Over the past 30 years, micro finance or micro credit, has gained global popularity and credibility. In its simplest form, it is the provision of small loans (typically US$100- 500) to very poor individuals, primarily in the rural areas of developing countries, so that they can start and develop micro businesses. The success of the Grameen Bank in Bangladesh proved that poor villagers, with no assets for collateral and no proven cash flow, can utilize seed capital to generate additional income and reliably repay their loans. Today, over 90 million people have received micro loans and other financial services, such as insurance or savings accounts.

Micro finance has been in existence in China for about 20 years, with early, small scale funding from the private sector, but little involvement from the government. In 1996, the government officially recognized micro finance as a useful method for alleviating poverty and began to provide capital to support local governments and financial institutions. Since that time, the government has provided hundreds of millions of dollars to rural areas through its system of financial institutions including the Agricultural Bank of China, the Rural Credit Cooperatives, and the China Development Bank . In addition, international institutions such as the United Nations Development Program, Grameen Trust, and the Ford Foundation have all provided funds for micro finance organizations.

Despite the significant influx of capital over the past 10 years, micro finance institutions (MFIs) in China have achieved only limited success. Although over 300 programs were established, only about 100 remain and none have reached self sustainability.  None have adequate and regular access to capital and few have sufficient cash flow to cover operating and financing expenses, plus provide reserves for bad debts. 

The reasons for this limited success include insufficient levels of capital; lack of management experience and staff training in the MFIs; inefficiencies and irregularities in operations; inadequate financial systems and operational processes; inadequate supervision of the MFIs, and slow to evolve government regulations.

As a result, international organizations, private non-governmental organizations (NGOs), and the Chinese government have greatly curtailed funding for micro finance activities over the past three years. The Agricultural Bank of China has focused on lending to small and medium businesses.  The Rural Credit Cooperatives are being structurally reformed due to poor performance in their loan portfolios. 

Today, the government continues to search for both public and private organizational models that will work within China’s unique environment. Currently, the People’s Bank of China is promoting the formation of commercial micro credit companies with private capital in 5 provinces. The China Banking Regulatory Commission is now encouraging the formation of village banks to lend to the poor. Whether these new pilot projects will be successful remains to be seen, but the environment is improving and the opportunity to help the rural poor remains enormous. 

The 1990 Institute believes that the government is now more actively supporting micro financing because of its success in other developing countries, and because of the growing income disparity between those living along the eastern coast and those living in the rural inland areas. While regulations are still not clear, the government is continuing to consider ways to improve and clarify the regulatory environment and to encourage the development of various MFIs, including NGO sponsored entities,  to bring capital to the rural poor.