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.