The Regulatory Environment for Microfinance in China

Publication Date: Apr 2005
Published by: Microfinance Regulation and Superivision Resource Center
Document Type: PDF

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The impact of the existing regulatory environment on access to financial services in China

This paper discusses the present regulatory environment for microfinance in China and suggests steps for its improvement. It discuses China’s:

• Microfinance industry’s history;
• Microfinance regulatory environment;
• Rural financial policy and the possible future trends.

The paper then lists the advantages and disadvantages of China’s microfinance regulatory environment:

• Advantages:
  • Government’s positive attitude toward the microfinance sector;
  • Policies becoming more open and the Government’s encouragement to urban commercial banks to diversify into microfinance;
  • No limitations on loan interest rates offered by commercial banks;
  • A number of innovations in microfinance operations.
• Disadvantages:
  • No unified regulations for microfinance institutions (MFIs);
  • No official documents for the licensing and regulating credit-only microfinance projects;
  • Private banks not permitted to experiment with microfinance;
  • Weak supervisory capacity within the regulatory agency;
  • Lack of a formalized regulatory system leading to NGO and quasi-governmental MFIs operating on a loose understanding of government memorandums.

The author recommends that the Government should:

• Organize MFIs into financial and non-financial institutions;
• Establish guarantee institutions, or funds, to contribute to fundraising and supervising MFIs;
• Not intervene in setting market interest rates for institutions;
• Not subsidize interest rates;
• Move towards market interest rates;
• Have different supervision policies for deposit and non-deposit institutions;
• Reduce or waive taxes for MFIs;
• Encourage commercial insurance institutions to offer agricultural insurance;
• Provide training to microfinance organizations.