Microfinance reworked with Chinese characteristics
03 April 2010
Shi Ke uses a shovel to smooth out the soil he has unloaded in front of his house. He spent nearly a week building a better path up the rocky hillside between the main road and his home. The path is not for himself or his family, but for tourists who stay at the guest house his wife runs.
Shi hopes the guest house will provide extra cash to the family of six on top of the 1,700 yuan (HK$1,930) he earns every month. He would be able to make more money if he worked in the city. But he prefers staying in the village, where he has a responsible job as a teacher.
“Eighty per cent of the people in this village can’t read. I’m well respected here. I don’t want to give it up for earning more in the city where I would be just another worker,” he said.
Shi, 34, did not hesitate when he was given a chance to borrow 20,000 yuan to furbish his home and turn it into a guest house in late 2008, even though he had no collateral. It was the first time he had borrowed from anyone other than relatives. Modern banking had skipped the village, where most people didn’t even have a bank account. Instead, he was granted the loan through a microfinance project run by Hong Kong businessman Shih Wing-ching.
Microfinance is based on the idea that very small loans – at reasonable interest rates – can have a disproportionately large beneficial effect on low-income rural entrepreneurs. And also that the poor tend to repay their debts.
Shi is a native of Dashanbao in rural Zhaotong, Yunnan. Unspoiled by urbanisation, industrialisation or pollution, the Dashanbao wetland is an important conservation area, harbouring a variety of waterfowl, including the world’s highest concentration of the black-necked crane.
Being a remote village, transport is difficult.
Dashanbao is isolated by a mountain range. It takes half a day to reach it from Zhaotong, the nearest city. It is a full day to the provincial capital, Kunming. And it took even longer just a year ago before the completion of a new road.
With no internet or land-line telephone connections to the outside world, it is a far cry from cosmopolitan Beijing and Shanghai.
On a recent visit, Shi’s hair appeared uncombed. His skin was dark, his hands, rough and dirty and his Putonghua heavily accented. He is the village mathematics teacher, and yet he has no idea what the internet is.
Every morning, he rides a motorbike to the school, 30 minutes from the village where he was born and still resides. His modest salary is the only reliable source of income for himself, his wife and three children and his mother.
The loan he received is to help finance one of 19 microfinance projects approved by a foundation set up by Shih. The guest house project covers eight families, all in Shi’s village, and the foundation lent 20,000 yuan to each of them – more than it has advanced to borrowers in other projects.
The credit is to refurbish and transform their homes into guest houses to take advantage of the local government’s attempts to turn the wetland into a tourist destination.
The loan is interest-free and Shi was given two years to make money on the guest house before he has to start repaying the money.
“The government built the new road to bring in tourists,” said Shi. “So when they came to me and checked with me whether I was interested in the project, I was pretty sure I would have business if I turned my home into a guest house. So I happily accepted their proposal and joined the project.”
The maths teacher and his wife, Fu Mei, used the money to renovate the kitchen and toilet, repaint the walls and buy several sets of bed sheets and pillow covers. They reserve three rooms for visitors, each with two double beds.
They charge 30 yuan per person, per night. In return guests get fresh air, big blue skies, plenty of hiking in the wilderness and freedom from city life and its trappings, including the internet and showers. The couple earned 500 yuan over the Lunar New Year.
The loan for Shi’s guest house is among the first batch disbursed by Shih, a leading property executive and newspaper publisher.
The chairman of Centaline Property Agency, he announced in early 2008 that he would give all his shares in the firm to a charitable foundation he set up to run poverty alleviation programmes in rural China. His shares, representing 45 per cent of the company, were estimated to be worth HK$5 billion at the time. The Shih Wing-ching Foundation operates on the dividends Centaline distributes to shareholders.
Many charities on the mainland donate money to the poor or improve their living conditions by building hospitals, schools, roads and other basic infrastructure. But the businessman hopes his money can enable farmers to run sustainable businesses, eventually freeing themselves from assistance. The experiment provides credit in some of the poorest parts of China.
“I would like to see the farmers standing on their own feet,” said Shih. “For them to do so, they need the ability to run a business and calculate the risks involved. But they have no concept of the market and they have a completely different set of habits and culture.
“The learning process is going to be rather long and painful. For them to start, they need encouragement. That is why I run a microfinance project. There are plenty of rich people in China and they need investment opportunities. If the farmers eventually acquire the entrepreneurial spirit and come up with interesting ideas, they will be able to attract investment. But to begin with, I think they need encouragement.”
Microfinance refers to the provision of banking and other financial services to low-income people who otherwise would lack access to them. Traditionally, banks seldom extend loans to those with low incomes and most poor people have few assets that can be used as collateral. When poor people borrow, they often rely on relatives or a local moneylender, whose interest rates can be very high.
