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

How can the Chinese microfinance be better regulated?
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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.

About this Publication

By Chia, L. & Counts, A.