I. Microfinance Definition

Microfinance, from the international prevailing point of views, is defined as the intended provision of credit services to medium and low-come clients in a small volume in a sustainable way. The fundamental traits that make microfinance different from other regular financial services from formal financial institutions and traditional poverty alleviation projects are that microfinance marks its particular target group on the poor or medium and low-come clients and providing financial services suitable for this group accordingly. The institutions or projects aiming to provide financial service products to this particular group and pursuit to achieve financial self-sufficiency with sustainability constitute the essential difference with ordinary development project and poverty alleviation projects with long term subsidies from government or donors.

According to the international prevailing theory, there are two basic elements that involving with various Microfinance models: first, provide financial services to a big amount of low-income (including the poor) clients; second, ensure the survival and development of Microfinance institution itself. The two elements, being connected and contradicted, consist of completed definitions of Microfinance; it can’t be called a completed or formal Microfinance without any one of the two elements. In essence, Microfinance combines the credit activities, which involving revolution of organization and finance, with poverty alleviation projects that reach to farmers and householders (or assistance that reach to householders).

The generally accepted as the effective microfinance projects started from the 1970-1980’s, and primarily operated by different financial institutions and non-government organizations. Financial institutions include: state-owned commercial banks, Microfinance Banks for Poverty Alleviation that set up on purpose, joint stock banks evolved from Microfinance projects that had operated by Non-government organizations and non-formal financial intermediaries such as credit unions, associations and credit cooperatives etc.

After over 20 years of practice, especially development in the recent 10 years, Microfinance grows from some of the regions in the world to nearly whole developing countries and some developed countries. In terms of scales, it has proved models stretching national wide; in terms of organizations, it has successful cases of microfinance operated by state-owned formal banks, cases of non-government microfinance organizations that achieving the dual goals of serving the poor and self-sufficiency, cases of pioneer professional Microfinance institution aiming to scaling up and successful examples of special banks established to respond to the special demands. However, microfinance is still a new thing as the history for successful and professional experience is not long while there is not high percentage of successful cases, which facing kinds of challenges and risks. As present, the ways to move Microfinance forward from piloted project to expansion for further institutional development is still need to be explored, and many questions are still pending to be answered by researchers, practitioners and policy makers.

II. Microfinance practices in China

(I). Summary
Poverty alleviation is one of the prioritized works to realize well-off society by Chinese government. Therefore, Microfinance is an effective tool to allocate the loans to reach the poor and ordinary peasants that corresponding to the country’s overall strategy.
1．Types
According to different visions, objectives, funding resource and organizations, microfinance projects are been divided into three kinds:
First, Microfinance projects that has vision of exploring the feasibility, operation modes and policy recommendation of microfinance services and poverty alleviation, with funds donated by international organizations or soft loans, and operating in the type of civil or semi-government and semi-civil organization. Second, microfinance poverty alleviation projects running with the requirements from government policy and operated by government authorities and financial institutions (Agriculture Bank), which aims to achieve the goals of poverty alleviation year 2000 and Poverty alleviation tasks of new century, taking the national public finance and poverty alleviation soft loans as the funding resources. Third, due to the requirements to support the “agriculture, countryside and farmers” policy by Center Bank (the People’s Bank of China), rural credit cooperative implement the householder credit loans and group guarantee loans under the cooperation with local governments with the funding resource of public savings of RCC and concessive loans from center bank.

