"Searching in the dark" for the credit switch
Ethnic Minorities | Livelihoods | Subscription-only Content
Although in theory farmers in China can access credit through a national network of Rural Credit Cooperatives, in practice these are not always able or willing serve poor, remote communities. Numerous local and international NGOs have tried to plug the gap by offering microfinance as part of integrated rural development projects. Myriam Bartu explores the difficulties and the achievements of these schemes and, in a downloadable attachment, presents case studies of five NGO projects in Sichuan and Yunnan.
Conventional microfinance wisdom has it that credit is best delivered by specialised, large-scale microfinance institutions (MFIs) that recover all operating costs through the interest charged on loans, thus achieving financial sustainability.
While such MFIs can achieve high operational efficiency, they rarely manage to serve the poorest or the most remote communities. In China, several local and international organisations have tried to set up such MFIs but none have yet succeeded by international standards. This is often ascribed to an uncertain policy environment for rural insitutions (see, eg, China Develpment Brief's 2004 policy overview here) but other factors specific to China including “culture” and geographic conditions are also to blame. In the absence of seasoned MFIs, and with Rural Credit Cooperative services varying greatly in quality and reach, sources of finance can be scarce in rural China.
Demand from rural residents and—usually, more importantly— pressure from donors or NGO head offices familiar with the literature on the success of microcredit internationally, have encourgaged NGO staff on the ground in China to include loan projects as components of rural development programmes. Typically, these organisations are already delivering projects in fields such as education, infrastructure, health, training, environmental protection and agriculture. They usually take on microcredit at a stage when they are already known and trusted by the community.
While these NGOs have been confronted with big challenges, they are going far beyond what most MFIs would achieve in terms of reach. NGO practitioners are serving some of the poorest, most remote and excluded ethnic minority groups in rural western China.
An obstacle course
For development workers on the ground, the remoteness of mountainous communities in ethnic minority areas is itself challenging. Villages are very sparsely populated. It is common to have to walk several hours to travel from one village to another or from a village to the road. In some cases, such as in Sichuan’s Hanyuan County (汉源) where the Development Organisation of Rural Sichuan (DORS) works, it can take several hours to walk from one end of a village to the other. These “villages” are actually houses dotted across the mountains connected only by an imposed administrative structure. Roads that turn into mud baths and rivers when it rains, landslides, fierce dogs and uncooperative village leaders add to the hazards of field trips.
The accessibility problem is aggravated by the fact that the NGOs need to work in predetermined “project villages”. These are selected during the programme design phase based on factors such as poverty levels, needs, ethnicity, willingness to cooperate etc. The villages are often far apart, far away from markets or even roads, and have extremely limited income generation opportunities.
Many NGOs target ethnic minority people because they tend to be the poorest and most disadvantaged. Therefore borrowers, especially women, usually do not write Chinese and often do not speak it either. In places like Yuanyang (元阳) in southern Yunnan, where World Vision has an Area Development Programme, there are half a dozen different ethnic groups living in one county. It is impossible to find staff who can speak all the minority languages. It is therefore common to find development workers serving clients who they cannot speak to. This inevitably slows down project development and increases the potential for misunderstandings.
Another common external challenge for loan programmes is migration out of the village. There is hardly a village in China where young people don’t look to more urbanised centers for work opportunities. Borrowers leaving the village pose a challenge to loan repayments and group meeting attendance, and this also affects the confidence of the staff in lending money out.
Group meetings, solidarity groups and mutual guarantees of the kind originally popularised by the Grameen Bank are controversial in China. Some international NGOs that use these models in other countries have abandoned them in China. Opportunity International in Hefei and Hope International in Hebei and Shanxi are two examples. They say that solidarity groups don’t work in China for cultural reasons. Rather than encouraging group members to repay, one default will often trigger the whole group to default. Some NGOs are still using solidarity groups, but none seem to be finding singular success.
“Culture” is often also cited to explain the low number of loans NGOs disburse. Most organisations have found that actual demand for their loan products is much lower than they originally estimated. All over China, NGOs are now finding ways to reduce their loan funds, often transferring money allocated to microcredit to other projects. Why are loans unpopular? NGOs offering group lending say that borrowers are not interested in their product. Others find that Rural Credit Cooperatives are serving the area, or that villagers prefer to borrow from friends and family. Interest charges are often cited as a reason for reluctance to borrow. Borrowers in rural China are not willing to pay interest that is higher than the Rural Credit Cooperative rate—even if they cannot borrow from the RCC.
This is particularly problematic for generic rural development NGOs where villagers have already become accustomed to the NGOs providing resources. Potential borrowers are often taken aback by the idea of paying interest. When NGO staff discussed interest rates at a focus group of Hani women in a village in Yunnan the women exclaimed: “How can you charge interest? You are here to do poverty alleviation!”
NGO staff are often themselves opposed to charging interest, and some projects do not charge any at all. When interest is charged, it is often used to fund other projects in the same community rather than to recover the costs of delivering credit. No rural development NGO providing village level loan services in remote areas of rural China is seriously aiming to be financially sustainable.
