Every year just before the spring plowing, CFPA Microfinance General Manager, Liu Dongwen, gets the same request: more money.
“Farmers come out in droves and block up the doors to our branch offices,” Liu says. “The rationale is that the faster you can get a loan, the faster you can improve upon last year’s harvest.”
But there is a problem. CFPA Microfinance has a shortfall of loan capital, and every year at this time Liu Dongwen is tempted to temporarily withhold branch employee salaries so that more farmers can have the funds they need to sow their seeds on schedule.
This may sound alarming for a country that has risen to prominence over the last decade as one of the world’s strongest and largest economies. But according to the World Bank, there are still nearly 160 million people in China that live on less than $1.25 a day, and income disparities between rural and urban areas have been rising precipitously. There are 592 state-designated poor counties in China and over 17,000 poor villages.
“For the sake of argument, let’s say that every county has 30,000 poor residents and that each loan is roughly 10,000 RMB ($1600),” says Du Xiaoshan, researcher at the Chinese Academy of Social Sciences (CASS). “This number is extraordinarily large. Even as a conservative estimate, there is a huge funding gap that exists in rural areas.”
The Chinese government, as part of its Rural Poverty Alleviation Plan, has pledged subsidized grants of 150,000-250,000 RMB ($25,000-$40,000) to state-designated poor villages to promote microfinance within rotational savings self-help groups. But even taking this funding and that of civil society organizations into account, the existing amount of rural financing doesn’t come close to meeting the total need.
“CFPA Microfinance is the most established non-profit microfinance organization in China,” continued Du, “but it currently only has an outstanding loan balance of 1.6 billion RMB ($260 million), far less than what would be required to reach each of these residents.”
CFPA Microfinance operates on the largest scale of any domestic microfinance organization in China focusing specifically on micro-entrepreneurs in rural communities, covering 132 counties in 16 provinces with over 224,000 active clients. As the microfinance industry’s first social enterprise in China, CFPA Microfinance, established in 2008, has come a long way since it began as a Poverty Reduction Project with the World Bank in the Qinba Mountains in 1996.
“Our branch offices have been increasing at a rate of 40% per year,” says Liu Dongwen, who just signed a cooperative agreement to open nine new county branch offices in Qinghai, one of the poorest provinces in China. “But we still have a long way to go before we can satisfy all of our clients’ microcredit needs.”
CFPA Microfinance’s clients – predominantly low-income farmers in rural areas without any physical assets – are considered by banks to have a low credit rating and high risk, and most are ineligible for traditional bank loans. In spite of the risk, CFPA Microfinance has for 18 years invested billions of RMB into China’s vast market of non-financially backed rural villagers without requiring collateral or security. The gamble that it took on these clients has come to bear fruit: since 2006, CFPA Microfinance has been able to leverage its loan portfolio and the high creditworthiness of its borrowers to secure commercial funding from China Development Bank, the Agricultural Bank of China, and the Bank of Beijing.
But loan financing continues to be one of the biggest bottlenecks in the development of the microfinance sector in China. Many microfinance NGOs cannot gain access to even a small amount of loan financing and must rely on donations. Non-profit microfinance organizations that have achieved commercial funding have had their pro-poor mission called into question by the public. Bank loans, even when they are available, often carry with them the pressure of high interest rates. In addition, over reliance on banks and development financial institutions can be risky, as this funding tends to be more sensitive to external shocks.
Therefore, it has become increasingly important for microfinance organizations like CFPA Microfinance to diversify their funding sources beyond traditional banks and access capital markets investors. CASS researcher Du Xiaoshan believes that securitization may be one path toward achieving this goal.
Securitization typically involves the conversion of a pool of microloans with predictable future cash flows into tradable securities. These securities are then sold to third parties such as banks, mutual funds, and insurance companies in exchange for a decreased risk profile and an influx of immediate, lower cost capital for the microfinance organization. Since 2006, securitization has been undertaken by microfinance organizations such as Grameen, SKS Microfinance, and Equitas as an increasingly ubiquitous tool to meet funding requirements. But in China, microloan securitization is still very much a fledgling practice.
CFPA Microfinance, no stranger to being a pioneer in the field, announced last week that as a way to alleviate its loan funding shortfall, it will join forces with CITIC Securities, a leading investment bank in China, to explore asset securitization. CFPA Microfinance hopes that packaging its credit receivables as bonds will attract the interest of investment institutions as a way to raise more capital than they currently borrow in bank loans, and at a lower cost.
“Not only does securitization represent an innovation within financing channels, but it is also a model of innovation in the field of poverty reduction,” says Du Xiaoshan.
But CFPA is not only looking domestically for new financing opportunities. As part of its capital raising and debt financing campaign, CFPA Microfinance is also targeting foreign investment firms with a specific interest in funding microfinance organizations. After gaining special approval from the government to accept foreign debt capital, CFPA Microfinance can now remit loans in foreign currency, allowing the organization to access a global network of industry investors for the first time in its history.
General Manager Liu Dongwen believes that this new capability not only represents a huge opportunity for the organization to reach even more rural clients, but he also sees it as a big step forward for the microfinance field in China.
“Accessing foreign capital has the advantage of allowing more institutions and individuals to get involved in the microloan movement to accelerate the pace of rural poverty alleviation in China."