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Microfinance to aid targeted poverty alleviation

OUYANG ZHIGANG and ZHOU CAIYUN | 2018-10-18 | Hits:
(Chinese Social Sciences Today)

Growers dry dendrobium (a huge genus of orchids) flowers at a planting base in Xinqi Village of Zhijin County, Guizhou Province, on June 12, 2018. China has set a goal to eliminate poverty by 2020, leaving no one behind. Photo: CHINA TODAY


Eliminating absolute poverty in rural areas, which China is on course to achieve by 2020, is an inevitable move in the nation’s building of a moderately prosperous society and an essential requirement for socialist common prosperity. In recent years, China has seen extraordinary success in poverty alleviation through its unremitting efforts. In 2017 alone, some 13 million people were successfully lifted out of poverty. However, the situation remains grim, with more than 30 million people still living in poverty in China.

As the 19th CPC National Congress report stated, “China will continue to implement targeted poverty reduction and alleviation measures to ensure that by the year 2020 all rural residents living below the current poverty line will be lifted out of poverty and that poverty is eliminated in all poor counties and regions.”

Financial stimulus is an important approach in the strategic scheme of rural poverty alleviation. However, given that the financial markets in poor areas are often troubled by market failure and insufficient market development, policy-based finance or commercial finance can’t meet the needs, so microfinance is expected to be the most effective anti-poverty tool.

According to statistics, by the end of December 2017, a total of 249.7 billion yuan in micro loans had been issued throughout the country, supporting 607.44 million households. The results are encouraging.


Concrete results
The rapid development of microfinance and the sustainable and healthy operation of financial markets in poverty-stricken areas are conducive to increasing farmers’ income, improving employment and optimizing local socioeconomic structure.

The goal of microfinance is to support the poor population and develop the rural economy by providing sustainable financial services for the poor or mid- and low-income groups. According to the 2017 case study on microfinance, 54.5 percent of the loan-receiving households surveyed in Yongshun County, Hunan Province, said their family income has gone up with the aid of microfinance, among which those with an increase of more than 5,000 yuan account for nearly 70 percent. Similarly, in Zuoquan County, Shanxi Province, 69.7 percent of respondents increased their household income due to microfinance, with 40 percent of them seeing their income rise by more than 5,000 yuan.

Microfinance can also support farmers, rural youth, women, returned migrant workers and the disabled in poverty-stricken areas to find jobs and start their own businesses, raising the level of employment and entrepreneurship.

Taking Jiangxi Province as an example, the Jiangxi Rural Commercial Bank issued 6.7 billion yuan of micro loans for youth entrepreneurship in 2017, creating jobs for 41,400 people in poverty-stricken areas. Due to the low educational level of most poor farmers, it is difficult for them to adapt to the work of modern enterprises. By providing credit support to small and medium-sized enterprises in poor areas, more employment options for the local population can be presented.
At the same time, the development of microfinance can promote the development of featured industries in poverty-stricken areas, such as leisure agriculture, the ecological industry, rural tourism and forest tourism, translating natural resource advantages into industrial and economic advantages.

As China has stepped into an era of industrialization, informatization, urbanization and agricultural modernization, resource constraints are more prominent. Poor areas must rely on science and technology investment, embarking on the path of endogenous growth, through building an inclusive and efficient microfinance system.


Policy advice
We need to innovate with microfinance systems and build a diversified financial system to meet the differentiated financial needs in the vast poor areas.

To start with, moderately increasing the distribution of rural credit cooperatives in poor areas is key. In recent years, the reform of the rural financial market has been deepening, but small and micro financial institutions, the main force for supporting agriculture, have seen their numbers drop from 27,101 setups in 2005 to 1,125 in 2016. The drastic reduction in microfinance institutions will keep many financial services out of reach for remote rural areas, which will make it difficult for microfinance to aid targeted poverty alleviation.

In this light, we should encourage the establishment of new types of rural financial institutions to provide a supplement to the existing formal channels of rural financial services. State-owned banks, joint-stock banks and foreign-funded banks could be allowed to set up village and township banks and small loan companies in poverty-stricken areas to expand sources of funding.

In the meantime, it is essential to promote the innovative development of agricultural insurance. We should continue to expand its coverage in poverty-stricken areas, tapping the full potential of the agricultural insurance market based on local conditions.

We should innovate with the microfinance fund supply mechanism to strengthen the endogeneity of targeted poverty alleviation. After all, abundant funding is an important prerequisite. Therefore, it is necessary to test out various approaches and expand the sources of funds. One such approach is to advertise how financial poverty alleviation funds “teach people to fish.”

That said, the government should actively guide and regulate various types of social capital and private funds to participate in financial poverty alleviation projects. Agricultural financial institutions can try to issue small-value financial bonds, and the funds raised can be directly used to support the improvement of the ecological environment in poverty-stricken areas or for the development of featured industries.

It is also advisable to set up venture capital funds. Financial institutions can jointly set up investment funds with municipal and county governments, social investment entities and other departments, with the focus on supporting migrant workers to return home to start their own businesses and other front-end enterprises in the initial and growth stages.

We should also innovate with the microfinance services mechanism, accelerate the construction of modern financial systems in poverty-stricken areas, and improve the management and operation of financial institutions. To start with, introducing a competition mechanism could help improve the quality and efficiency of small and micro financial services.
For a given project, many small and micro financial institutions can be invited to participate in the bidding and tendering before making the final decision. Due to the uncertainty of agriculture, the financing demands coming from production and operation tend to be high frequency, long maturity and high risk, calling for financial institutions to constantly innovate products to improve the quality of small and micro financial poverty alleviation.

In terms of interest rates, to a certain degree, financial institutions can be allowed to fluctuate interest rates on deposits and loans while heeding national regulations, thus enhancing the freedom of operation of agriculture-supporting small loan institutions.

With the wide application of computers and the internet, small and micro financial institutions in poor areas can offer new services such as government-bank-insurance cooperation, online deposits and loans, and electronic payment.

Furthermore, innovation in the microfinance supervision and management mechanism could ensure security in targeted poverty alleviation. In the past, the rural financial market has been haunted by moral hazards. For example, some managers of small and micro financial institutions lend money to people with certain backgrounds, making it impossible for credit funds to reach low-income people, thus reducing the accuracy of financial poverty alleviation. And some farmers use loans for gambling and squandering, so that the bank loans cannot be repaid on time.

The above phenomena are eventually what lead to the difficulty in connecting farmers’—especially poor households’—demand for funds with the funding supply of financial institutions. This requires further supervision of small and micro financial institutions.

Measures must be taken to review loans regularly and to carry out follow-ups in a timely manner. An accountability system for loans should be formulated and implemented.

At the same time, the problem of information asymmetry should be solved to the greatest extent and a dynamic and continuous credit rating evaluation mechanism should be put in place.

Finally, to encourage small and micro financial institutions in poverty-stricken areas to expand their business, regulatory departments should innovate preferential policies for poverty alleviation funds, properly relax supervision, and moderately reduce the requirements for such aspects as risk provisions and write-offs of non-performing and bad debts.


Ouyang Zhiguang is a professor and Zhou Caiyun is an associate professor from the School of Economics and Management at East China Jiaotong University.

(edited by YANG XUE)