MANILA, PHILIPPINES - The People's Republic of China (PRC) needs to reform its rural financial system if it is to tackle poverty in the countryside and allow agriculture and local businesses to play a strong, long-term role in the domestic economy, says a new book from the Asian Development Bank (ADB).
Rural Finance in Poverty-Stricken Areas in the People's Republic of China, launched this week, recommends the repeal of laws that hinder the establishment of a competitive financial market, including private banks, in the countryside. It also suggests new laws are needed to support microcredit institutions, financial cooperatives, and informal finance, which are key to meeting financing needs in rural areas.
Although the PRC has seen rapid reform in its financial sector in recent decades, reform in the rural financial sector has lagged, exacerbating the economic gap between rural and urban regions.
"It's essential to nurture rural financial institutions in PRC so that farmers and local businesses have access to investment and finance and can contribute to local development," said Ying Qian, Lead Professional for regional cooperation in ADB's East Asia Department, and one of the editors of the book. "A new rural financial system will make sure that all citizens share the benefits of the country's rapid economic development."
Rural customers are best served by institutions that clearly understand their needs and can closely monitor borrowing. Until now, demand for rural finance has largely been met by local branches of large urban banks at high cost and high risk. Practices that work well in PRC's cities often do not work as well in the vast countryside where individuals, small businesses and farms need different kinds of financial products and may have fewer or different assets.
Microfinance institutions, as well as the many informal financial outlets that serve rural customers such as Buddhist temples, provide competition to local banks and, being more flexible can often better meet local financing and investment needs.
"Formal local financial firms, such as cooperatives, meet local needs with local money. Meanwhile, rural lending shops can provide lower cost services by channeling funds through grassroots providers such as credit cooperatives," said Mr. Qian.