2. Stages of microfinance development
Started from 1990s, microfinance was piloted successively in a small scale in some poor regions, which targeted to solve the problem existing in poverty alleviation by using the credit loans. Among those projects, some early good examples in a larger scale and with profession regulations such as “Poverty Alleviation Association” with China Academy of Social Science, Yunnan and Sichuan projects with UNDP, Sichuan Liangzhong and Shaanxi Ankang projects with World Bank, “Poverty Alleviation Association” with Shangluo local government in Shaanxi etc. According to the statistics, the above mentioned microfinance project had reached a business volume at 90 million yuan and had drawn the attention from the public and government authorities. For example, the “Poverty Alleviation Association” project which started at the beginning of 1993 to 1994 by the Academy of Social Science, in some extent, had reached the original policy goal and project objective that exploring the ways to solve the problem of “poor farmers are difficult to access to loans, low repayment rate of national issued loans and institutions providing loan services are difficult to survive”. “Poverty Alleviation Association” in Danfeng , the forth piloted program of the Academy of Social Science, was becoming the typical model to learn experiences from of the government-lead microfinance poverty alleviation projects that promoted by government in Shaanxi province. On the other hand, the project is still facing many theoretical and practical difficulties during the process of implementation, having challenges in operation and management; one of the county had been involved in the pilot had bad problems of arrears, fraud and delinquency later on. In addition, the project itself did not meet the requirements for scale economic development. However, then the sized is enlarged, the supervision capacity and project quality then face with harsh challenge. Now the pilot project is still on exploration.

According to the changes and requirements of our government’s poverty alleviation policy and the policy supporting “Agriculture, Countryside and Farmers”, until now the development of microfinance industry in our country has undergone three phases: Phase I: The Primary Stage for Pilot Experiments, which is from early 1994 till October of 1996. In this phase, the microfinance pilots are mainly conducting activities via the abovementioned type one projects. The obvious characters of this phase are: the funding sources mainly depend on international donation and soft loans without inclusion of governmental capitals. People were focusing on the exploration of the feasibility of the Bangladesh “Grameen Bank” style in China. The operation was on a semi-official or civil institution basis and attaching importance on the standardization of project operation. Phase II: Project Expansion Stage, which is from October 1996 to 2000. In this phase, the abovementioned two types of project are developing in parallel. The obvious characters of this phase are: The government promoted actively in terms of capital, manpower and organization and attempted to pursuit the target of poverty alleviation by means of microfinance the financial tool. Meanwhile, people paid more attention on the integration with international standards while implementing the type one projects. Phase III, Rural regular financial institution step in comprehensively with all kinds of projects evolving into the institutionalizing building stage, which is from 2000 till now. The RCC as a regular financial institution are testing and promoting comprehensive microfinance activities with motivation from the central bank, the People’s Bank of China. The obvious characters of this phase are: RCC being a formal rural financing institute steps gradually into microfinance experiments with fast advances and probably will become the main force of microfinance industry. Meanwhile , the abovementioned the two type projects are deviating from each other, good and bad are intermingled. Further on, the central government and the central bank are showing more cares on microfinance than ever, policy making is being studied.
Besides, starting closely from the 2nd stage, some urban microfinance experiments targeting on laid-off and low income communities in some regions began. However, this was just a very beginning with very limited size.
At first, China’s microfinance projects, with the main objectives of improving the efficiency of poverty alleviation funds and resolve the difficulties in poverty alleviation, were mainly developing in the context of CCPCC and the State Council’s poverty alleviation policies. Since the new century, microfinance has expanded its service scope from poverty alleviation to serve the vast households in countryside. However, the government’s microfinance poverty alleviation projects are still facing with certain problems and dilemmas in the mechanism and macro policies. Therefore, the arriving time of the national poverty alleviation loans have been postponed greatly, otherwise the arrived amounts are reduced greatly. The problem of whether the fist type project are complying with banking legislations are still unanswered now.
Motivated by the central bank, RCC’s microfinance projects were leaping fast in the year of 2002, although some RCCs were still showing reluctances. According to the statistics by the central bank, there were 30710 RCCs started microfinance throughout the country by the end of 2002, this figure amouts to 92.6% of the total RCC number. The two types had loan portfolio nearly one hundred billion RMB and 5986 households receive loans. 46884 villages were evaluated as creditworthy village, 1736 townships were evaluated as creditworthy township.

