The Microcredit and Financial Inclusion Program Supported by UNDP

Poor access to finance for lower-income groups of the population is a significant obstacle towards human development, affecting their ability to fight poverty, potentially reinforcing causes of poverty and increasing the incidence of reversion to poverty. In the last 40 years, in its goal to reduce poverty and support development, the Chinese government has been actively engaged in improving financial access for the poor as one of the tools of its poverty eradication's strategy.

At the early stages of the Reform era,loans were a large source of poverty reduction funds. In 1986, the Chinese government began to provide subsidized loans for poverty reduction with positive results. However, problems were also encountered. Despite, subsidies and low interest rates, such loans were not always available to the poorest, and the low repayment rates were a strong disincentive for financial institutions to be involved. Lack of collateral was another challenge for poor households, limiting their access to commercial loans from regulated financial institutions, with a negative impact on their ability to invest in and upgrade their skills and development. There was an urgent need to reform the credit system for poverty alleviation.

The lack of access to financial services for the lower-income sections of the population and its negative consequences on poverty alleviation and sustainable and inclusive development were also major concerns of the United Nations Development Program(UNDP). Since the early 1990s, the UNDP has carried out a series of innovative programs, pioneering initiatives on financial services directly targeting poverty alleviation, together with the national and local governments.

At the end of 1992, China's impoverished rural population still numbered80 million. To boost the government's poverty alleviation effort and reach its goal of guaranteeing food and clothing to the poor by the end of the century, in 1994 the Chinese government launched the National Eight Seven Anti- Poverty Campaign. Non-public organizations were encouraged to join central and local governments and relevant institutions and engage in poverty reduction initiatives. The campaign also actively called upon international organizations, regional organizations, NGOs and overseas Chinese to join efforts in cooperation and poverty reduction.

This set the stage for a very prolific cooperation between China and the UNDP on microfinance, that ranged from piloting microcredit programs all the way to introducing and supporting the creation of an inclusive financial system, greatly underwriting human development in poverty-stricken areas. The UNDP programs were conducted in three consecutive phases. First, microcredit demonstrative programs were piloted and became among the first and largest microcredit institutions in China. With UNDP support the concept of microcredit was introduced at the national and local level and institutional capacity was built.The second phase narrowed the focus to a few selected projects and efforts were concentrated around building their financial capacity and sustainability, and standardization. In the third phase, the UNDP introduced the concept of an inclusive financial system and carried out the first international cooperation programs and pilots around this theme.

1. Phase One: Micro credit Programs

In the 1970s, the Grameen Bank (GB) in Bangladesh achieved great success in poverty reduction by means of microcredit, drawing global attention from development stakeholders. This experience proved that providing microcredit to impoverished people effectively reduced poverty.

In 1993, the Rural Development Institute of the Chinese Academy of Social Sciences (RDI-CASS) introduced GB's microcredit model and successfully channeled funds to poor families. The same year, UNDP and China International Center for Economic and Technical Exchanges (CICETE) of the Ministry of Foreign Trade and Economic Cooperation jointly designed the“Poverty Reduction and Sustainable Development Program”.The program aimed at piloting, demonstrating and promoting innovative poverty reduction approaches. Because of the multidimensional aspect of poverty, comprehensive interventions were adopted to tackle rural poverty. These included microcredit, rural planning, promoting eco-friendly agriculture, education for illiteracy, healthcare, building production capacity, promoting gender awareness,and creating skills in community development. The Program was based on a participatory approach that emphasized the key role of beneficiaries in its design and implementation phases, given that poor farmers and local residents best understood their needs,resources and markets. It directly supported local households and used a bottom-up approach rather than a top-downone. To achieve sustainability, the program also followed the principles that impact on the environment and natural resources should be taken into consideration along with the whole life of the project, and successful models and experience should be institutionalized.

Microcredit was a key and an innovative element of this new comprehensive and participatory approach. Furthermore, the theory and practice of microcredit suggested that women were more effective in using the credit to generate productive work and improve living standards of households. Therefore, the“Poverty Reduction and Sustainable Development Program”targeted women as the main recipients of small loans.

