The Micro and Small Enterprise Finance Project, launched in 2005 and supported by a World Bank loan of US$100 million, has demonstrated that MSE lending can be commercially sustainable in China. The project facilitated loans of less than 100,000 yuan (about US$15,459) to about 180,000 micro and small enterprise (MSE) borrowers and trained more than 1,100 credit officers. The lending technology was successfully replicated in rural finance. Thanks to the project’s demonstration effect, now more and more banks are turning to MSE lending.
China has about 60 million MSEs, or 99 percent of the total number of enterprises. MSEs have great potential to contribute to GDP growth and job creation. However, one major obstacle for MSE growth is lack of finance. In 2005, almost no banks in China lent to MSEs. Lending interest rates were controlled so that banks were not allowed to set higher rates to cover the associated costs and risks. Consequently few banks believed that lending to MSEs could be commercially sustainable. Nor did banks have the capacity and skills such as the credit risk assessment skill required, even if they wanted to lend to MSEs.
Recognizing the essential role of MSEs in the economy, the Chinese government had tried different ways to promote MSE finance, including fiscal subsidies, preferential tax treatments, risk compensation funds and credit guarantee schemes. Yet all these measures failed to achieve the desired sustainability and outreach.
The World Bank has been working with the Chinese government to promote MSE and rural financing since 2003, by adopting a strategy which combined policy dialogues to catalyze policy reforms and regulatory changes with financial and technical support to unleash commercially-oriented MSE lending by financial institutions.
In October 2004, lending rates were liberalized. In April 2005, the principle of commercial sustainability in MSE finance was embraced at an international seminar jointly held by the Bank with the China Banking Regulatory Commission (CBRC) and the People’s Bank of China (PBC). A set of guidelines for MSE lending were issued by CBRC shortly afterwards. These paved the way for expanding credit flows to MSEs in the country.
To demonstrate that MSE lending can be sustainable, the World Bank joined hands with KfW, Germany’s development bank, to provide financial and technical support to the China Development Bank (CDB) to onlend loans to MSEs through participating banks. 12 banks were selected to participate in the project, and support was provided to develop their institutional capacity, systems, human resources and risk management skills to effectively engage in MSE lending. MSE lending technologies that had been developed and validated in some Eastern European and Central Asian transition economies were introduced. The objective was to lay a foundation for progressive, nationwide scaling-up of commercially-sustainable MSE financing services.
The policy dialogues contributed to:
- Liberalization of lending interest rates in 2004;
- Regulatory changes to promote MSE lending in 2005.
The lending operation combined with capacity building assistance achieved the following results:
- Since the first MSE loan of 15,000 yuan in 2005, cumulative disbursements of MSE loans reached 18 billion yuan by the end of 2010, benefiting about 180,000 micro and small business borrowers, with average loan size below 100,000 yuan.
- 1,108 qualified loan officers were trained, many of them recruited from outside the participating banks;
- The average nonperforming loan ratio was kept below 1 percent；
- Some of the participating banks mainstreamed commercially-oriented MSE lending after graduation from the program. The best performing banks have become industry leaders in MSE financing；
- The project demonstrated that MSE lending could be safe and profitable if done properly. Today many other banks in China are beginning to engage in MSE lending in a commercially-oriented fashion；
- MSE lending technologies have been successfully replicated in rural finance in selected participating banks.