(II). The institution organizations
In general, there are four types of institutional operating Microfinance:
(1)　Special project institution (project office) set up by bilateral or multi-lateral projects to manage and operate the donated funds according to the requirements and regulations of donor organizations. Operating project include: UNDP , World Bank , UNICEF, Australian-aid Qinghai Project (during implementing) , Xinjiang Project by Canada CIDA etc.
（2）Civil institution( non-government ) to operate Microfinance for poverty alleviation. Project such as “Poverty alleviation Association” by CASS, Oxfam Hong Kong.
（3）Particular department set up by government to manage and operate concessive loans provided by government for poverty alleviation. Projects like: government poverty alleviation projects in Shaanxi, Yunnan, Sichuang provinces and Guangxi Autonomous Region.
（4）Microfinance Project directly operated by financial institutions. For examples:
Microfinance project by RCC in Luanping, Hebei province, Austrain-aid project which operated by local agriculture Bank after the expiration of the project, and householders credit loans and group guarantees loans provided by Rural Credit Cooperatives from 2002 nation wide.
Different kinds of institution may have different focus for development: in general, civil institution and donated projects will focus on social development and sustainability, while government operated project will focus on speed and scale of development and financial institution put more weight on sustainability and risk control.

(III). Method of project operation

At the beginning, Microfinance project in China initially intimated the model of Grameem Bank (abbreviated in GB) and so did the following project promoted by government. At the same time, some other international organizations and bilateral projects were finding the other ways out. In General, most of the microfinance projects for poverty alleviation are group collateral based, and emphasizing on cooperation and monitoring by group members. The typical way is the community members will form a group of 5 people ( not allowed for kin) comprising a center of 6-8 groups with leaders of group and centers that selected by group members. It is asked that the group members to help monitor and guarantee each other to form an internal system of monitoring and risk control. Every week (decided by repayment frequency: probably every three months, every half month or every month) , the leads of the center call for a meeting to check the funding implementation, issue and collect loans, deal with savings and sharing experiences amongst center members etc.
Besides, microfinance projects in China provide different type of loans such as individual loans, Village Banking and Credit Union. In addition, some of the poverty alleviation project only focuses on credit services, some are part of the comprehensive project of poverty alleviation and some are providing services of social and economic development besides credit services.
Microfinance projects operated by Rural Credit Cooperative don’t function as poverty alleviation. What they basically doing is rating clients into different credit class in their territory, granting loan size based on the credit class (various from 1,000 to 20,000 yuan ) and ask client for a lump sum payment. They implement credit loans based on the policy of “assessment once, apply loans when needed, balance control, revolving the funds” and standard of villages (towns) with credits. The group guarantees loans introduced by Rural Credit Cooperative was an adaptation based on the GB model and experiences from national programs.

(IV). Features of target group

Microfinance projects in China have their target group as the poor households in the poor regions. Many institutions attach their emphasis on women living with poverty as their primary beneficial group.
The government microfinance projects have their vision of fighting poverty and have national poverty alleviation concessive loans as their main funds resource, they emphasis on reaching the productive households as their target group. In fact they are targeting the officially registered poor households as basic target group without emphasizing on women. For instance, the microfinance project launched by Shaanxi provincial government set the whole registered poor households as objectives. Most foreign aided project and the CASS “FPC” projects, however, attach much emphasis on women as primary target. Banking institutions only require the projects (like the Australian aided project in Qinghai cooperating with local Agriculture Bank and the now completed RCC and Canadian DID cooperation Luanping project) to be carried out in poor regions without emphasizing the target customer to be poor households or poor women. The RCC projects have their target group on all those rural households who need loans and meet the credit standards. Their borrowers are mainly householders, usually males.