The program constituted the framework within which nine projects were established between 1993 and 1998, covering 48 state classified as poverty counties in 17 Provinces and Autonomous Regions andTianjin Municipality. The microcredit activities under these projects had four goals:

i. to establish independentand sustainable microcredit institutions with a sound organization and financial capacity, in order to provide long-term microcredit services to the poor population;

i. to lift poor families out of poverty and eliminate intergenerational transmission of poverty;

ii. to help women increase family incomes,establish a mutual support network, and create opportunities to participate in community activities, so as to enhance women's status within their families and society;

iii. to promote the capacity of local communities to achieve sustainable poverty reduction anddevelopment.

The programs also had four expected outcomes:

i. establishing a unified and standardized microcredit management system;

ii. issuing microcredit to impoverished women for income-generating activities;

iii. helping impoverished women establish credit organizations, including groups (consisting of five persons),and centers(consistingof five to eight groups), as mutually supportive networks;

iv. establishing sustainable microcredit institutions based on current projects.

The government of China and UNDP cooperated to establish a complete program management system consisting of the Advisory Board (AB), the Steering Committee (SC), the Provincial Program Office (PPO), the County Program Office (CPO), the Town Program Office (TPO) and the credit groups and centers. The AB consisted of

representatives from UNDP, CICETE, the State Council's Leading Group Office of Poverty Alleviation and Development, the World Bank and the RDI-CASS. It provided consultations on the strategies, policies, and management of microcredit. The  Steering Committee consisted of  representatives from  CICETE  and  UNDP,

monitoring microcredit projects.

In order to provide better management and technical support, CICETE and UNDP established the“Support Program for Poverty Reduction Programs”in 1996, under which the Support and Coordination Office (SCO) was established. The SCO was a microcredit management institution affiliated to CICETE, in charge of providing technical support, establishing and implementing unified management mechanisms, and monitoring microcredit projects. The Provincial and Country Program Offices established specialized management teams, most of which were later registered as associations (microcredit institutions) operating microcredit business.

The SCO developed the Manual on Management Information System of Microcredit Program for Poverty Reduction to formulate the rules of microcredit institutions, including credit principles, operational procedures, financial standards, accounting procedures, auditing mechanisms and internal control systems. Based on this manual, it also developed the first microcredit information management system (uniprocessor version on PC) in China consisting of client management, credit management, financial management, the information management of social performance, and other modules. Most microcredit projects and institutions were equipped with this system for regular reporting. Under the monitoring and guidance of the SCO, microcredit projects and institutions operated independently. The SCO also conducted on-site inspection and organized professional training courses. It convened 15 annual meetings (China Community Corps Convention) in which all microcredit  institutions participated.

The UNDP provided 150,000 to 600,000 U.S. dollars of revolving funds for each microcredit project, to a total of 8.1 million U.S. dollars. The funds were allocated to the project offices or microcredit institutions through the SCO and were exclusively used for microcredit business. Project offices or microcredit institutions were allowed to charge a fund management fee(no more than 8% of the funds at the beginning).

Between 1993 and 2000, all microcredit institutions adopted the Grameen Bank model, which provided microcredit to the poor, targeting women, using a group lending approach, to help them increase their incomes and improve human development. The first batch of rural microcredit institutions were established; pilots were launched and microcredit was gradually scaled up at the national level. The program was successful in achieving its expected outcomes, directly helping many poor families to escape from poverty. Moreover, it was central to the development of microcredit, microfinance and, in time, financial inclusion in China.

The main achievements of the microcredit projects were:

1) Improvement in the development capacity of the poor population. Microcredit became an important source of financing for a large number of urban and rural poor families to engage in business. The evaluation reports indicated that by the end of 2000, based on available data and calculations, the total funds invested in UNDP's poverty reduction programs added up to 19.9 million U.S.dollars, including around 10 million U.S. dollars of revolving funds for microcredit, directly supporting over 90,000 impoverished rural families and laid-off women workers. By the end of 2017, 10 microcredit institutions had issued around 11.3 million U.S. dollar to 138,737 clients in total. Other reports show the positive impact on household incomes. In 2002, 96% of beneficiaries in Chifeng Municipality of Inner Mongolia Autonomous Region had increased their incomes, with the average household income increasing by 1,435 yuan. In 2008, the net household income in rural pastoral areas increased by 4,000 yuan while the average household loan was 4,000 yuan.

