The Regulatory Environment for Microfinance in China

This paper discusses the present regulatory environment for microfinance in China and suggests steps for its improvement. It discuses China's:

• Microfinance industry's history;
• Microfinance regulatory environment;
• Rural financial policy and the possible future trends.

The paper then lists the advantages and disadvantages of China's microfinance regulatory environment:

• Advantages:
  • Government's positive attitude toward the microfinance sector;
  • Policies becoming more open and the Government's encouragement to urban commercial banks to diversify into microfinance;
  • No limitations on loan interest rates offered by commercial banks;
  • A number of innovations in microfinance operations.
• Disadvantages:
  • No unified regulations for microfinance institutions (MFIs);
  • No official documents for the licensing and regulating credit-only microfinance projects;
  • Private banks not permitted to experiment with microfinance;
  • Weak supervisory capacity within the regulatory agency;
  • Lack of a formalized regulatory system leading to NGO and quasi-governmental MFIs operating on a loose understanding of government memorandums.

The author recommends that the Government should:

• Organize MFIs into financial and non-financial institutions;
• Establish guarantee institutions, or funds, to contribute to fundraising and supervising MFIs;
• Not intervene in setting market interest rates for institutions;
• Not subsidize interest rates;
• Move towards market interest rates;
• Have different supervision policies for deposit and non-deposit institutions;
• Reduce or waive taxes for MFIs;
• Encourage commercial insurance institutions to offer agricultural insurance;
• Provide training to microfinance organizations.