> Posted by Jeffrey Riecke, Communications Assistant, CFI

Much of the financial world’s attention is directed at China and the global impact of fluctuations in its banking and financial markets. Last week saw a sharp increase in the country’s short-term borrowing costs, and a record high in the country’s interbank (bank-to-bank) overnight rate – a rate that serves as a gauge of liquidity in a market. In a statement published on Monday, the People’s Bank of China asserted that the liquidity in the country’s banking system overall is at a reasonable level, but emphasized that financial institutions need to improve “awareness about preventing risks.”

Turning with impeccable timing to China’s small and micro lending sector, last week PlaNet Finance released its latest research report, Emerging Risks on China’s Path Towards Financial Inclusion.

China first began experimenting with microfinance in the late 1990′s, much later than many other countries. Since then, in part due to a policy environment aimed at supporting rural area and small enterprise development, the industry has grown rapidly, with over 6,000 microcredit companies as of June 2012. At this time of counting, only 25 percent of these companies had operating histories of longer than three years, and only 50 percent longer than two years. Of China’s current population of over 1.3 billion, an estimated 400-500 million live on only two dollars a day. As China’s microfinance industry continues to grow and serve more individuals, effective risk management becomes increasingly important. The PlaNet Finance report reviews the development of the Chinese microfinance sector and identifies four pertinent industry risk areas.

  • Many microcredit companies mainly focus on credit risk, without reference to other risks, such as governance risk, external risk, operations risk, IT systems risk, and liquidity risk
  • Restrictions in access to funding create obstacles for the scaling-up of operations
  • Emerging market leaders are beginning to face the risks inherent in a rapid expansion strategy, including the challenges of maintaining control and standardization, particularly as portfolio monitoring, risk management, and IT systems have not kept pace with the increasing scale and complexity of operations
  • A disproportionately fast increase in lending volume in certain urban markets raises concerns about potential future risks regarding market overcrowding, over-indebtedness, and inadequate consumer protection

The report is part of the Microfinance Robustness Program, an initiative of PlaNet Finance in partnership with the Credit Suisse Microfinance Capacity Building Initiative. The program is focused on upgrading risk management as a necessary foundation for the industry’s sustainable growth, with a focus on China. The program produces and disseminates research, trainings, and tools. Along with the report, the program released a credit risk dashboard tool for MFIs last week. The tool, available to download here, visualizes the credit risk exposure of an MFI.

Image credit: Microfinance Robustness Program

Have you read?

Designing Financial Services for China’s Marginalized

The “Lucky Three”: Tailored Products for the Rural Poor in China

Banana Skins 2012: Overindebtedness Tops the Risk Charts