2) Women's empowerment and human development. Microcreditstargeting women instilled self-confidence, elevated their voice within families, and promoted the development of local communities. The microcredit projects also conducted capacity-building activities related to agricultural technology, healthcare, environmental protection, social development, gender awareness and education for illiteracy, providing greater knowledge to impoverished people and improving their labor productivity. They also cultivated professional talent, teams and institutions, training them to manage microcredit and promote community development.

3) Demonstrative role for poverty reduction and financial service innovation. The microcredit projects were adopted by local governments and formal financial institutions as an innovative financial model for poverty reduction. They also served as good demonstrations of innovation in China's poverty reduction methods, and in rural financial services and products.

2. Phase Two: the Sustainable Microfinance for Alleviating Poverty (SMPA) Program and the Comprehensive Approaches for Poverty Reduction (CAPR)Program

Around 2001, when most of the projects under the above-mentioned program were reaching completion, the microcredit institutions began to encountersome problems. One key obstacle to their operations, growth and sustainability in the long-term was that they were not recognized as financial institutions, making it impossible for them to raise extra funds from the market and expand their lending business. Therefore, in 2001, UNDP and CICETE launched the Sustainable Microfinance for Alleviating Poverty Program (SMAP Program) and the Comprehensive Approaches for Poverty Reduction Program (CAPR Program), an evolution of the earlier microcredit projects aiming to solve these problems.

By 2001, 21 microcredit institutions had been established. In order to help microcredit projects and institutions to gain regulatory permission, CICETE, in the name of the Ministry of Commerce of People's Republic of China (MOFCOM), sent a letter to the People's Bank of China (PBoC), requesting the PBoC to permit the then existing microcredit projects and institutions to conduct micro lending for poverty reduction. The PBoC endorsed those microcredit businesses by the piloting microcredit institutions under the UNDP projects. The document thereafter became the policy basis for all those assisted by the UNDP.

Under the new regulatory framework and in order to underpin the sustainability of microcredit in poverty reduction, the aim of the program shifted to support some of the existing projects to professionalize and become microcredit institutions, evolving into non-profit entities. The SMAP Program selected four high-performing microcredit institutions (Chifeng of Inner Mongolia, Yilong of Sichuan, Dingxi of Gansu and Xingren of Guizhou) as the recipients of concentrated technical assistance and training, aiming to develop them as commercially sustainable microcredit institutions, with management systems and specialized products for local markets and development strategies for poverty reduction. A director, domestic and international experts and staff members were recruited to manage and implement the program. The Program also supported the PBoC to conduct research, both at the national and international level, on the supervision mechanisms and the legitimacy of microcredit institutions, and then established a database covering most of the Chinese institutions.

The sister-CAPR Program, launched at the same time, engaged in monitoring and providing technical support to the microcredit programs outwiththe four selected for the SMAP Program. It also supported the State Council Leading Group Office of Poverty Alleviation and Development to conduct research on poverty reduction and develop a poverty reduction information system.

In 2005, the PBoC compiled and published the China Microcredit Development Research Report. The report suggested the commercial development ofthe sustainable microcredit industry and the establishment of microcredit companies and microcredit associations, and launched the large-scale growth of China's microcredit industry and microcredit companies. The Management Information System of Microcredit Programs for Poverty Reduction compiled by the SCO was the first and most systematic microcredit management system in China, and was included in the PBoC Guide Book on the Management of Microcredit Companies and applied among formal financial institutions. High-performing rural microcredit institutions became the experience exchange bases for the initial microcredit industry.

Furthermore, CICETE, RDI-CASS and the Development Department of All-China Women's Federation jointly established China's first national-level microcredit organization, China Microfinance Development Promotion Network (now China Association of Micro finance). The microcredit projects and institutions supported by the UNDP were registered as the first members of the association.

