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It is a sunny morning in March 2006. A hundred or so rural
dwellers and their family members gather in Yuba Village,
Yilong County, Sichuan Province. Everyone looks happy, with
justification, because today they will receive small loans
from a local financial institute. Among them is farmer Yang
Jiawen. His previous applications for small loans have been
unsuccessful, but he is nonetheless optimistic.
What makes this occasion distinct from those preceding
it is that instead of being loaned cash, small loan applicants
will be issued with debit cards from the local bank. This
is a much-welcomed innovation. It means that farmers will
no longer be obliged to purchase farming necessities with
cash. Only those with no credit misdemeanors qualify for
these new-style loans, and Yang Jiawen passes muster. He
is given access to RMB 13,000 (US $1,500), not a huge amount,
but enough to make a fresh start.
Small loans have a history of 30 years, but have been in
existence for less than 10 years in China. They were introduced
in rural areas in 1998 to help impoverished farmers, and
were later promoted nationwide, particularly in China’s
western regions.
With support from the central and provincial governments,
villages in Sichuan searched for the most practical and
sustainable loaning mechanism. One of them was Kunshan Village
in Yilong County, which, on July 28, 2005, established a
groundbreaking poverty relief foundation in a three-strand
mode. It comprises:
1. Encouraging farmers to buy a RMB 1,000 share [in the
poverty relief foundation], RMB 500 of which is paid from
the local government poverty-relief fund. Each farmer is
required to repay the other MRB 500, acceptable in installments,
within a year.
2. The local government’s donating a RMB 1,000 share
in the foundation to impoverished households capable of
doing farming work. Eligible households are nominated, after
due deliberation, by the village committee.
3. Shareholders in the foundation receiving dividends,
by means of meetings held every 10 days, in which new loan
applications are assessed and the time span of repayments,
made in installments, is decided. The longest term of repayment
is 5 years, and the amount loaned during the first year
does not exceed RMB 3,000.
Deng Hongfu is a farmer in the Group 6, Kunshan Village.
His house may be ramshackle, but an atmosphere of optimism
nonetheless pervades it. He has livestock, comprising two
fat hogs in the pigsty, caged otter rabbits busily feeding
on vegetable leaves, and apricot saplings almost two meters
tall that are expected to bear fruit next year. Deng Hongfu
acknowledges that “ … if not for the foundation
my rabbit breeding operation would have come to a halt.
The foundation works like a bank that makes funds for sideline
operations available when needed.”
The foundation is flexible as regards methods of repayment.
A small loan may be paid back in 7, 10 or 15 days according
to the farmer’s financial situation. “I would
never have been able to afford a methane generating pit
without the loan from the foundation,” acknowledges
farmer Wang Xiuzhen of Kunshan Village, explaining, “I
borrowed RMB 500 from the foundation and repay RMB 15 every
10 days, part of it interest and part that pays off the
principal.” A further 16 householders in Kunshan Village
have received loans from the foundation that they have used
in ways similar to Deng Hongfu and Wang Xiuzhen -- either
to buy rabbits or start fruit farming businesses. “Providing
start-up funds has helped farmers to emerge from poverty,”
says Ran Zhonghua, chief of a local poverty-relief organization,
Gao Xiaojun, secretary of Yilong County Rural Development
Committee, becomes animated upon being asked about the changes
that that have occurred in local life since the poverty-relief
foundation was established. “In previous years, the
local government provided fruit tree saplings to farmers
free of charge, the intention being to help them emerge
from poverty. But the saplings needed care and nurturing
after being planted, which by villagers’ reckoning
was the government’s responsibility. Their reasoning
was that as the government had bought the saplings and asked
villagers to plant them, villagers should be compensated
for the time and money their continuing cultivation entailed.
Unsurprisingly, few saplings survived. But things are different
now. Many farmers use their loans to establish fruit farming
businesses, and it is in their interest to take care of
their trees, reap a plentiful harvest and repay their loans
as soon as possible,” Gao explains.