(V). Size of Development

Governmental microfinance poverty alleviation projects, according to the statistic by the Poverty Alleviation Leader Team Office, has launched in 605 counties in 22 provinces through China by August of 1998 and distributed 600 million RMB loans. Till the end of 1998 the capital invested amount to more than 1 billion RMB. The provinces with bigger governmental projects are Shaanxi, Yunnan, Sichuan, Guangxi Autonomous Region, Guizhou, etc. According to the statistics by the Agriculture bank, there were totally 25 billion RMB lent to poor households by the end of 2001 and the portfolio was 24 billion, benefited 1715 poor households. Till the end of August 2003, the portfolio supporting poor households was nearly 30 billion RMB.
The projects carried out by the United Nations, including UNDP, UNICEF, IFAD, WFA, ILO, UNFPA and World Bank projects, launched in 150 counties in 22 provinces and regions till the end of 1998 and the total capital was around 1 billion RMB according to statistics.
Bilateral institution and civil institution, including Australian AusAID Qinghai Hai Dong Project with capital size of 12 million RMB, Canadian CIDA Xinjiang Project with capital size of more than 3 million, Bangladesh GT and Ford Foundation supported CASS FPC project with capital size 15 million RMB; Hong Kong Oxfam project in Yunnan and Guizhou with capital size 12 million RMB, German GTZ Shan Jiang Hu project in Jiangxi province wih capital size 600 thousand RMB, and DID project with capital size 1 million RMB.
RCC large microfinance project started in 2002. According to the statistics by PBC, in the same year 96.7 billion RMB credit loans was distributed to rural households and the yearend balance was 75.47 billion RMB. There were 47.51 billion RMB Group Guarantee loan distributed and till the end of December the balance was 25.33 billion RMB. The RCC’s size was far beyond the foreign aid projects and governmental projects. Till the end of June 2003, total portfolio of RCC household microfinance and Group Guarantee loan had reached 160 billion RMB and took 23% of the total portfolio of agriculture loans. Over 90% of the RCCs throughout the country started household micro credit loans and Group Guarantee loans.

(VI). Financial activities

1. loan products
Loan size of first loan cycle set by most of government projects of Microfinance is 1000-2000 yuan and loan term is usually one year with installment payment ; the payment will be collected every 1-4 weeks and the yearly interest rate of the loan is 2.88~7.2%; the loan is based on group guarantees however, as the governmental projects were handed over to agriculture Bank, most of the clients changed from female to male, loan term changed to 1-3 years and the repayment frequency is every three months, half year and one year.

For most of donated and Civil organizational Microfinance projects, the ceiling of the loan size for first loan cycle is up to 400~1000 yuan, loan term is 3-12 months, flexible with lump sum payment and installment payment , which has the frequency of 1-4 weeks with interest of 6％~20％. Most of them are based on group guarantees as individual loans are not the exception.

Microfinance Project operated by Rural Credit Cooperative category the loan size from one or two thousand to ten or twenty thousand based on their credit rank of clients. (normally rank 3-4). The loan term varies from a few months to one or two year. In general, the payments are lump sum paid, having similar interest rate with other loans of Rural Credit Cooperative.

2. Saving product. At present, government projects and most microfinance projects that are funded by donors and civil organizations projects are all requesting compulsory savings which function as the substitutes of collateral by forming the group funds. Some projects require clients to save the amount of money as a certain percentage of the loan size that he or she get from the projects. For example: “FPC” of CASS requires: each client need to save 5% of the loan amount of money to Group Fund when borrows a loan, and every week he or she need to save another 1 yuan or 0.1% of the loan amount of money into the fund. In the practice of Xinjiang project of CIDA, they set the formulation between the amount of savings and it of loan, which the percentage is 1：10、1：8、1：6 or 1：4，and will be requested less as your loan amount grows. Although Rural Credit Cooperatives encourage the savings from clients, there are no such requirements of linkage between savings and loans for Microfinance projects.

