In the afternoon of April 14th, Li ShiBin is sorting out the table for “Village Mutual Funds.” From his office computer, Li Shibin can see the records over the past few years. The records show more than 200 people and 400 mutual funds provided by villagers, amounting to roughly 2 million RMB.
Li ShiBin is the Vice-Secretary General and the Director of the Credit Department for the Association for Rural Development in Yilong (ARDY).
ARDY is a non-banking microfinance organization. ARDY started in 1995 with the support of 2.65 million RMB from the United Nations Development Programme (UNDP; United Nations Educational Scientific and cultural Organization, UNESCO). This fund was for sustainable poverty alleviation in Yilong County, Sichuan Province.
Li ShiBin at the moment is weaving their dream of becoming a Village Bank similar to Grameen Bank.
Presently, ARDY in Nanchong has attracted extensive attention from societies all over the world.
The main battlefields lie in rural areas where there is a need to stimulate domestic demand. The farmers who return home to start local businesses primarily require funds. However, the villages in the west lost too much in the past; thus, addressing this area of poverty is an urgent and difficult problem in the western rural areas.
ARDY’s new opportunity: to become a real business bank. “We need to become that kind of real business bank,” Li ShiBin emphasizes.
In the entire Nanchong district, ARDY is just one type of organization that gives out microfinance loans to customers without a financial license.
Li ShiBin says that migrant farmers returning home can get capital to start a business in several ways. S/he can go to village credit unions, postal savings, loan companies, or Huimin Bank. They charge an interest rate around 8.4-10.44%. “Of course, you can also get high-interest loans from loan sharks with interest rates of 10-25%. We generally have a nominal interest of 8-10%.”
According to ARDY’s 2008 survey, the demand for loans in rural areas in the region is great.
Presently, ARDY has established 8 branches in 8 different towns, containing a permanent population of 12,000-15,000 households or 60,000-80,000 people. As of now, ARDY has more than 3000 households as clients. If there are enough funds, there is enough space to increase another 3000-5000 households. Yilong County contains 71 towns with a permanent population of 900,000 people and 250,000 households; according to the market survey, 150,000 households have a demand for loans. With the current conditions of the branches, after ARDY expands, ARDY can have a scale of 50,000-80,000 customers.
Yet, another number causes people to deeply ponder. From 2000 to 2006, the labor, agricultural, and construction banks have withdrawn 2701 networking offices, decreasing in size by 60.37%.
“Postal savings started giving out loans last year. Before, it was a rural credit union. Thus, for us, there is a lot of empty room for us to expand,” says Li ShiBin. “Of course, this empty space does not exclude certain foreign banks or commercial banks out to benefit the farmers by using their market behavior and their licenses. I am talking about a real credit institution that purely wants to service the farmers.”
Village Bank’s Survival Region
ARDY offers microfinance loans to “poor people” who cannot receive any financial services from commercial banks. These loans do not require assurance or mortgage. So far ARDY has already made a small impact in Nanchong.
Having a non-governmental microfinance organization in Nanchong, a town in east of Sichuan Province, is not a coincidence. In Nanchong, there is more than 6 million people within the 7 million who are farmers. Since 2007, Nanchong’s name is often connected to rural financial system reform. “This is because there is an abundance of opportunities for microfinance.”
“A manager of a microfinance organization is someone who wears grass shoes and rides his own motorbike to service the village’s poor farmers,” says Li ShiBin, “At most, they just get reimbursed for fuel money. Costs are low. If they wear leather shoes and drive cars to find customers in the countryside, then costs will be high. Thus, other banks will definitely not do it.”
Like Grameen, ARDY has copied the model with the following characteristics: small short-term loans, continuous borrowing, 5-people union to borrow, focus on lending to women, and only lending to the poor.
“Giving loans to women is because women’s mobility in society is low. They are poorer than those in poverty. The poorer the population means the greater their trustworthiness and credit. This is an observation we have made for more than a decade, “ Li ShiBin explains. However, later on, ARDY’s Secretary General Gao XiangJun discovered that this kind of policy may need to undergo a cultural change in order to screen for better-suiting customers.
“We later gave up the 5-people unions, which was needed previously for people to borrow. The reason is simple. Yilong is an administrative village that is highly distributed and dispersed. In addition, clients’ needs are not always the same. It is just too complicated for more than 10 of them to take out a loan at the same time. In fact, we later found out that those in the farmer population who want to start a business do not lack credit. Instead, they lack people to provide them with financial services. That is the most basic,” Li ShiBin clarifies. Li ShiBin goes further, “We loan however much the farmers need. We are able to determine how much they really need by taking into consideration their practical cash flow. We suggest them to either borrow more or borrow less and offer to plan a repayment schedule.”
In reality, giving limited credit funds to these farmer households that really need the money is the true difference between microfinance companies and other rural financial institutions.
