Microfinance Regulation and the Chinese Context: An Opportunity for Making a Major Impact on Reducing Poverty

This paper discusses the limitations of the current regulatory environment on microfinance organizations and programs in China, while presenting some alternatives to the current regulatory/supervisory environment.

It lists the following characteristics of the current regulatory environment in China:

• Lack of formal policies to govern microfinance organizations;
• No clear legal basis for microfinance institutions (MFIs) to operate and plan for growth and sustained impact;
• Strict restrictions on the transfer and conversion of foreign currency loans;
• Tendency towards interest rate ceilings on loan products.

The paper recommends the following potential initiatives for facilitating a supportive legal and regulatory environment for microfinance:

• Short-term measures:
  • Draft microfinance policy to be incorporated into current banking regulation that (1) lifts interest rate caps, (2) liberalizes acceptance of funding from all wholesale sources by all MFIs;
  • Develop and implement training for all microfinance personnel;
  • Allow community credit unions and MfIs to take retail deposits from clients;
  • Institute a policy requiring MFIs to provide proper disclosures on their process and calculation of interest rates.
• Medium-long term measures - To develop:
  • A full set of policies governing microfinance in China;
  • Standards for licensing different types of microcredit organizations that are fully sanctioned by the Government;
  • Develop an entity to supervise all microfinance entities in a cost-effective manner;
  • Collaborate with international organizations to set uniform methods for accounting, reporting and supervising MFIs.