For Jin Longmei, the poverty trap seemed like it was impossible to escape. The 41-year-old farmer, a member of the Yi ethnic group, worked in Laojianghe village in Jinning county, Yunnan Province, where she grew corn and tobacco, feeding a family of five with only 7,000 to 8,000 yuan ($1,258) a year.
But it turned out that all she needed was 5,000 yuan to turn things around. In 2009, she received a two-year loan from the local women's federations, and was able to diversify into growing more profitable snow peas. She more than tripled her annual income, paid the money back earlier this year, and has now borrowed a larger sum.
There are many such microfinance projects in China aimed at helping the poor in rural areas. It is been almost 20 years since the country began to experiment with modern models of microfinance and "banks for the poor," but experts say the scorecard is less than satisfactory and severe challenges lie ahead.
Loans for the lowest
Microfinance has a long history. In China, the Kuomintang government ran microfinance projects in the 1930s and 1940s through the Chinese Industrial Cooperatives.
Modern-day microfinance was popularized by Muhammad Yunus, the founder of the Grameen Bank in Bangladesh.
In 1993, Du Xiaoshan, a researcher at the Rural Development Institute of the Chinese Academy of Social Sciences (CASS), introduced the Grameen model to China. His team established the cooperatives to operate small loans.
Not long after such trial projects kicked off, in 1996 the government issued a plan to alleviate poverty and provided subsidies to banks to give out small loans.
While waning in the West, this type of government-subsidized small loans still make up a major part of the microfinance sector in China. With very low interest rates of around 3 or 5 percent annually, or in some cases no interest at all, such loans can cover a larger population in a short period of time, said Du.
For example, the China Women's Development Foundation started a microcredit project in 1996 and now has a total loan of close to 30 million yuan. It has helped nearly 300,000 women.
In 2012, Jinning was given 1 million seed money from the China Women's Development Foundation for a one-year microcredit project. The money was given to 210 families in three villages for different projects, including growing snow peas, tobacco and flowers.
The wide reach of local women's organizations helps promote the microcredit project. No collateral is needed, and women were chosen based on their situation and trustworthiness, said Wang Mengtao, chairwoman of the local women's federation in Jinning county.
Each family gets around 3,000 to 5,000 yuan in loans and the annual interest rate is only around 3 to 5 percent. Five families are grouped together to ensure enough supervision to pay back the money.
The organizations have already decided what the money will be used for and arrange training sessions for the villagers. For instance, in Laojianghe village, borrowers are encouraged to grow snow peas, which were already sporadically planted.
"The idea is to have more people grow it, so that we can contact companies to come in and purchase from villagers," said Wang, adding that it is much easier than for villagers to go out and sell the peas.
Six months into the project, the villages reported a 20 to 40 percent increase in income.
Although Jin is making more money now, she said she still needs the loans to expand her farm. Snow peas take considerably more preparation than corn, and 5,000 yuan only covers one or two mu (667 square meters) of farmland, she said.
The advantage of the microcredit project is obvious, since no collateral are needed and it is easier to pay the loan back, but it is also difficult to expand operation given the small scale of the loans, said Wang.
The low interest on such loans is certainly attractive to the poor, but it also leads to problems if not well managed. "Such projects rely heavily on government subsidies or donations, which could hurt their sustainability. If not well managed, borrowers can easily become too dependent on such loans and consider them donations," said Du.
The low cost also creates room for corruption and rent-seeking, meaning the rich could easily take advantage of the loans, creating new inequality, he added.
"Unfortunately we can find all these problems in China. Management across all those different government agencies is also a great challenge," said Du, 65, generally regarded as the "father of microfinance" in China.
The Grameen model that Du and his team in the CASS introduced to China represents another, more sustainable model of microfinance, where the institutions are run like a business, but instead of seeking profit, are aimed at helping the poor.
In 1994, with funds provided by Ford Foundation and Grameen Trust, Du and his team established a cooperative in Yixian county, Hebei Province. They also tried to raise funds from businessmen and other donors.
