Credit Market and Microcredit Services in Rural China

Gap in credit access to rural poor population in China exists because rural households, especially farmers, are constrained to access credit from formal Rural Financial Institutions (RFIs). The risky nature of agriculture business and the absence of land ownership due to China’s village-based communal land-tenure system hinder the farmers from accessing formal credit requiring collateral and force them to resort to informal borrowings that charge exorbitant interest rates. The subsidisedloan programme implemented by the Chinese government in 1986–2000 failed to reduce the credit access gap because it was poorly managed, missed the target borrowers (poor rural households) and was financially unsustainable due to the low repayment rate. Microcredit programme was then introduced in 1994 to bring more effective and sustainable rural poverty eradication. This chapter provides an overview of the rural financial system, rural credit market and the development of microcredit in China. The chapter concludes that microcredit may significantly reduce the gap in the rural credit market and play an important role in rural poverty alleviation provided some reforms are implemented both at RFIs as well as national policy making levels.