Cao Hongmin, a poverty-relief worker, 0recalls, “The
regulations of the foundation prescribe a shareholders’
meeting every 10 days, which at first worried me as I was
not confident that the practice would be kept up. As it
turned out, my fears were unfounded. The meetings convene
regularly and are very lively affairs. Shareholders discuss
possible cooperation, exchange farming and husbandry experience
and share information about the market. Meetings sometimes
take the form of training workshops, and often have a recreational
atmosphere. They have made villagers even closer.”
The poverty-relief foundation in Yilong County was a response
to the central government’s call to “relieve poverty
for a socialist harmonious society.” The foundation
runs on poverty-relief funds provided by the government,
and encourages farmers to buy shares in it. It is distinct
from other small loan mechanisms in that its shareholders
earn dividends from the interest paid on loans. The foundation
encourages more well-off rural residents to buy their own
shares, allocates shares to less well-off farmers and donates
shares to the impoverished. The most well-off rural residents
pay RMB 1,000 for a share, the less fortunate pay RMB 500,
the other half being paid out of governmental funds, and
poverty-stricken households, as assessed and agreed by villagers,
are given a RMB 1,000 share by the local government. Residents
buy a share of their own volition if they have the financial
wherewithal, and have the choice of paying off the principal
amount within a year, in a lump sum, or by installments.
Each household is allowed to buy a maximum two shares. Since
the foundation was set up last July, 116 households holding
a total 137 shares have joined it.
For years Chinese farmers’ low economic status and
uncertain financial circumstances have excluded them from
the banking services enjoyed by their urban cousins. Skyscrapers
soar, and vast amounts are spent on urban development, while
Chinese farmers search desperately, often getting deep into
debt, for the RMB 100 or 200 they need to buy seed and fertilizer.
This situation, however, is changing. Building a “new
socialist countryside” was a main topic at the last
National People’s Congress and the Chinese People’s
Political Consultative Conference sessions held early this
year. Farmers want to develop their means of production
and improve their living standards, and for this to happen
business in rural areas must expand. Consequently funds
are desperately needed. In his work report, Premier Wen
Jiabao called on guild funds of various types to invest
in construction and accelerate banking innovations in the
countryside. Jin Renqing, minister of Finance, confirmed
that China would do its utmost to support banking reforms
in rural areas. “It seems to me that the main accent
in both Premier Wen’s and Minister Jin’s speech
was on garnering all funds possible to advance rural construction.
Also that the government will shortly announce new policies
regulating the operation of financial institutes other than
conventional banks in rural areas,” was the comment
of Xing Kezhi, vice president of Tianjin Academy of Agriculture.
Small loans began and developed in China on the basis of
other countries’ experience. Between 1994 and 1997,
the United Nations Development Program (UNDP) and various
Chinese non-governmental institutes began their efforts
to relieve poverty by means of small loans in Yilong, Sichuan.
Local governments and poverty relief departments closely
monitored this “trial run” in Yilong, and gradually
small loans became accepted in the rural community as a
viable means of poverty relief. In 1998, the practice of
small loans was promoted in other rural areas and also in
urban districts with impoverished residents and a high unemployment
rate.
At the outset, however, small loans to poor farmers were
not successful. One problem was that the rate of repayment
was low -- about 40 percent -- another that rate of borrowing
was less than workable. In 2004 in Yingjing County, Sichuan
Province, for example, only RMB 8 million out of the RMB
20 million made available by the China People’s Bank
was loaned out.
This is attributable to banks and other financial institutes
regarding loans to ease the plight of poor farmers as a
political obligation rather than an economic proposition.
They see small loans as money paid out to borrowers who
are not required to take out a mortgage, provide neighbor
guarantees, or commit to an installment repayment plan.
In conventional terms, therefore, small loans constitute
a huge financial risk.
With the help of the local government, Jiaguan Town farmers
have organized their own poverty-relief foundation, using
a pool of money voluntarily contributed by local farmers,
funds from the central government earmarked for poverty
relief and other sources that include the local bank. The
foundation operates on the principles of helping people
in need; of providing neighbor guarantees when necessary
and allowing repayments in installments.
