Microcredit Service to Smallholders for Income Generation

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Micro-credit Service to Smallholders for Income
Generation

• Linxiu Zhang
• Center for Chinese Agricultural Policy (CCAP) ,
  Chinese Academy of Sciences (CAS)

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Limitations of presentation

• A presentation on rural credit service in general
  rather that micro-credit service
• BUT, most rural household credit needs are
  relatively small
• Will have limited mentioning of livestock
• BUT, studies found that expansion of livestock
  production or small enterprises are the business
  mostly need credit services
• Not intended to offer solutions
• mainly to share observations

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Rest of Talk

• Why we interested in rural credit services-
  motivation
• What is the current status of credit services in
  rural China- supply vs demand
• What are needed at policy level to better serve
  rural households credit needs- some thinking only

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Motivation

• Access to credit service is critical to ensure
  active participation of small farmers in the
  market
• Evidences show increased rural savings have not
  been channeled to agricultural/rural sectors
• High operational cost, high risk
• Objective- lay out facts, but seek to generate
  some policy implications

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Current situation supply side

• Main financial institutions in rural area
• ABC- Agricultural Bank of China
• ADB- Agricultural Development Bank of China
• RCC- Rural Credit Cooperatives
• Mostly are withdrawing from rural areas and
  leaving RCC as the only one to provided limited
  services

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Initiative- micro-credit

• With the initial help from international
  organizations,
• Mostly adopting Grameen Bank model, which
  stresses the importance of joint liability
  lending and regular group meetings,
• For poverty and women targeting

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Outcomes from micro-credit

• Provided good support to rural small households,
  especially the poor
• Project-based with limited access by small
  farmers at large
• Heavily dependent on subsidies
• Evidence has shown that one of the major
  determinants of success is fairly idiosyncratic.
• For example, the most successful ones were those
  that just happened to have a particularly
  committed and dynamic manager who provided
  hard-to-replicate leadership.

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Other studies found out about rural financial
institutions

• High incidence of NPL
• Lack of resources, especially in poor areas
  been a net suppliers
• Not much incentives from institution side to
  provide services high degree of non-commercial
  functions
• Bad governance?

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Current situation demand side from field
observations

• Based on a household survey data collected from 6
  provinces covering 1200 households
• Documented borrowing and lending activities at
  household level

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Increasing demand for credit

• From 1996 to 2000
• Total borrowing increased from 90 (7.5) to 640
  times (53) among sample households
• Majority of increase coming from informal credit
  service
• For example, in 2000, loans from formal
  institutions only account for 15 of total
  household loan,

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Source of informal loans
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RCC plays increasing role in formal credit
services
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Large regional variations exist
Informal
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Percentage of households took loan
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Purpose of loan use ()
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Assessment on services

• Studies show that current rural credit service is
  far less than sufficient in meeting the
  increasing needs of rural households for
  development
• Major constraint in small business development
• Need seed money to search for off-farm jobs
• Lack of credit for buying agricultural inputs
  such as feed and fertilizer

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International Experience

• Farmers formed associations to address their OWN
  problems
• Credit union movement to provide rural financing
  eg. Canada
• Credit unions were outside of direct control of
  the Bank of Canada until some 30 years ago

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Little more on farmers associations in China

• Based on a national representative survey of 2459
  villages in 6 provinces
• In our 2450 village, we recorded 290 FPAs
  (several villages with more than 1)
• National point estimation of villages with
  FPAs 10
• No. HHD participated 2.9

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Main economic activities

• 44 on livestock
• 24 on cropping
• 18 on horticulture
• Only ONE FPA related to financial business ?

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Unsolved Issues

• FPAs roles in increasing the outreach of credit
  to small farm households
• Collateral substitutes guarantees, information
  provider, stable cash flows, etc. but, they are
  not allowed take deposits and make loans
• The legal status of FPAs
• Local government involvements as catalysts?

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Policy implications what are the choices?

• Still rely on existing financial institutions?
• Already experimenting with RCC
• From involved in micro-loan to piloting reforms
• Create new rural financial institutions?
• Farmers associations credit union?
• Informal credit activities?

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Possible considerations?

• Reform of RCC needs to be associated with clearer
  property rights regime, establish incentive
  systems and governance structure
• Build credit unions coupled with capacity
  building for efficient management
• Relax interest controls and give more authority
  to financial institutions but have proper
  regulatory and monitoring system in place
• Offer legal status to rural informal credit
  services

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What can we hope if Changes made/allowed
?Increased income for smallholders!
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Thanks!