3. Financial management
There is no big different of microfinance and other loan business in financial management for Rural Credit Cooperatives. The system of financial management of RCC is relatively completed; others have been taking many steps to move it forward. At the initial piloting stage of Microfinance before year end of 1996, nearly all projects put their emphasis on project implementation, which means focusing on the clients’ identification and advocacy of project to ensure the high repayment rate and loans reaching the poor. There were no completed accounting system and financial reporting system, no standard and combined balance sheet and income statements, no standard loan portfolio and business progress report in place for most of Microfinance projects. At the primary stage when Microfinance project served the purpose of poverty alleviation and social development, most of the staffs were lack of the financial knowledge having some background of social development only. The accounting staffs were not able to meet professional qualification. Comparatively, the Australian-aid project in Qinghai, started from 1996, is capable of financial management and operation as it is implemented by local Agriculture Bank
Since 1997, when government start piloting and spreading up projects, Microfinance is supported by local financial institutions (usually local Agriculture Bank or RCC) to form and improve accounting system and financial management system. “FPC” of China Academy of Social Science, has established accounting system and financial management system under the training provided by international and national Microfinance experts. They produced combined financial statements every month and make financial ratios analysis according to the financial ratios introduced by international organization SEEP.

4. Sustainability. So far, due to the ceiling limitation policy for interest rate in China, microfinance institution could not follow the global principle of charging higher interest rate than commercial rate, and operate their business with the calculated interest theoretically. However, it does not mean that microfinance in China do not have the goal for sustainability. In projects where RCC are operating professionally with high quality of loan portfolio, the win-win solution could be reached for both RCC and householders. In addition, after years’ experiences, there are some models that have reached operating self-sufficiency. For example, in three piloted counties by “FPC” of China Academy of Social Science, the association at grass root level (county, township level) began to reach operational self-sufficiency by the end of 1997, which means the interest income could cover the operational cost. At the end of 1998, the operational self-sufficiency ratio (interest income divided by capital cost and operational cost) in counties is in the mid of 120%-150%. Besides, the Australian-aid project in Haidong ,Qinghai has reached operational self-sufficiency as well by appropriate interest policy, strict cost control, improving working efficiency and ensuring quality of portfolio.
III. Hints and Policy Study of the Microfinance Projects
(1) Hints
Looking back to the experiences gained for the past 10 years, we can learn at lease some hints and lessons as follows:

