guizhou, a mountainous agricultural area and the poorest province in the PRC, 87% of the population lives in rural areas and poverty incidence is three times the national average.

"Over the last three to four years, IMAR and Guizhou have seen rapid economic growth, fuelled mainly by nonagricultural sectors such as resource-intensive industries, small- and medium-sized enterprises, and tourism," says Ying Qian, an ADB Principal Financial Economist.

"To sustain this growth and ensure that it benefits the poor, a range of affordable and sustainable financial services must be made available to the rural sector," adds Betty Wilkinson, an ADB Microfinance Specialist.

Rural credit cooperatives are the only financial institution with a physical presence in many rural areas. However they are plagued by unclear ownership structures, poor corporate governance, administrative problems, and poor financial performance. Several attempts at reform have proven ineffective.

In 2003, the Government piloted a program to clarify the ownership structure of these cooperatives and transfer the administrative responsibilities over them from the China Banking Regulatory Commission to the provincial governments. This latest reform program has generally shown positive results.

The Government started to encourage microlending as an alternative source of financing in 1994. Until recently, microfinance was restricted to a series of pilot projects, limiting the options for growth and ongoing institutional sustainability.

The TA will be implemented through two separate components respectively for IMAR and Guizhou Province, each responsive to the particular needs of the concerned regions and unique timing of reforms.

Generally, the TA will ensure the adoption of suitable institutional restructuring strategies for various types of cooperatives as well as appropriate regulatory and supervision systems for the restructured ones.

It will also develop a sound policy and institutional framework for microfinance and microfinance institutions, to better inform policymakers and the public about the importance and feasibility of microfinance. In particular, the Guizhou Government will adopt a bidding process for licensing of microfinance institutions.

The Government will contribute $440,000 equivalent toward the TA's total cost of $1.44 million. The IMAR Financial Office will be the project's executing agency for the component in IMAR, and the Guizhou Provincial Rural Credit Cooperatives Reform Office for the component in Guizhou. It is expected to be completed around November 2005.