> Posted by Dan Wang, China Association of Microfinance

This post is part of the Center for Financial Inclusion’s Expert Exchange: Building A Movement Toward Financial Inclusion by 2020, cultivating conversation around the goal of reaching full financial inclusion by 2020. For further questions about this series, write to Sonja E. Kelly, Fellow, Center for Financial Inclusion at Accion.

Bringing microfinance products to Northeast China’s rural communities requires innovative loan products. One of the China Association of Microfinance‘s members, Ewenke Baoshang Village & Township Bank (EBVTB), strives to reach two very underserved groups in China—rural farmers and nomads. They do this using what they call “the Lucky Three”—three loan products tailored to the needs of the rural poor. EBVTB’s success with these products lies in a deep understanding of what these groups need and want from financial services.

However, it is no small feat to figure out what these prospective clients do need and want. EBVT’s target clients live in China’s grasslands, far from urban centers and formal financial institutions. To get the relevant information, the bank interviews clients and conducts focus groups, supplemented with local statistics to understand the unique business activities of these rural farmers and nomads. We know that they are primarily involved in animal husbandry, as the conditions are often too harsh for growing crops. A client demand survey revealed that this group has difficulty with most lenders’ collateral requirements, short loan terms, inflexible repayment schedules, small loan sizes, and lengthy wait times.

Based on this information, EBVTB determined that loan product terms must match the animal and crop production cycle, seasonal variations in weather, clients’ profit margins, and their available collateral. Armed with significant data on target clients’ needs, EBVTB designed “the Lucky Three”—a credit line, an enterprise loan, and a loan for cooperatives. The three loans share three important characteristics—alternative collateral, flexible repayment methods, and adequate loan amounts.

Traditional Chinese banks require borrowers to provide collateral such as the titles to land, vehicles, or equipment. Needless to say, most of EBVTB’s target clients cannot provide such collateral, so we accept alternative collateral in the form of “pasture operation certificates”—certificates issued by the local government that grant farmers the right to raise animals in a given pasture. This is a form of collateral that its clients can actually provide.

Additionally, in order to match the production cycles and geographical location of farmers and nomads, EBVTB allows clients to repay interest either monthly or quarterly, and make irregular principle repayments. Since clients’ income streams are variable and often occur at infrequent intervals, this flexibility allows them to pay on time, directly from their business income.

Finally, EBVTB has found that most traditional lenders issue loans that are too small to meet the capital requirements of many farmers and nomads. Market research showed that the typical loan amount offered to these clients is between 30,000 to 50,000 yuan (USD 4,800 to 8,000). However, EBVTB offers credit lines up to RMB 100,000 yuan (USD 16,000) to allow farmers and nomads to capitalize their businesses without taking additional loans from other sources.

In China, we’ve seen that even the most carefully designed products can fail without carefully managed customer service. So in addition to offering products that work for our target clients, EBVTB works hard to develop a good relationship with clients. Potential clients are screened for their ability and willingness to use and repay a loan, and within 14 days after loan delivery, a loan officer visits the client’s house and business to enquire about loan use and answer any questions the client may have. The same officer follows up once a month either by phone or field visit (depending on the weather and road conditions). A separate department randomly visits clients and asks clients about any concerns or complaints, such as inappropriate loan officer conduct. In this way, the bank can understand how clients are served and whether they are satisfied with our products and service quality.

We hope that our efforts will inspire and encourage others to consider how the right product design creates exciting opportunities for financial inclusion.

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