China City Commercial Banks: Opportunity for Microfinance Delivery?

This paper provides an introductory background of Chinese City Commercial Banks (CCBs) and considers their applicability for the delivery of microfinance services in China.

The paper examines:

• The history of the microfinance movement in China;
• The Chinese banking sector, with focus on CCBs.

It lists the following advantages that CCBs have in terms of microfinance delivery:

• Focus - local and SME;
• Substantial infrastructure, in terms of branch networks, systems and human resources;
• Sufficient financial resources.

The paper states that offering microfinance products would offer CCBs the following opportunities:

• Market demand;
• Limited competition;
• Increased profitability.

The paper lists the following factors that limit CCBs' ability to serve microenterprises:

• Perceived high risk of microfinance;
• High transaction costs;
• Lack of expertise and trained staff;
• Contradictory ambitions;
• Low profitability;
• Lack of collateral.

It concludes that:

• CCBs possess the institutional compatibility, branch infrastructure and financial resources necessary for microfinance programs;
• Large market potential and profit margins make microfinance attractive to them. However, they perceive microfinance as being risky and costly; this is due to a lack of exposure to international "best practices";
• CCB managers, who want to enter microfinance, should consider cooperation with foreign shareholders and technical assistance providers. Such initiatives would catalyze the potential of CCBs to deliver microfinance services to local communities in China.