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Micro-credit Service to Smallholders for Income Generation Linxiu Zhang Center for Chinese Agricultural Policy (CCAP) , Chinese Academy of Sciences (CAS) Limitations of presentation A presentation on rural credit service in general rather that micro-credit service BUT, most rural household credit needs are relatively small Will have limited mentioning of livestock BUT, studies found that expansion of livestock production or small enterprises are the business mostly need credit services Not intended to offer solutions mainly to share observations Rest of Talk Why we interested in rural credit services- motivation; What is the current status of credit services in rural China- supply vs demand; What are needed at policy level to better serve rural households credit needs- some thinking only Motivation Access to credit service is critical to ensure active participation of small farmers in the market; Evidences show increased rural savings have not been channeled to agricultural/rural sectors; High operational cost, high risk Objective- lay out facts, but seek to generate some policy implications Current situation – supply side Main financial institutions in rural area ABC- Agricultural Bank of China ADB- Agricultural Development Bank of China RCC- Rural Credit Cooperatives Mostly are withdrawing from rural areas and leaving RCC as the only one to provided limited services Initiative- micro-credit With the initial help from international organizations, Mostly adopting Grameen Bank model, which stresses the importance of joint liability lending and regular group meetings, For poverty and women targeting Outcomes from micro-credit Provided good support to rural small households, especially the poor; Project-based with limited access by small farmers at large; Heavily dependent on subsidies; Evidence has shown that one of the major determinants of success is fairly idiosyncratic. For example, the most successful ones were those that just happened to have a particularly committed and dynamic manager who provided hard-to-replicate leadership. Other studies found out about rural financial institutions High incidence of NPL; Lack of resources, especially in poor areas – been a net suppliers; Not much incentives from institution side to provide services – high degree of non-commercial functions; Bad governance? Current situation – demand side from field observations Based on a household survey data collected from 6 provinces covering 1200 households; Documented borrowing and lending activities at household level Increasing demand for credit From 1996 to 2000: Total borrowing increased from 90 (7.5%) to 640 times (53%) among sample households; Majority of increase coming from informal credit service For example, in 2000, loans from formal institutions only account for 15% of total household loan, Source of informal loans Source Percent of total (%) Individual lender 4 Relatives 67 Friends 26 Collective 2 Others 1 RCC plays increasing role in formal credit services 100 Banks 80 RCC No. of times 60 40 20 0 年份 1996 1997 1998 1999 2000 Large regional variations exist 6 Informal Loan size (1000 yuan) 5 4 3 2 1 0 Si chuan Zhej i ang Percentage of households took loan 54 53 52 51 With 50 loan 49 48 Without loan 47 46 45 44 % of households Purpose of loan use (%) Purpose Formal credit Informal credit Production: 62 42 Agriculture 66 48 Others 34 52 Consumption 38 58 Assessment on services Studies show that current rural credit service is far less than sufficient in meeting the increasing needs of rural households for development: Major constraint in small business development; Need “seed money” to search for off-farm jobs; Lack of credit for buying agricultural inputs; such as feed and fertilizer International Experience Farmers formed associations to address their OWN problems Credit union movement to provide rural financing– eg. Canada Credit unions were outside of direct control of the Bank of Canada until some 30 years ago Little more on farmers associations in China Based on a national representative survey of 2459 villages in 6 provinces: In our 2450 village, we recorded 290 FPAs (several villages with more than 1) National point estimation of villages with FPAs 10% No. HHD participated 2.9% The Main Economic Activities Cropping Subtotal 70 Grain and General Cropping 6 Cash Crops 14 Vegetables 18 Specialty Crops 27 Orchards Subtotal 52 Orchards 37 Specialty Fruits 15 Livestock Subtotal 128 Hogs 24 Beef and Dairy Cattle 16 Mutton, Lamb & Wool 16 Poultry 14 Aquaculture 23 Silk Cocoon Products 14 Technologies Subtotal 40 & Services General Technologies 29 Marketing 4 Others 7 Main economic activities 44% on livestock 24% on cropping 18% on horticulture Only ONE FPA related to financial business ? Unsolved Issues FPAs’ roles in increasing the outreach of credit to small farm households Collateral substitutes: guarantees, information provider, stable cash flows, etc. [but, they are not allowed take deposits and make loans] The legal status of FPAs Local government involvements as catalysts? Policy implications: what are the choices? Still rely on existing financial institutions? Already experimenting with RCC From involved in micro-loan to piloting reforms Create new rural financial institutions? Farmers associations – credit union? Informal credit activities? Possible considerations? Reform of RCC needs to be associated with clearer property rights regime, establish incentive systems and governance structure Build credit unions – coupled with capacity building for efficient management; Relax interest controls and give more authority to financial institutions but have proper regulatory and monitoring system in place; Offer legal status to rural informal credit services What can we hope if Changes made/allowed ? Increased income for smallholders! Thanks!
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