Neighbor guarantees are indispensable to the operation
of small loans, simply because the exact nature of such
loans has always been quite clear: that they are loans,
as compared to aid, and must be repaid. In areas where the
small loan system has been most successful, the repayment
rate within the designated time limit is up to 90 percent.
This is not because people in some areas are more reliable
than those in others, but because the loans have been made
on the basis of neighbor guarantees. As residents of any
neighborhood know each other very well, none but the most
reliable of applicants are given neighbor guarantees.
Small loans nevertheless carry risks that must be covered.
The poverty relief foundation in Yilong County specifies
three types of risk: lax morals; unforeseeable misfortune
in business activities; and financial misadventures by those
“blazing a new trail.”
Eighty percent of the non-repayment risk due to lax morals
is shouldered by neighbors that have guaranteed the borrower.
As neighbors are generally aware of the borrower’s
economic situation, as well as their character, the risk
of this type of loan default is minimal.
As regards the risk of unforeseeable misfortunes in business
activities, farmers’ inexperience in market competition
is taken into account. Borrowers that default on loans for
this reason are not liable for the full amount of the loan,
as small loans are not intended to punish the vulnerable.
Finally, 80 percent of the risk of financial misadventures
experienced when “blazing a new trail” is taken
on by the government, on the principle of “encouragement
to try, tolerance of failure.” As achieving a new socialist
and harmonious society in rural areas calls for a fair level
of investment, the government’s taking responsibility
for 80 percent of such losses is regarded as part of its
duty.
Previously the Huang Village in Yilong County, with its
haphazardly erected pigsties and pools of stagnant water,
was not at all a pleasant place to live. It was dusty in
high summer and a boggy mire on wet days. Big changes have
since occurred. The village is now clean and orderly. All
Huang households breed hogs, silkworms or rabbits. Everyone
has work and every day brings in a little income. Since
the county government promoted methane-generating pits through
small loans from the foundation, the income of each household
has increased, and the village has taken on a pleasant aspect.
Qi Changrong, a farmer from Yuexing Village, began otter
rabbit farming after being judged credit worthy and receiving
a small loan from the foundation. He sold more than 1,000
rabbits last year, which earned him RMB 60,000 (US $7,255).
Mo Shangcai, a farmer from Jinguang Village, proudly told
our reporter, “Our village is famous for cement plate
making and almost every household does it.” As Mo also
has a good credit history, he was able to borrow RMB 50,000
(US $6,045) to set up his small factory.
Among the 260 households in Jinguang Village, 145 dispense
loans on credit. Over the past two years, they have borrowed
a total RMB 50 million for varies business activities.
Jinguang Village in Yilong County is by no means exceptional
as regards poverty relief. At the end of 2005, the county
had established credit records for 190,000 households whose
members can take out loans whenever they need, simply by
producing their credit certificate, identification cards
and personal seals.
“The financial services offered by conventional banks
in rural areas are far from adequate,” says Yang Yuxue,
a government official in Yilong County. “Yet financial
services from institutes other than banks have proved flexible
and convenient, despite being small, limited in function
and lacking in operational guidelines.”
Similar experiments have begun in other provinces. On December
27, 2005, two legitimate private financial service institutes,
Rishenglong and Jinyuantai, whose aim is to meet the specific
needs of local farmers, opened business in Shanxi Province,
and shortly after in Shaanxi Province and the Inner Mongolia
Autonomous Region. They are currently in the process of
setting up local financial institutes. As the Central Bank
has not yet issued policies regulating the setting up and
growth of such private financial institutes, small loans
are still regarded with skepticism in some quarters. Yet
Yang Yuxue is confident about their future. “Chinese
rural areas need a type of financial institute, other than
the conventional bank which meets farmers’ needs by
providing small loans at relatively high interest. Their
operation should follow commercial rules, and serve people
on low incomes. If the practice of small loans is promoted
nationally it will amount to a financial revolution.”
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