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Promoting Commercially-sustainable Lending to Micro and Small Enterprises

April 8, 2014


China has about 60 million micro-and-small enterprises, accounting for 99% of the total enterprises. They need financing to grow but faced difficulty accessing credit from formal financial institutions. A World Bank-financed project has helped to improve the situation.

World Bank Group

The Project, supported by a Bank loan of $100 million, has demonstrated that micro and small enterprise (MSE) lending can be commercially sustainable in China. A total of US$ 3.2 billion had been provided for MSE financing in China. From this total, $95 million had been provided by the World Bank, $50 million by KfW, $180.8 by CDB, and $2.8 billion by participating PFIs, and trained more than 1,100 credit officers. The MSE lending technology was successfully replicated in rural finance and Africa region as well.

Challenge

China had about 60 million MSEs, or 99 percent of the total number of enterprises. MSEs had great potential to contribute to GDP growth and job creation.  However, one major obstacle for MSE growth was 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.

 Solution

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.

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 lend 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.


" I learned from a friend that small loans from Taizhou Bank were available. I went to apply without much hope in mind. To my surprise, the loan was disbursed to me after investigation on site. "

Chen Dezhi

owner of a small business in garment manufacturing in Taizhou, Zhejiang Province

Results

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].
  • The project benefited about 180,000 MSE borrowers, with average loan size below RMB 100,000: rising from RMB 59,150 in 2008 to RMB 89,700 in 2011.  
  • 1,108 qualified loan officers[2] 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;

 

Baseline

Value

Actual

2008 YE

Actual

2009 YE

Actual

2010 YE

Actual

2011-June

Line of credit component

Number of MSE loans outstanding

 

32,795

50,682

64,338

63,540

Volume of MSE loans outstanding

 

RMB1,940 M

US$245 M

RMB3,560 M

US$450 M

RMB 5,716 M

US$ 723.5 M

RMB 5,700 M

US$ 721 M

Average Outstanding MSE loan size

None

RMB 59,150

US$ 7,470

RMB 70,250

US$ 8,880

RMB 88,850

US$ 11,250

RMB 89,700

US$ 11,350

Cumulative number of MSE borrowers

None

60,000

114,187

175,184

205,372

Cumulative volume of MSE loans disbursed

 

RMB4,600M

US$582 M

RMB10,180 M

US$1290 M

RMB 17,978 M

US$2,280 M

RMB 17.9 bln

US$2,3 bln

NPLs

 

Less than1%

Less than 1%

Less than 1%

Less than 1%

TA Component

Number of CDB MSE unit staff able to evaluate and monitor PFIs eligibility to engage in MSE activity

0

N.A

N.A

N.A

7 in CDB HQs, and 12 in CDB branch

Number of PFIs that adopted and implemented institution development plans and project-related credit technologies

0

12

12[3]

12

12

Number of CDB MSE unit in-house advisors able to advise PFIs in conducting MSE lending business.

N.A

N.A

N.A

N.A

20 internal candidates received classroom and on-the-job training for in-house training purposes

Number of trained loan officers in PFIs

0

N.A

N.A

N.A

1,079

[1] Source: CDB and six PFIs, 2010.

[2] Source: CDB and six PFIs, 2010.

3 The actual figures in 2009 do not include data from Lanzhou Bank, Chongqing Bank and Deyang Bank which did not have credit relationship with CDB; however, the 2008 figures include the performance of these 3 PFIs. 


" Participating in the project is like a window opened for our bank, enabling us to take a fresh look at ourselves. As a result, our operating performance has been greatly enhanced. "

Wang Huiping

President of Baoshang Bank

Bank Group Contribution

The World Bank-funded MSE Finance Project was implemented over the 2007-2011 period and amounted to US $100 million. Of the total, the line of credit amounted to US $95 million, while TA funds to USD$ 5 million. All project funds for the line of credit were disbursed by early January, 2009. Funds for the TA were canceled.

The Bank engaged in policy dialogues with the government to catalyze interest rate reform and changes in regulatory framework to clear the way for boosting MSE lending.

Partners

Initial on lending resources provided by the World Bank amounted to 14% of total program, which was funded also by KfW and CDB. The total credit line under the program was initially estimated at US$699 million of which US$95 million were financed by the Bank loan. KfW provided a loan of US$50 million in addition to the credit facility and a grant from the German Government of 3 million Euros.China Development Bank provided co-financing of about US$600 million as well as technical assistance to the participating banks.

Moving Forward

Thanks to the project’s demonstration effect, more and more banks are getting involved in commercially-oriented MSE finance. The MSE lending technology has also been successfully replicated in rural finance, and in Ethiopia where a study tour was conducted in China in March 2012 and a concept note was completed to promote MSE lending in Ethiopia.

In recognition of the bottle neck and vast demand for training and capacity building, the Bank has launched an initiative to create an academy for inclusive finance, with the objective to provide world class training and advisory services in lending technology, management and leadership skills to credit officers and managers. 

Beneficiaries

The project benefited about 180,000 MSE borrowers, with the average loan size below RMB 100,000 – rising from RMB 59,150 in 2008 to RMB 89,700 in 2011.

Chen Dezhi owns a small business in garment manufacturing in Taizhou. Like many MSEs, he had difficulty to access to bank lending in the past. “I learned from a friend that small loans from Taizhou Bank were available.  I went to apply without much hope in mind. To my surprise, the loan was disbursed to me after investigation on site,.”

Baoshang Bank in Inner Mogolia is one of the 12 participating banks in the project. “Participating in the project is like a window opened for our bank, enabling us to take a fresh look at ourselves.  As a result, our operating performance has been greatly enhanced,” said Wang Huiping, President of Baoshang Bank.

180,000
MSE borrowers have been benifited from the project, with average loan size below RMB 100,000: rising from RMB 59,150 in 2008 to RMB 89,700 in 2011.


Project Map