Improving credit delivery to rural poor people through reform of the rural finance sector

The Rural Finance Sector Programme (RFSP) is part of an ongoing process to reform China’s rural credit cooperative (RCC) system. RCCs have been serving rural households in China since the 1950s. However, weak policies and a tendency to focus resources on township and village enterprises have limited the impact of RCCs on agricultural production, household consumption and poverty. The programme aims to make RCCs more effective in reaching poor farmers and thus improve their contribution to poverty-reduction campaigns.

IFAD developed the USD 15 million programme in close cooperation with the China Banking Regulatory Commission and the Ministry of Finance.

Lessons learned

• Low interest-rate ceilings do not allow RCCs to cover transaction costs and they make doing business too costly. When interest rates are based on the actual costs of delivering services to rural poor households, cooperatives get significantly better returns on their operations and thus ensure their own sustainability.
• Microfinance programmes based on the Grameen Bank approach may target poor households better and may achieve a high repayment rate, but they face extremely high non-financial costs.
• Pilot interventions demonstrating good practices are more likely to spark the interest of local and central governments than long-term processes.
• Collaboration with like-minded partners and networking among country experts are critical to the success of any project.
• Rural poor people need to have access to training. RCCs are more likely to give loans to rural poor people that have attended functional literacy or technical skills training.
• Women tend to be better borrowers than men, and are more likely to repay their loans.
• Microenterprises in rural areas are able to reduce migration to urban areas, particularly among men, and thus reduce overall poverty.

Expected Results

Ongoing reforms in China’s rural finance sector include: reorganizing the legal structure of cooperatives, relaxing interest rates, implementing microfinance and group-lending schemes, implementing a staff incentive scheme and addressing gender and poverty policy issues. IFAD is providing technical and managerial support to these reforms.

Their impact is expected to include:

• an increase in the number of rural poor households accessing formal financial services
• more efficient and sustainable practices among rural credit cooperatives
• more secure loans to rural poor people, particularly women
• improved policies and institutional and operational modalities
• broader cooperative outreach
• improved extension-service operations
• group lending and special loan programmes for women
• collateral-free loans for individual households

Results to Date

IFAD has been using rural credit cooperatives to channel credit to IFAD-funded projects since 1996. The impact has included:

• increased agricultural production (livestock rearing, fruit-tree plantation, greenhouse cultivation of vegetables)
• more households eligible for formal credit through technical and business training
• establishment of a variety of off-farm activities
• higher investment returns
• an increase in women’s confidence in productively using borrowed funds

Scaling Up

In line with China’s reform strategy, the programme will be implemented at the county level. Later, the reforms will be translated into policy and institutional reforms to use on a wider scale. The Government’s pilot programme for cooperative reform is currently being implemented in eight provinces and, if successful, will be scaled up to the national level. There has been some early success with pilot testing of microcredit and joint-liability group lending, and both are now being implemented on a wider scale.