From modest beginnings in internationally funded programmes run by non-government institutions, the concept of microfinance has been spectacularly successful in attracting Chinese government attention and rapid expansion. But this is not quite the good news that it might appear. For many government-run replication programmes have distorted or omitted vital elements of effective microfinance delivery.

Microfinance was introduced in China in the early 90s, through the Rural Development Institute of the Chinese Academy of Social Sciences, which pioneered a Grameen style approach in its Funding the Poor Cooperative programme, with grant support from the Ford Foundation. Soon after, it was taken up by the United Nations Development Programme and its Chinese implementing agency, the China International Centre for Economic and Technical Exchange (CICETE).

Early successes proved so enticing that the government Poverty Alleviation Bureaus of many provinces began to establish their own programmes. By the end of the decade, these had largely replaced the previous government system of low-interest Poverty Alleviation Loans, which had frequently been used as investment funds for local governments, and were very seldom targeted to poor households.¹

Today, over 95% of microfinance funding comes from government agencies. The CASS Rural Development Institute reports that last year saw investment of USD 30 million from internationally sponsored programmes, compared to USD 775 million in government funds.

Some former non-governmental programmes have even enveloped into government schemes. Take the example of the Malipo and Jinping County programmes in Yunnan, the sites of southwest China's first pilot projects. During its earlier stages, the Malipo and Jinping County activities, particularly those piloted by the United Nations Development Programme and Grameen replication funders, were closely appraised and lauded. Numerous sources testify that the Malipo Programme was, at least until a couple years ago, the most successful microlending scheme in Yunnan. It became one of the Foreign Ministry's 'pet programmes', according to senior CICETE programme officer, Bai Chengyu. This, (and the fact that Jinping and Malipo are assigned to the Foreign Ministry as counties where they are required to help alleviate poverty) helps to explain why so much international financial and technical aid poured into these counties: not just from UNDP, but also from, Développement International Desjardins, the Grameen Bank, the International Fund for Agricultural Development, and United Nations Population Fund.

After receiving praise from a national level delegation from Beijing, the Malipo and Jinping schemes were dubbed 'models' in 'Yunnan's most Poverty-Stricken regions.' The provincial government started its own scheme, funded by the Agricultural Bank of China, into which the internationally funded projects were merged, and the resulting programmes have changed for the worse.

Many of the core elements of sound microfinance have been dismantled: stringent targeting of the poorest, frequent loan repayment intervals, mutual assistance groups, regular training sessions, women borrowers. Now only 50% of the borrowers are women and many men openly take out loans in their wives' names. Borrowers are not effectively encouraged to follow through with their 'solidarity group' guarantees and they rarely meet for group activities or income-generating training. Instead of every twelve days, repayments have fallen to an average frequency of three months.

The Funding the Poor Cooperative programme had a similar experience when the Shaanxi government took over microfinance operations in Danfeng County. FPC could do little but retire gracefully and wish the local programme recipients good luck.

The Canadian government funded programme in Xinjiang, implemented by the Canadian Cooperative Association, has also been beset by difficulties since the Xinjiang government came in with a low-interest scheme of its own. The attempt to develop and institutionalise a financially sustainable model of village cooperative banking has been seriously undercut by the availability of much cheaper, government loans.

Unfortunately, these are not isolated examples; many government micro-finance programmes are expanding fast without adhering to basic principles.

The senior directors of the Malipo programme lament the fall in quality of their operations and hope to leverage the separation of government funds (delivered through the Agricultural Bank) from the internationally funded sites. Perhaps then, they hope, the international projects can recover some of their early potential. But, notes the programme director, this is no easy task when their original UNDP training tells them one thing, and government guidelines another. Malipo awaits direction from Beijing.

Toshihiro Tanaka, 'poverty alleviation focal point' at UNDP in Beijing, believes, however, that 'the Malipo programme wants to work with the local government.' He adds that the original programme was not, in any case, as successful as was first made out. Yet the glossy, 1999 Annual Report for the Jinping and Malipo programmes claimed impressive loan repayment rates of up to 96%. If UNDP staff disagree with their own annual report, whom to believe?

UNDP headquarters appears out of touch with the realities of operations in the field, where programme staff await guidance from the top. Given this, perhaps it is wise that UNDP/CICETE have now narrowed their scope from 48 project sites nationwide to a mere four, selected as pilots to attempt to demonstrate real financial sustainability. But what about the other 44? A lot of poor farmers will be disappointed when their microfinance provider folds.

Some international donors believe that macro policy reform is needed before microfinance operations can be usefully expanded. Leading experts argue that, given stringent government restrictions, it is impossible at present to establish a true microfinance institution with market interest rates.² The current welfare mentality of the state simply does not fit with international standards of sustainable microfinance.

