As China’s economy wobbles on the path to becoming a dominating global force, the growth of domestic financial services development has the nation poised to enter a new era. One of the recent innovations to find purchase in China is microlending, a trend that could dramatically revolutionize and strengthen the nation’s economy.
The microlending market in China started relatively small. Only 6,000 microcredit providers operated domestically in 2012, with fewer than a quarter having been active for over three years. It has since grown by leaps and bounds, as the Center for Financial Inclusion reports that China’s robust microfinance market now spans “nonprofit institutions, government programs, microcredit companies, commercial banks, rural credit cooperatives and banks, village and township banks, and P2P lenders.”
“Microfinancing is popular due to its ability to mitigate risks intrinsic to first-time borrowers.”
Controlling for risks
The key to the rise of microfinancing in China is it’s unique ability to mitigate risks intrinsic to first-time borrowers. As China slowly enters the global economic system, the majority of its population is credit invisible. Traditional financial instructions lack metrics to gauge Chinese consumer and enterprise credit-worthiness. The China Story reports that less than five percent of micro-enterprises in China are covered by the formal credit system. This presents a challenge for microfinancing, even when operating on a smaller, more localized scale.
“Microfinance [in China] is facing several challenges, including a weak credit information system and insufficient data collection,” writes GUO Zhenzhou, Founder & CEO of Quark Finance in a guest blog for LendIt 2016. “Also, lending practices serving small and micro enterprises tend to be fragmented, with limited professional skills, and in very small scales. By the end of 2015, there were 8,910 small loan companies in China with outstanding loans of 941.2 billion yuan, which manifests a huge gap with the nearly one hundred trillion asset balance of the Chinese banks.”
‘Small micro-lending’ in China
Microfinancing in China still tends to fall under the mainstream banking category of ‘small micro-lending’ – referring to enterprises with between 50 and 100 employees and a net income of less than twenty million yuan a year. But as Zhenzhou said, the way to expanding this sector is through technological advancement. Specifically, Zhenzhou argued that data aggregation through the Internet scraping is likely to be the most effective, given the proliferation of web access in China.
“The data collected from online can be an important supplement to the credit bureau data,” he writes. “By September 2015, the third-party Internet payment market had reached nearly 12 trillion yuan, with a growth rate of 33 percent.”
He goes on to praise the growth of mobile payments, citing an “explosive” growth rate of 59 percent in the third-party mobile payment market.
Within the burgeoning lending industry, China find itself in a unique position: Aside from thriving metropolitan cities like Shanghai and Beijing, the majority of the nation’s population is located in rural communities and villages. The nimbleness of microlending makes it uniquely suited for lending to entrepreneurs and consumers in rural areas. The ease of application combined with quick turnaround time means that borrowers in these communities can build, if not an individual credit score, a collective community score.
For Jiangshan Rural Cooperative Bank, this has taken shape as a Credit Village ranking system – where households, rather than individuals, are scored and the community is aggregated based on their borrowing and repayment rates. Loan officers who utilize these alternative metrics are also given incentives to approve loans to borrowers who make timely repayments. While high interest rates remain an issue given the lack of sophisticated credit scoring, the willingness of microlenders to enter these underserved community shows that the market may soon be evolving in economically stabilizing ways.
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