Microfinance, or small loan programmes, has changed some poor people's lives, but there are still policy and legal barriers dragging it off the fast-growth track, according to international agencies and experts.

"There is not a complete and legal framework in China to allow microfinance to operate efficiently," Laure Anquez, administrative co-ordinator of Planet Finance, a France-based non-governmental organization, told China Business Weekly.

Ren Changxin, a researcher in China microfinance training centre with the Chinese Academy of Social Sciences, agrees.

"There is currently no law referring to microfinance. All microfinance businesses need to be legally brought into the areas of financial regulation and supervision," he said.

Non-governmental microfinance organizations are not financial institutions, he claims. China Banking Regulatory Commission (CBRC) does not authorize microfinance operations in China.

Microfinance programmes are allowed to be operated as an independent project or as a foreign capital assistance programme.

International microfinance institutions have to act as outsider agencies rather than real participators, which is a main factor blocking the development of microfinance programmes.

However, there are encouraging signs.

A draft law that allows China's non-banking institutions to be engaged in microfinance projects is currently under approval, State Council officials on poverty alleviation and elimination told Xinhua News Agency.

China also decided to write "to actively and sustainably develop microfinance in China" into the country's law on poverty alleviation and elimination, according to Xinhua.

However, the main problems are on how to regulate and supervise the microfinance business and which government departments should undertake the task.

CBRC does not have enough power to do it because the number of microfinance institutions in China is huge and their locations are dispersive, Ren added.

China introduced microfinance mainly to eliminate poverty. It is very important to balance the roles of local government and microfinance institutions in a bid to achieve the goal, experts said.

In principle, the government's function is to support the development of microfinance rather than to interfere. But some local governments never really help, while others are even worse, they tighten the control over the microfinance practices to minimize the loan risks, or even take administrative measures to manage the financial activity.

Now, governments may promote the microfinance programmes with the help of China Postal Savings and Remittance Bureau and the Agricultural Bank of China.

"The government should fully realize the rural needs to avoid pitfalls of the past and get a clear means to operate microfinance on a commercial basis," said Ren.

In fact, government plays an important role in developing microfinance.

Ren said that governments should become involved in regulatory framework that would enable microfinance institutions to better help the poor.

Another factor that hinders the development of microfinance in China is the fixed interest rate.

More and more financial institutions participate in microfinance projects. Citigroup is the potential partner of the Planet Finance.

"In fact, microfinance is not only a tool to assist with poverty alleviation, but it can become a kind of commercial activity with more and more commercial groups joining it," Anquez said.

However, there is a dilemma between financial institutions and poor people because of the high interest rates.

"Poor people cannot afford the high interest rates, which is an important way to fend off risks by financial institutions," Ren explained.

Anquez said that financial institutions allow poor people to pay interest rates once a week or constitute collective group to pay interest rates, which is easier for the poor to make the repayment.

"A flexible interest rate system should be set up, and we want higher interest rate to countervail high potential costs," said Pinako Kunisawa, information manager of Planet Finance.

Providing financial services to the poor is pretty expensive, especially in relation to the size of the transactions involved. Loan officials must visit the clients' home or work place to evaluate their credit.

"We must train professional microfinance workers, communicate with government financial institutions and poor people and develop technological system. All this requires money," said Kunisawa.

Fortunately, more and more companies are addressing China's rural need for technology through microfinance projects. They develop technologies that enable loan officials to share information and provide opportunities for capacity building through the Internet. Poor people can also use these technologies to get help on borrowing money and eliminating poverty.

"Microsoft is our partner to develop the information and communication technology system, with which microfinance organizations can improve efficiency and provide more affordable loans to the poor," said Kunisawa.

With help from more sectors, microfinance institutions may reduce the costs and ensure loan quality at the same time.

"However, until recently, governments generally felt that it was their responsibility to get loans for the poor," said Kunisawa.

She added that the governments believe that microfinance institutions should not be allowed to operate the microfinance business that is, in essence, a financial activity. They think NGOs cannot do microfinance directly, which hinders the efficiency of microfinance operation.

Now, the major fund provider and manager in some microfinance projects in China are rural credit co-operatives.

"It is necessary to foster and establish a framework to enable NGOs to operate independently to enhance the efficiency," Ren said.

Most microfinance programmes started in China for poverty alleviation and financial sustainability as well. When they tried to achieve these goals, they found some projects lack proper strategies.

"Without proper strategies, microfinance projects cannot be sustainable. They would only be regarded as a way to help the government alleviate poverty rather than as standard practice of microfinance," said Ren.

Microfinance programmes provide a range of services, including lending, savings, and insurance for the poor who lack access to traditional financial institutions. Such programmes began in China 11 years ago.

"Due to its short history, few people pay attention to microfinance," said Anquez, "Nowadays, although about 28 million Chinese people still live in poverty, they do not know of microfinance."

The UN General Assembly designated 2005 as a year to promote microcredit. It is expected to improve people's knowledge about microfinance and provide a good opportunity for China's microfinance practitioners to participate in the global plan to accelerate the its development.

Yang is an intern with China Business Weekly.

(Business Weekly 08/24/2004 page4)