The poverty rate in China has been in decline. According to the Vice Minister of Finance, Yu Weiping, it has reached its goal of poverty reduction by the end of 2020. Although they have succeeded in pulling a large chunk of their population out of extreme poverty, the present low-income sector is unable to fully utilize the available financial services.
Despite the significant improvement in financial inclusion as well as economic integration, there are still some sections of society that lag behind. We will discuss the key issues faced by the marginalized sector and how redesigning existing financial services according to popular needs can help improve the situation.
Aligning Financial Services with the Needs of the People
China has seen exponential economic growth in the last few years. Unfortunately, the benefits of this economic growth have failed to reach certain corners of the country. The market reforms of 1978 left the poor to fend for themselves by taking away most of their social support. They were left without a job and without pension plans or government-sanctioned rations. So, this section of society finds it difficult to improve its social standing.
Further, due to the lower investments in this section, commercial banks have kept from including them in their business models. They are deemed as low-priority, high-risk customer base. The need for product innovation at the base of the pyramid is essential for increasing financial inclusion.
Understanding the Needs of the Marginalized Community
Financial exclusion keeps a group of people from availing of financial services and improving their living standards. These groups are often the ones most in need of financial assistance. As most of the financial services are targeted at middle-class and upper-class people, the products are designed in a manner that is useful for them. The lower-income group cannot access these services as the costs are too high and the products do not even solve the problems they face on a regular basis.
To remedy the situation, first, the needs and grievances of the people need to be understood. What they require from their financial institutions differs markedly from what high-income customers require. Hence, the products should not be uniform but rather flexible to meet those requirements.
Lack of Banking Facilities in Rural Regions
The formal institutions are physically situated only in urban areas. People living in rural communities and remote areas cannot access these facilities, which keeps them on the margins. The four major banks in China closed over 30,000 of their branches in rural areas. Already, the number of unbanked citizens is around 64% of China’s rural population. This will further increase the gap between the rich and the poor. Steps toward remedying this situation need to be taken immediately. Increasing formal financial institutions and new products are some suggestions for increasing poverty outreach.
Prioritizing the Low-Risk Clientele
Banks and other formal institutions target low-risk clientele to market all their products. The low-risk clientele is usually middle-class and upper-middle-class families who are already well-to-do so the income from investing in these groups is quite high for the banks. But to include the lower-income category in their business model is not very profitable in the short-run. So, the financial institutions prioritize the richer group, leaving very few utilities available to low-income residents. Such discriminatory practices further the gap between the rich and the poor in the adventures in love and credit reporting.
Marginalized communities are already pushed into a corner due to the lack of commercial banks in rural areas. They cannot access savings options, or take out credits because of their poor financial conditions. But they would need a lot of help from the bank, like loans and credits, to improve their financial standing. On top of discriminatory practices by banks, the social protection that kept the rural community afloat in times of hardship has disappeared. Retirement plans and unemployment benefits, which were earlier distributed by the state, are now alarmingly reduced so that they almost amount to nothing.
Exploitation by Informal Financial Service Providers
The gap created by the closing of banks in rural areas was promptly filled by alternative financial service providers. These include loan sharks, money lenders, labor bosses, and other informal institutions that provide for needy customers and charge a high rate for their services. Since people living in rural communities are desperately in need of these services and have nowhere to turn, they give in to the demands of the money lenders, and their financial situation worsens over the years.
Looking Towards the Future
The state of China’s economy has a strong base, but it is highly discriminatory towards marginalized communities. The rural community is handicapped due to the lack of proper financial services available to them. But the situation can be remedied if efforts are made in the proper direction. The reason behind poor financial inclusion in China is very similar to why people aren’t saving money in Mexico. Various strategies are being implemented in Mexico to remedy the situation and China can also benefit from similar strategies. They are:
Addition of Need-Based Financial Products
The major discrepancy between the richer and poorer communities is the difference in how they utilize financial services. And the financial institutions are grossly underprepared to cater to the needs of the lower-income section. Banks and financial institutions need to introduce more financial products that are specifically tailored to the customer’s needs.
Policies and Strategies for Client Protection
Simply introducing new products is not enough, the implementation of these services needs to be monitored. Along with new products and services, there need to be policies ensuring that financial service providers can not exploit their customers.
Improving Digital Financial Services
Market analysis of China suggests that its population is primed for the introduction of a national mobile-based financial service system. The market characteristics of China are very similar to Kenya where the success of the M-PESA mobile payment platform has been phenomenal. The impact of digital field applications can be observed in the long run. If proper execution is done, the gap between financially excluded and included will reduce drastically. A national mobile-based financial remittance system brings the entire population under the financial system, and along with it, all the benefits of having bank accounts.
Q1. What are the financial services of China?
The financial services available in China roughly fall under four categories: monetary financial services, capital market services, insurance, and other financial services. The last category includes digital financial services, nonfinancial institutional payment services, and financial information services. The financial services available in China roughly fall under four categories: monetary financial services, capital market services, insurance, and other financial services. The last category includes digital financial services, nonfinancial institutional payment services, and financial information services.
Q2. What is China’s sustainable finance policy?
China has focused on sustainable finance policy by establishing the Green Financial System. China’s Guidelines follow that green initiatives are promoted by providing credits for specialized green-guaranteed programs, subsidies on interest rates for green loan-supported projects, and launching a national-level fund for green development.
Q3. What is the regulatory body of money in China?
The regulatory body of money in China is China Banking and Insurance Regulatory Commission (CBIRC). They have regulatory and supervisory powers over the banking and insurance institutions and their market conduct in the country.
China has a growing and powerful economy but it is careless about taking care of the weakest sections of its population. As the social benefits received from the government waned, people in the marginalized community were left to fend for themselves without even access to proper financial services. The microfinance industry is neglected and all financial needs are met by informal, sometimes unethical, financial service providers. The CBIRC should make a case for social investment in microcredit review because, without social benefits, the poor are barely making ends meet. Advanced technology and innovative product design are the only way out.
- Jonas Taylor is a financial expert and experienced writer with a focus on finance news, accounting software, and related topics. He has a talent for explaining complex financial concepts in an accessible way and has published high-quality content in various publications. He is dedicated to delivering valuable information to readers, staying up-to-date with financial news and trends, and sharing his expertise with others.
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