1. Microfinance’s life force has just been shown, yet there is no medium or big scale Microfinance project. The piloted projects in China has proved its strong ability of survival both in theory and in practice for poverty alleviation. It served the poorest households and farmers in rural and distant areas by benefiting most of them with small loans. In addition, some of projects had reached a certain outreach and scale. As long as we are with serious attitude and strict management, microfinance project could be proved with high repayment rate and fast funding turn over ratio. It is also proved in practice, that microfinance could reach self-sufficiency and sustainable if with enable macro environment, clear vision and appropriate methods; in which one of the basic precondition is to have fairly same interest rate as commercial interest rate. As all of the projects in China are soft loans or donations, the average capital cost is fairly low (normally no higher than 3%)，in order to reach sustainable , the actual interest difference should be over 6% -10%. However, all the projects in China are still relying on technical support externally and have not counted that into operational cost.
2．Three kinds of projects are facing with different issues respectively. The history of development of microfinance is short, problems may exist in many ways which need to be further discussed and investigated. The three types of projects have their own problems. In author’s opinion, briefly speaking at current stage the problem of first type is the legal validity that needs to be solved for longer development; while the main problem of second type is ignoring the goal of sustainability; the third type is the willingness to take initiatives and operate the project seriously to ensure the quality of project implementation. The common problem of the three types is how to breakthrough the bottleneck of low level of project implementation and financial management. According to the current policies set by the government, the type one projects are using non-governmental funds for poverty alleviation purpose without absorbing social savings, therefore they are allowed to charge flexible loan interests and fees as short term projects. However, when it comes to the long term existing and developing institution conducting banking activities, the question of legal compliance will then arise.
For the type two projects, namely the government oriented ones, basic objectives are realizing the tasks of government to alleviate poverty and they attempt to realize “alleviating to the doors of poverty” and resolve the difficulties in repaying process. The objective and measurements to establish projects and keep the institution sustainable running were nevertheless not considered. Measuring by the criteria of “sustainability”, these projects in a strict sense can not be called standard or exact microfinance projects. The more proper name shall be poverty alleviation projects. Besides, the mechanism of such project varies often and do not meet the evolving situation, the insufficiency of professional team building and the emphasis on subsidized interest rate policy disqualify these projects for sustainable development. Learning from the past unsuccessful experience of the economy’s vulnerability and the problems popped up in the rural cooperative foundation’s development, the central government has clearly defined that the lending relationship in this kind of projects shall be between the Agriculture Bank and the rural households, while the governmental “FPC” or “workstation” shall be a kind of intermediary service provider. As a matter of fact, however, the governmental microfinance projects currently have no choice but to be operated jointly by government institutions and the Agriculture Bank. For the time being the government institution and banking departments of Agriculture Bank are having “two interfaces” with lots of wrangling cases. Therefore, whether the two entities can look in a long run and coordinate with each other become one of the key factors to the project’s success. The practices at each region also clearly showed this point. However, the cut-throat disadvantage of this joint management by Agriculture Bank and government is that the responsibility, rights and interests are vague, in dissymmetry and hard to supervise. This may finally result in a huge drop of loan repayment rate and cause huge waste and loss to the national treasure. From a long run, if these projects do not change their mechanism and management system, the three objectives of direct distributing poverty alleviation funds to the poor, high repayment rate and institution’s sustainable development will be at stake. Besides, the issues of “commingled enterprise with government with unclear functions and responsibilities” in the system, “Iron rice bowl, Communal Pot” in the mechanism and demand of strengthening management and staff capacity general exist in the abovementioned two types of projects. The SOE reform towards “separate government functions from enterprise management, clearly define ownership, clearly set powers and responsibilities, manage in scientific ways” shall be followed, measure shall be taken to improve each level’s staff’s awareness and sense of responsibility, the professional team building and capacity enhancement of financial managers and staffs shall be enforced, the management and supervision on operation and financial shall be strengthened, effective motivation and control mechanism shall be built in order to resolve the issue of the governmental projects’ fund source for operational cost and an independent financial accounting system.
For the type three projects and those project cooperating with governmental institutions (i.e. the second type of government oriented projects defined herein), the first the key to success is to rectify the knowledge and ideas on conducting microfinance business. Financial institutions starting microfinance business shall base on their true will and initiatives instead of regarding it as an obligation assigned by the upper governments. Besides, the target customer’s characteristics and needs shall be met when designing and running the financial business and products, instead of copying the old banking models. Second, avoid doing in a haste without success. Third, the relationship with local government where the microfinance project is running shall be properly maintained in order not to step into the wrong way which the second government oriented projects did. Fourth, the issues of internal organization structure, personnel and policy measures, including the low management level and capital quality of some credit cooperatives, shall be properly resolved.

(II) Some thoughts on the policies
In order to drive China’s microfinance into a healthy path for development, the following general suggestions on the policies are hereby submitted through many years of pilot experiments and research on China’s microfinance.
1. Employ microfinance’s functions for banking service, anti-poverty and providing vast farmer with social service. Microfinance is a realistic and effective tool with high potential to fight against poverty in China’s countryside. Therefore the policy makers in the government shall place it in an important tactic position. Base on our country’s current status of resolving the warmth and belly issues, we need to expand our service targets and markets, provide effective credit service according to differ customer demand in different regions, piloting simultaneously the urban microfinance project to explore ways for providing banking service to urban micro and small business. Various microfinance methods shall be tested instead of limit of some certain loan method, thus to meet different customer and different region’s need.
2. Strengthening regulation and seeking proper ways of supervision. We need to regulate and support the microfinance pilot projects, explore on setting appropriate rules and guidelines and seek proper supervision method. As long as the microfinance activities are conducted in a “loan without saving” way by various community or organizations, there should be legal permit and open attitude now. Of course, we also need to set qualification requirements and regulate them to start a benign competition environment and be strict with institutions that absorbing social savings. In case the project institution has a long run development, the government institution per se shall not be the operating entity. Different policies shall apply to different existing projects according to actual situations. Those qualify for the standard after adjustments, retrofitting and perfections shall be allowed legally and supported financially, so as to keep China’s microfinance business development in the healthy track. Also the microfinance industry shall be integrated to the general plan of our nation’s banking system reform.
3. Flexibility on interest rate. Whether bigger flexibilities can be granted for lending is one of the key factors for microfinance project’s sustainable development. From now on, we shall consider canceling or canceling gradually the concessive loan for poverty alleviation and broaden the fund resource channels in a more active manner instead of relying on donation and soft loans. The pilot projects using commercial capitals shall be increased.