But, pending policy change, 'those programmes that have found the means to reach the poor, and cover their costs should stay busy doing good work', according to Gao Xiangyun, Director of the Yilong County (Sichuan) programme, one of the lucky few chose to retain UNDP/CICETE support. Gao stood up defiantly during a recent meeting of microfinance practioners in Kunming to make the point that huffing and puffing about policy reform on a macro level is for those with their heads comfortably in the clouds (or in their offices in Beijing).

Thus, some advocate for policy deregulation and government withdrawal, while others put their shoulder to the wheel to keep sound programmes running. But what of the numerous Jinpings and Malipos that are left in the lurch? Food for eager, but incompetent, government hands?

This is not to say that government staff are inherently incapable of running sound programmes. But appropriate training and capacity building are essential to professionalise government operations.

At the Funding the Poor Cooperative programme, where management has been able to achieve operational sustainability, the Branch Manager of Hebei Province's Yixian County was an early recruit from the local government's Poverty Alleviation Bureau. After training in Bangladesh and extensive field experience, the Branch Manager is known to run a tight operation, insisting that staff work to improve efficiency and operational knowledge. Innovations are encouraged.

In Yunnan's Luoping County, the Yunnan Reproductive Health Research Association has worked closely with the local Women's' Federation on a charming programme that combines reproductive health, women's education, and microcredit. A group of dedicated and visionary Women's Federation staff ensures that village women are empowered to set their own microlending policies, interest rates, and group activities. This programme was funded by the Ford Foundation, and received training inputs from the Caohai Nature Reserve community development programme across the border in Guizhou, where the local Environment Protection Bureau, International Crane Federation and Trickle Up Program initiated an innovative lending programme to support development and nature conservation objectives.

In both Yixian and Luoping, success seems to hinges on vision and drive but also, more concretely, on access to the right kind of training.

Some donors such as World Bank's Consultative Group to Assist the Poorest have realised the need for this kind of capacity building, and helped to establish the China Microfinance Training Center in Beijing. Others, like the German aid implementing agency, GTZ, are working up to providing capacity building in the field (in GTZ's case, in Hunan and Guizhou). If more could join this effort, it might be possible to work towards what experts like CASS' Du Xiaoshan and Liu Wenpu, China's first microfinance researcher-practitioners, say is most needed: training in management and financial administration. Microfinance cannot be delivered effectively simply on command. Government programmes need to start budgeting for staff training.

It is also important to be realistic about what microfinance can achieve. The same UNDP Annual Report cited above claims that 'it is proved by facts that microcredit is an effective way for the people living in the mountain areas to lift out of poverty.' What facts, exactly? International specialists such as David Gibbons of CASHPOR Financial and Technical Services recognise that microfinance is probably not a sufficient solution for poverty alleviation in the 'stony mountains.'

To judge by the operational experiences of the Funding the Poor Cooperative project in Henan Province's Nanzhao Country (which won an award from Grameen Foundation USA, microfinance programmes just won't be able to cover costs in areas where there is both seasonal drought and flooding, no road access to most villages, limited market access for most villagers, and low density of population. Many areas of Yunnan fit such a description.

And given that the single province of Yunnan is larger and more culturally diverse than the entire country of industry trend-setter Bangladesh, there is evident need for a more localised approach to mountain microfinance.

Cross-fertilization is another type of capacity building that needs to be moved to the fore in China's microfinance sector.

Microfinance programmes need a more ardent effort to synthesize and share lessons learned. They need more information from abroad.

PlaNet Finance is a new organization on stage that hopes to answer some of the pleas for networking from other agencies by acting as an agent for outsourced information sharing. Despite numerous newsletters, listserves, and networks, operating microfinance programmes don't have time for sufficient outreach and upkeep of learning networks.

With a market of over 100 million Chinese people living under the World Bank defined poverty line, microfinance should be able to bring credit to the poor in China; but it will have to be carefully planned out, locally crafted, prudently managed by skilled staff, supported with open and honest sources of information, and not left up to any old state worker receiving instructions down the phone from Beijing.

Contact:
Sarah Tsien,
PlaNet Finance,
Email: tsien@bhumi.net

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About the author: Sarah Tsien spent nine months researching microfinance programmes in Yunnan, and working as an intern with Funding the Poor Cooperative and the China Microfinance Training Center, both located at CASS in Beijing. She represents PlaNet Finance in China.

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¹ For a critique of the government Poverty Alleviation Loan system, see the April 2000 World Bank/UNDP/Leading Group for Poverty Reduction report, China: Overcoming Rural Poverty

²For a recent paper setting out the major challenges and problems, see Albert Park and Ren Changqing, Microfinance with Chinese Charactersistics, in World Development Vol 29, No 1, 2001.

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