In regards to risk control management, this non-banking microfinance organization has its own unique method and manner.
“When calculating risk, we do not follow the current risk. Instead, we also include overdue loans. In accordance with the lengths of time for overdue loans and relevant ratios, we prepare the funds for the loss. As an assessment of task completion, the loans written off the year before must be recovered this year. The loans should not be re-financed in order to avoid bad debts. These are all according to international and not general business standards,“ says Li ShiBin.
A reporter saw a copy of ARDY’s March 2009 Business Indicators. The percentage of repayments is above 99% with risk control under 1.06%.
“A farmer in Nanchong is able to easily get a loan.”
“Nanchong's Maxim Corporation and ARDY all have a model for rural microfinance, “ says Guo XiaoMing, Director of Agricultural Economics Center in Sichuan Province.
In the last 13 years since ARDY was established, ARDY provided almost more than 70 million RMB in non-mortgage loans and assisted almost 150,000 people develop. On the other hand, Maxim Corporation gave out 4.38 million RMB in loans to 1908 households. This means that each household received 23,000 RMB.
Li ShiBin reveals that ARDY provided 200-10,000 RMB in loan amounts in Nanchong’s finance market, comparing this to village credit unions’ 500-50,000 RMB and Huimin Bank’s 1000-200,000 RMB. Thus, farmers in Nanchong are able to get loans easily is a local consensus.
Marketing manager of Maxim Corporation Chen Min gives an example to the reporters. One time, a bee keeper asked for a loan, but bee keepers usually do not stay in one place. Would you loan to this person? “Our company’s manager personally visited the bee keeper’s farm. He ended up finding a profitable, healthy model. In general, as long as the farmer uses the money on production and not on consumption, we will simply the application process to give him/her a loan,” informs Chen Min, “While these agencies and organizations can cover a large population of people, they only cover less than 30% of the market demand. Even though it seems that the effects from microfinance are small, these small effects bring huge changes to their lives.”
For example, in Yilong County, a local woman used 300 RMB loan to buy two piglets. To pay back the loan and interest, she labored as a migrant worker 3 days every month. She changed her original life in poverty.
“Banks rejecting services to these low-income residents, people in poverty, and households with miniature businesses is logical,” says Li ShiBin matter-of-factly. So it is possible to apply for government support to establish microfinance companies. As a microfinance organization, our hope is to provide low-income farmers loans without the need of insurance or mortgage.
Unfortunately, the reality is likely to disappoint Li ShiBin. The China Banking Regulatory Commission and the Ministry of Agriculture issued a joint named “Suggestions to Successfully Run Farmers’ Organizations and Their Financial Services” in February 2009, allowing eligible farmers’ organizations to follow market principles and put funds into banking institutions. Yet, these cannot match ARDY, this kind of community organization, or Maxim’s, this kind of foreign investment microfinance company.
Chen Min adds on, “An investor cannot own more than 30% of stocks; otherwise, there will be a large impact on Maxim’s strategic investment plans in China. Because microfinance company’s operation costs, capital investment, and costs to process a loan are high, we need to enlarge or model in order to gain benefits and achieve financial sustainability. Yet, as of now, we still have our limitations.”
The 11th rule from the “Temporary Plan for Managing Microfinance Company in Sichuan Province”: The microfinance company’s surplus in contributed assets from banking institutions cannot exceed 50% of net capital.”
“To bring sustainable development and appropriate investor returns into reality, we need the leverage ratio (debt/interest) at least 4-5 times bigger. Sometimes during peak times, we need the ratio to be 8-10 times bigger; otherwise, it will be difficult to attract enough for future contributed assets,” Chen Min describes.
What the reporters understood about ARDY: Because the loan repayment is divided into several installments (method for repayment: [loan amount + yearly interest]/amount of repayments), there should be 24-36 installments in one year. The operating cost ratio is usually between 5.5-6.5%. In addition to loan losses and other costs, this organization in 2008 can have an annual interest rate for contributed assets around 4%.
“”In the financial projections for 2009, the average return on assets is 1.81%. With the gradual expansion of loan size, our profit margin and average loan return will also gradually increase. By 2013, we expect the average return on assets will grow to 3.21%,” says Li ShiBin, “We did seek for cooperation with agricultural banks, but we failed. The other party is satisfied with our financial conditions, but, because we are a social organization, money cannot come in. Non-registered companies are not allowed.”Li ShiBin helplessly adds on, “From the beginning of last year, Sichuan Province has raised the threshold to register a microfinance company. It takes at least 100 million RMB to register a company. Right now there is more than 2 million RMB recorded in mutual funds. These are all 1-year deposits. In order to obtain further development in the next 5 years, we need another 1.7 billion RMB. This can only be solved with a single change in financial donation and through debt and equity financing.”