Banking to Lift Poverty in China

Rural China

A close look at Poverty in China: How does micro-finance services help lift many Chinese out of poverty?

Earlier this year, it was announced by the central bank of Bangladesh that the father of microfinance, Professor Muhammad Yunus, was being sacked. The details, motivations, and ramifications are unclear, and it remains to be seen whether he will step down. This action appears to be politically motivated (although it is based on the legal technicality of retirement), and it is the latest in a string of events that are shaking the very foundations of microfinance.

Watch: Reduction of Poverty in China

The Micro-credit Summit Campaign estimated that since 2006, over 3,100 microfinance institutions (MFIs) have been providing financial services to more than 113 million poor people worldwide. The Indian subcontinent accounts for the majority of the world’s MFIs and borrowers, yet one may still wonder where is the world’s largest microfinance market? Is it in Bangladesh? Is it in India?

In the past two decades, changes in the locations of the world’s poor have been taking place. In 1990, roughly 93% of the world’s 1.3 billion poor lived in Low-Income Countries (LIC). However, recent research suggests that three-quarters of the world’s poor currently live in MICs, and the remaining quarter, approximately 370 million people, live in 39 LICs, which are largely located in the sub-Saharan Africa region. It is not that people have moved but that consistent and stellar economic growth rates have pulled countries such as China up the World Bank’s classification system, and thus have aided to life the Poverty in countries such as China.

Poverty in China: Is There a Way Out?

Poverty in China is often overshadowed by average annual GDP growth rates of 9% or more. According to the World Bank and UN statistics, approximately 200 million Chinese people live on less than US$1.25/day; Furthermore, 482 million people live on less than US$2/day – a figure that is greater than the populations of the US, Germany and the UK combined. Although many are quick to point out to the number of people lifted from poverty in China over the past few decades, poverty reduction is slowing down and a gap between the rich and the poor is opening up: The rural-urban divide in China is the new Great Wall and has the potential to risk the incredible progress that China has made in recent decades. The average income of one of the 750 million who lives in rural China is less than 1/3 of that of a person living in an urban area. This rural-urban divide manifests itself not only in wealth distribution and income but also in human development indicators, in education, in health, and in gender inequality.

‘Microfinance must be an enormous sector that helps lift Poverty in China’ – Think again.

Microfinance in China is an extremely underdeveloped and overlooked sector that deserves much more attention than that it is getting. Despite the numerical demand for microfinance services, China only has 22 microfinance institutions (MFIs) with approximately 1.6 million borrowers. China’s financial and banking regulations make it difficult for entrepreneurs and for small business owners to access loan credit, especially in rural China. Although these data would seemingly make a strong case for continued and targeted aid programs for China, DfiD (the Department For International Development – a United Kingdom government department), in light of its recent aid review, has cut aid to China, and it seems that plans for stronger financial aid for the poor have been put on hold.

Gaps in the market, unseen opportunities and tough regulation spur innovation and entrepreneurship in the aid arena. Some commentators on microfinance see P2P platforms (which leverage online tools and global networks to connect contributors with borrowers) on a precipice. P2P microfinance was recognized by the Harvard Business Review as one of the top 20 breakthrough ideas of 2009; It has global demand and receives contributor confidence because of its transparency and accountability measures, lender interest and technological support through web architecture. It is predicted that by 2013, P2P lending will exceed US$5 billion.

Such platforms are redefining where charity actually begins. Prior to advances in communications technology and globalization, one could really only donate to organizations within one’s own community. Now, an individual can take matters of development assistance into his own hands and donate to organizations and projects across the globe.

Global communities, migration and social networks are also redefining where ‘home’ is. Wokai, a peer-to-peer microfinance platform that aims to help lift Poverty in China, provides new architecture for mobilizing people to decide how they want to address the world’s most pressing issues. Although largely benefiting from contributors outside of China, Wokai is in the process of establishing a partnership with a Chinese foundation that will enable it to scale-up, to fundraise, to advertise and to leverage the potential of the Chinese market. More importantly, Wokai will offer a South-to-South (or in China an east-to-west) model of development cooperation and participation, which mobilizes civil society and enables Chinese people to support Poverty in China. Young Chinese professionals in Shanghai will be able to support low-income entrepreneurs in rural Sichuan and watch online as businesses grow.

Such organizations and platforms offer a way to bypass traditional aid flows and channels. Although government aid has been increasing for certain areas in China, it is clearly insufficient, and poverty in China is still very much prominent. Granting everyone with the opportunity to participate in the development assistance for the poor in rural China is a mechanism that will help many rural Chinese as they continue to struggle with poverty.

This is an edited version of the post that originally appeared on the Lowy Institute’s Interpreting the Aid Review