Generic rural development organisations are not microfinance specialists. Loan projects are often run by the same development workers who organise the construction of schools and roads, allocate scholarships and supervise health projects. Few have any training in microfinance. Loan records are often kept in the traditional Chinese book-keeping system using record books bought from local stationary stores. Computerised records when they exist are usually pieced together with Excel to meet management and funding demands. Record keeping errors abound. This is particularly the case with NGOs that lay a strong emphasis on local participation: it can be extremely difficult and time consuming to train villagers to keep appropriate records. Some projects have had to terminate lending operations in order to sort out loan records.
Repayments are always the greatest concern for frontline staff, who feel under pressure to demonstrate success. Most NGOs say their repayment rate is around 99% but this is rarely accurate. Many of these projects do not or cannot measure the actual repayment rate. Some even find it difficult to say how many active loans they have. “We will be calculating that for the end-of-quarter donor report in June” I was once told when enquiring how many loans a project had disbursed.
Repayment rates are a sensitive issue for many NGO staff as they see this figure as a rating of the work they do. Practitioners see that everyone else claims a 99% repayment rate so they do whatever is necessary to achieve this rate as well. Various recording tricks are used, the most frequent being to extend the loan term for late loans instead of recording a client as defaulting. Another common method is to provide a defaulting client with another loan before the end of their loan term.
Doing the impossible
Yet these small-scale projects serve groups that no conventional microfinance institution would ever serve. NGOs may not sustainably meet the financial needs of their target groups, but they do provide villagers with a choice and encourage them to see more opportunities. By involving villagers as much as possible in administering loans, the projects also provide borrowers with rare capacity building opportunities.
Moreover, integrated rural development NGOs have some definite advantages in offering microfinance. The first is their ability to engage easily with the community. Organisations that come into a community to lend money as strangers are met with much mistrust. It is easier for NGOs already working in the community to gain the trust of potential borrowers. This is sometimes the only way to reach people—and especially women—in poor, mountainous ethnic minority communities.
Another benefit comes from the “microcredit plus” approach taken by most of the development NGOs, whereby loan schemes are combined with other interventions to increase efficiency and impact. Although microcredit generally aims to improve economic development, some NGOs have additional purposes such as empowering women, environmental protection or skills training. DORS lends only to women, and provides training for borrowers on topics such as animal husbandry. The Trace Foundation has been experimenting in Qinghai with loans to women through self-help groups in an effort to empower and build up the confidence and skills of isolated Tibetan villagers. The Nature Conservancy’s Green Village Credit in northwestern Yunnan uses microcredit to disseminate renewable energy devices as part of their environmental preservation work. Some of World Vision’s programmes combine loans with business development services to support micro enterprises, while other programmes focus on agriculture and animal husbandry training.
The greatest opportunity for these NGOs is also the greatest challenge: how to sustain services after the NGO withdraws, so that villagers have continued access to loans. Attempted solutions often involve giving the community more responsibility in managing the loan fund, in some cases passing the fund on to a local management committee to administer. Many NGOs have plans for the community to take on loan operations. Although the sustainability of such a transfer still needs to be demonstrated in the long term, the process in itself is a learning opportunity for both staff and villagers.
In Yongsheng County (永胜) World Vision has established a local organisation, the Yongsheng Rural Community Development Association, which implements projects in parallel to those run by World Vision staff. The Association currently runs all loans and savings operations. The association is expected to continue to deliver poverty alleviation projects, including microcredit, when outside resources are withdrawn. In other cases, loan schemes are designed to be run by villagers from the outset. In Yilong County (仪陇), Sichuan, the Association for Rural Development in Yilong (ARDY), which was created in the course of a UNDP-funded poverty alleviation programme, is establishing village level associations that run their own loan funds.
Other planned exit strategies include working with the Rural Credit Cooperatives or local government agencies to build up their ability and willingness to work with target communities, or to entrust them to manage loan funds. In Lancang county (澜沧), Yunnan, Heifer International disburses loans through the Animal Husbandry Bureau for example. Many loan projects already work with the RCCs to administer loans and some aim to gradually transfer the loan fund to them.
Working through existing local structures, whether community or government, is an ambitious strategy with many factors beyond the control of the NGO. However, it gives space for learning and the creation of new models and methods, in search of a different type of sustainability. There will never be a single model that fits all in a place as diverse as China. Stella Lone from World Vision’s Economic Development Department who has worked in many microcredit projects in Yunnan and Xinjiang has found that “what works in one village may not work in the one next door”. Whether they have recently started or have been running for years, these loan projects are still continuously learning, experimenting and evolving. In the words of NGO microcredit practitioners, they are still in the process of “searching in the dark” (摸索).
The following practical suggestions are based on work with microcredit programmes and women’s groups in the Yunnan, Qinghai, Sichuan and Anhui.
Myriam Bartu(firstname.lastname@example.org) has spent the last two years working with NGOs in China as a consultant, trainer, and researcher. She is currently based in Hong Kong.
The attached file contains case studies of five NGO loan programmes in Yunnan and Sichuan