Grameen Bank, founded by economics professor Muhammad Yunus in Bangladesh, is the most famous microfinance institution. In 1976, Yunus launched a research project in Bangladesh to design a way to provide banking services to the poorest of the poor, who had little income and no collateral.
In 2006, Yunus and Grameen Bank – Grameen means rural or village in the Bangla language – were awarded the Nobel Peace Prize for their contributions to the alleviation of poverty.
On the mainland, the state is the biggest entity providing credit to the rural poor. Yet given the country’s tight regulation of NGOs, financial services companies and cross-border currency flows, NGOs cannot provide extensive microcredit in the world’s most populous nation.
A survey a year ago by the Consultative Group to Assist the Poor, a microfinance group based at the World Bank, found that a majority of the more than 400 microfinance institutions reported liquidity problems during the financial crisis. But Shih said the recession had little impact on his venture.
Shih’s foundation is running 19 microfinance projects and eight more will start this year. Lending to farmers will continue to be the core activity of the foundation. So far its projects are concentrated in Yunnan and Gansu provinces.
Staff visit villages and farms to identify where to lend and to whom, trying to identify which businesses stand the best chance of success. The borrowers include illiterate middle-aged illiterate women and elderly farmers. The loans go to a variety of programmes – to rural hospitals to install central heating, to farmers to buy chickens and cattle, and to people like Shi to open guest houses.
The foundation is studying whether to get involved in helping farmers distribute their products because it has found farmers are not knowledgeable about marketing their products.
The majority of Shih’s borrowers receive 10,000 yuan on average to help their businesses. In the case of the hospital, the absence of central heating forced it to use coal to heat its wards, resulting in polluted air that drove patients to other hospitals.
“The situation in China is very different from Bangladesh,” said Shih. “China is much richer than Bangladesh. The credit we provide to each borrower has to be much bigger than in Bangladesh, where loans can be as small as US$1. Anything less than 10,000 yuan here is meaningless for the borrowers.
“In the beginning, I didn’t charge interest,” said the businessman. “But I realised that is wrong. In a real market environment, everyone who borrows has to pay interest. What I can do is charge them a low interest rate.”
He wants farmers to understand that the money they earn has to be enough to generate a surplus after paying interest to the foundation. “It sounds harsh but it is how the market works,” he said.
The foundation’s interest rate is 5 per cent, compared with the 6 per cent charged by the state-run rural credit agency. The farmers do not have to have collateral.
The unique political and cultural environment on the mainland means the charity has to work very closely with the local governments to screen borrowers, administer the projects and collect the money.
In Bangladesh, Grameen Bank relies on peer pressure to make sure loans get repaid by making several borrowers form a unit. If one borrower fails to repay, the others have to share the responsibility. In Shih’s programmes, peer pressure works hand in hand with local government assistance. He hopes peer monitoring will make borrowers try their best, but in the end he relies on local officials to collect the money.
One-and-a-half years down the road, results are mixed. In one case, financial irregularities by a village official forced the foundation to take control of a cattle-rearing project.
“We learned a lesson from this one. We have to have our own staff do the work. We have taken control of the project, but since then the village official has been creating difficulties for our staff working in the field,” said Eva Chan, Shih’s manager for the charity programmes.
In another case, the foundation lost money on a chicken-raising operation in a village in Yunnan. “The market situation changed and chickens were in abundant supply, pushing down prices,” Shih said.
And some borrowers are not keen on running their business after securing the money. Huang Changqiong is a neighbour of Shi Ke, the maths teacher. She also joined the guest house project. In her mid-30s, illiterate and unable to speak or understand Putonghua, she borrowed 20,000 yuan from the foundation.
Huang failed to attract any business. She blames the remote location of her home for her lack of trade.
“Some people came but they left immediately, saying we are too far away from the main road,” she said.
Huang said she regretted borrowing the money.
“Sometimes borrowers don’t work hard to improve their business and sometimes they don’t understand how things should work out,” said Shih.
The billionaire businessman has started to wonder whether he has been too ambitious.
“Maybe we are running too many programmes, making us unable to thoroughly assess each one,” he said. “The farmers may run a better business if we let them propose to us what business they want to run. But the problem is we don’t have the manpower to provide sufficient backup.”
Having started by focusing on microfinance, because he wanted farmers to learn how to earn money, Shih now feels donation programmes also serve their purpose. He cited a project his foundation runs in Sichuan providing psychological services to earthquake victims.
But back in Yunnan, business is going well for Shi and his wife.
Encouraged by the experience of running a guest house, they recently started selling groceries at their home. They buy soft drinks and snacks from the nearby town and sell them to travellers.
“Do you want a bottle of water?” Shi asks a recent visitor. “I don’t know when you will find another place that sells water.”