A Case for Successful Microfinance Programs in China

Finding ways of empowering the poor in the impressive growth process in China is of key importance. Following the trend started by non- governmental and multilateral organizations, government officials have put microfinance on top of their agenda. While this paper supports the view that China represents a potentially fertile soil for microfinance programs to succeed in their attempt at reducing poverty, it pins-down to a number of methodological difficulties due to a misleading replication of the Grameen system, which emphasizes the group lending methodology. Such difficulties have been exacerbated by the increased involvement of the government over the past decade. In particular, we argue that excessive government intervention has come at the expense of borrowers’ discipline. It has also lowered the probability of government-sponsored microfinance institutions to succeed in becoming self-sufficient and thereby further attracting commercial loans and international aid. We spell out a few guidelines for an improved design of government support to microfinance in China. These guidelines can potentially apply to other developing countries and transition economies where financial markets are also weak.