4. Training and technical support. We shall constantly conduct trainings on both the management level and grass-root level and provide the projects with effective technical supports. The social education on credit sense and the building for good credit environment shall be emphasized.
5. Realize the change from subsidized microfinance to sustainable microfinance in terms of guiding theories, policies and operation management. In China, the key to the change from subsidized microfinance to sustainable microfinance is the change of business strategy and business objective, or the purpose in other words. We need to shift from political target oriented to a comprehensive movement of economic, political and social objectives, we need to alter the governmental activities to market activities. During these two different stages, the policies and functions of the government are totally different. Accomplishing political mission will rely on the government’s vast input on capital, personal and organization, institution and propaganda force, while realizing a economic objective will rely on the government’s relevant policies. These two things can not be mixed up.
As a banking tool microfinance have the functions of poverty alleviation and farmer supporting with self-sufficiency financially at the same time. The hidden precondition is that economy shall be the vital target. Microfinance project is neither pure government activity nor pure market activity, it relies to certain extend not only on donations or national favorable policies, especially during a starting stage, but also on a wholesome market. The importance of sustainability or self-sufficiency is to transfer a non-market issue into a market one. The setting of a sustainable objective is guiding the MFIs to shift from taking funds from government or donation into digging gold in the market competition. Therefore, the dual purpose of microfinance of poverty alleviation and self-sufficiency have decided that it must make use of the market mechanism instead of totally depending on the market mechanism.
In general, there are many differences between China’s microfinance experiments and the microfinance activities abroad, including the closest South Asia and SE Asia large scale MFIs and projects, in the respects of timing, size, ideas of design, operation entity and the policy circumstances. China’s reforming on political and economic mechanism, changing in the field of economy and banking and the switch of local government’s duty and powers all give unique traits to the policy circumstances where China’s sustainable microfinance poverty alleviation is running. However, we shall nevertheless study, research and import carefully the international successful experience and failures of microfinance.
From international microfinance history and trend and the progress of China’s microfinance practice as well as the analysis of financial service market demand on each customer sector, it can be expected that in the near future, China’s microfinance industry may step into the stage of institutionalizing. The obvious sign of this shall be that government is having clear policies toward microfinance with financial institutions joining in large scale; the financial service functions are emphasized at the same time as poverty alleviation and farmer supporting functions are emphasized; service capacity of MFI are being strengthened; MFI’s standard financial management system and ability of risk control are being improved; microfinance’s loan capital source are changing gradually from mainly relying on external aids and political capital into a considerable percentage of such capital is from local financial markets.
We think that until now the early pilot microfinance projects looking up to international standards and using non-government capital in the form of half-civil-half-official institutions have played the roles of pioneer, model and inspiration to China’s microfinance industry. While the government oriented projects and RCC microfinance projects have made unforgettable contributions to large scale poverty alleviation using loans for poor households as well as the vast farmers. However, as long as proper policy environment is available, the regular banking institutions may become the major force of microfinance, meanwhile each unit practicing microfinance will find their places in competition and cooperation, and the biggest beneficial will be the loan clients. We can say that the government’s macro policies will play essential or even vital roles in order to create such situation. However, it shall be pointed out that even though the regular banking institutions might really become major force of microfinance development (by far their operation history on microfinance is too short to give a conclusion), their main target of service as shown by international practice will not be those poorest households with productivity. Taking account of this consideration, those civil non-formal bank MFIs have their long term mission for poverty alleviation and a broad space for activities.