Poor women are the main borrowers, as in many other countries. No collateral is needed, but instead five people form a group to provide peer pressure. They pay the money back in two weeks or a month, and then borrow again. The cooperative also tries to invite technicians to give free training to the villagers.
The CASS project now has cooperatives in five counties, with over 15 million yuan in investment and over 100 million yuan in loans. The loans support about 16,000 families and cover about 150,000 poor people, according to the cooperative's website.
Loans are given at an annual interest rate of 16 to 18 percent, much higher than those from subsidized projects but still lower than commercial banks.
The advantage of such a model is that it is sustainable, because the institution covers its own costs and doesn't rely on subsidies, experts say.
But lack of legitimate funding is a major challenge for these organizations. For a long time microfinance organizations have been caught in a fuzzy legal status. "Is it a company, or an NGO? Nobody knows, and there's no regulations in this regard," said Du, adding that back in the 1990s, these organizations were sometimes considered illegal.
These organizations therefore cannot legitimately raise funds or collect deposits, nor could they get loans from banks.
Earlier this year Wokai, a microfinance organization, closed its operations after five years due to funding troubles.
The organization, which includes a website wokai.org, raised over $500,000 worldwide to help Chinese people living under the poverty line. They had given out over 1,500 loans to 961 borrowers with a repayment rate of over 98 percent, according to an announcement on its website.
Capacity building is another problem as many people don't have the necessary knowledge and skills to handle microfinance.
"The staff needs to understand the rural areas and the villagers, and they need be able to assess and control the risks, and that requires training," said Du.
Back in the 1990s when international NGOs funded microfinance projects in China, they had training and education programs installed. But most of them halted after the NGOs left, he said.
Since 1993, there have been about 300 microfinance projects but over the years two thirds of them had to shut down due to poor management, lack of funding, or other problems.
The repayment rate has stayed at over 98 percent for most of the organizations, according to statistics collected by the China Association of Microfinance in 2011. Some of them are losing money and the volume of loans varies from area to area.
Yet the demand for loans is much greater than the supply. In 2011, China again raised the poverty line from 1,196 yuan a year to 2,300 yuan. By this standard, there are 122 million people, or 12.7 percent of the rural population, who are still living under the poverty line.
According to a report by Deutsch Bank Research in 2007, the microfinance sector, with about $25 billion in total loans, couldn't meet the demand of roughly 1 billion micro-borrowers.
"Microfinance in China is still in a very primitive stage," said Du. "It lacks reach, depth and efficiency."
The government has issued directives encouraging the development of microfinance. In 2008, guidelines were issued for the development of commercial microcredit companies, which mushroomed under the policy incentives.
But strictly speaking, such commercial "microcredit" banks and companies in China give out loans that average around 1 million yuan, much higher than the internationally recognized standard for microfinance, explained Du. According to international standard, a single loan has to be less than 2.5 times per capita GDP to be called microfinance, which translates to roughly 100,000 yuan in China.
This means that those living under the poverty line couldn't possibly benefit from such loans.
In comparison, the government has yet to issue similar guidelines for the nonprofit microfinance sector, despite issuing a document in 2006 that supports and encourages microfinance organizations.
Du believes the solution is simple. "If they can issue guidelines for commercial loans, why not the nonprofit ones?"
Du and other experts have also tried to persuade the authorities to set aside a wholesale fund, a practice adopted in dozens of countries, which evaluates microfinance organizations, helps build up their capacity and then gives them the seed money to operate.
With government action not forthcoming, the microfinance organizations are trying to survive on their own. In the 1990s, economists like Mao Yushi and Justin Yifu Lin started experimenting with anti-poverty microfinance in Shanxi Province. They founded the Beijing Fuping Institute, a NGO, in 2002 and later a microcredit company in 2009 to expand their services.
By 2011, the company had a gross loan portfolio of over 36 million yuan in loans with a repayment rate close to 99 percent.
The microfinance association has also set up a small 10-million-yuan wholesale fund last year which would help foster a handful of organizations.
"Despite all the difficulties, the microfinance organizations have survived and are growing, and that is reason for hope," said Du.