Microfinance Institutions in China: Development and Challenges to Their Sustainability

Abstract

Microfinance is a hot topic in China, where the main actors are facing challenges.

Microfinance Products and Service Quality in Financial and Quasi‐Financial Institutions in China

“…Britzelmaier et al . () also noted that these institutions are very active in rural areas. Hence, MFIs may find commercial banks to be serious threats to their market share and sustainability.…”

“…One possible explanation for the high interest rate charged by microcredit companies is because MCCs can only rely on the original registered capital for loan disbursement, in accordance with the existing policies in China. Since credit is the only business, and MCCs are forbidden from taking public deposits (Britzelmaier et al ., ; Jiao, ), the MCCs have to depend on the revenues generated from the interest charges for the loans. Moreover, the MCCs are mainly serving urban‐rural areas, where the operating costs are high.…”

“…However, most of the institutions in this study provide loan amounts far greater than what was recommended by Du (). Given that the goal of the welfarists’ microfinance approach is to serve poor clients, the provision of microcredit loan amounts of up to RMB 10 million and 60 million, respectively, by Haixin Rural Microcredit Company and Runyuan Microcredit Company seems to be alarmingly high, and may even be considered extra‐legal, in that MCCs are not subject to strict requirements of prudential regulation (Britzelmaier et al ., ).…”

“…Group lending is costly to implement. The various costs include costs to maintain the regular center meeting system (Britzelmaier et al ., ), peer monitoring systems, and opportunity costs to attend center meetings, as well as high transaction costs and risks, particularly when serving the poor in remote geographic regions (Chan and Abdul Ghani, ). Since group lending is costly to implement in the city and urban areas, MFIs began to focus on giving individual loans rather than group loans.…”

“…Similarly, the role of microfinance is recognized by the Chinese government (Byström, ), leading various financial and quasi‐financial institutions in China to offer microfinance to individuals. Traditional commercial banks downscaled their microfinance operations and new forms of MFIs came into being (Britzelmaier et al ., ). Foreign entities also enter the Chinese market through collaboration with a local partner to capture a slice of the lucrative microfinance business.…”