As the focus shifted to the legal transformation of the microcredit projects and institutions to formal microcredit companies, new challenges arose. Due to the small capital scale and low return rates, these projects and institutions were not attractive from a commercial point of view and struggled to achieve financial feasibility. In 2008, the SCO proposed to establish capital management companies to take over the microcredit projects and institutions, but the plan was not accepted by CICETE. Nevertheless, CICETE helped Tianjin Municipal Women's Federation and the microcredit institution in Xiangxi Prefecture of Hunan Province to establish microcredit companies supported by investment from commercial investment agencies and helping them to transform and expand.

3. Phase Three: The Financial Inclusion Program

To overcome the failure of the overall financial system to address the needs of the low-end market due to a lack of relevant policies, regulations and an institutional framework, and the lack of profitability models for commercial and financial institutions, in 2005, the UN first introduced the concept of an inclusive financial system, a system where even the poorest people could have access to credit and other financial services.

UNDP China and CICETE introduced the concept into China the following year and launched the“Building an Inclusive Financial Sector in China Program”(the Financial Inclusion Program) that built on the experience of the microcredit and SMAP programs. The program conducted policy research related to financial inclusion, supported the establishment of inclusive financial investment funds, piloted innovation in the micro finance sector, and continued to support existing microcredit activities.

The Program had seven objectives:

1. to promote the formation of China's policies on financial inclusion;

2. to support the establishment of inclusive financial investment funds and provide technical support for commercially sustainable microcredit programs;

3. to pursue sustainable commercial models for the development of inclusive finance, including traditional banking models and internet-based financial models;

4. to establish research and consultation institutions on financial inclusion to provide technical assistance services;

5. to innovate and develop rural finance;

6. to promote the sustainability of existing microcredit institutions;

7. to publish and disseminate knowledge and concepts of inclusive finance.

 There were eight expected outcomes:

1. formulating China's inclusive financial development policies under the leadership of the PBoC;

2. founding inclusive financial investment funds under the leadership of the China Development Bank (CDB);

3. enabling commercial banks to participate in developing inclusive financial products and service systems;

4. mapping out lawful internet financial models;

5. supporting Shanghai Jiaotong University to establish China Research Center on Finance Inclusion;

6. developing rural inclusive financial system, especially rural cooperative financial models;

7. leveraging funds, technical assistance and policy support for institutional transformation of microcredit institutions;

8. assisting the Research Bureau of the PBoC (the Research Bureau) in publishing journals on financial inclusion and conducting international knowledge exchanges.

Under the Inclusive Financial Program, seven sub-programs were designed and implemented, corresponding to the seven objectives. The PBoC and the Development Research Center of the State Council formed a national-level steering committee to provide guidance at the macro level. CICETE was responsible for monitoring the overall program and for supporting the microcredit projects. Each of the other programs designated different implementing institutions. The inclusive financial policy research was implemented by the PBoC, the inclusive financial investment fund by China Development Bank, the inclusive financial commercial model by selected domestic commercial banks, the internet finance model by China Research Center on Inclusive Finance of Shanghai Jiaotong University, the rural financial innovative development by local governments, and the dissemination of inclusive finance information and knowledge by PBoC's Research Bureau. In addition, China Association of Microfinance also participated in publicizing relevant publications and organized international exchanges.

The Inclusive Financial Program went through two stages. The first stage, from 2008 to 2013, covered the first three and the sixth of the above-mentioned sub-programs. The inclusive financial policy sub-program published reports such as Inclusive Finance — the Path of Universal Modern Financial Service. The inclusive financial investment fund sub-program designed the operational plan of“China Microfinance Development Investment Fund”with the support of domestic and foreign experts. The plan, however, was suspended because, at the time, CDB was planning to implement commercial development strategies. Under the sustainable inclusive commercial model, some commercial banks developed inclusive financial products and established service mechanisms of their own. UNDP, CICETE and China Association of Microfinance organized various international conferences and training courses on inclusive finance.

During the second phase, launched in 2014, the fourth and fifth sub-programs were implemented. The rural financial innovation sub-program supported five counties in establishing“People's Wealth Centers” to serve as the intermediary institution to improve the availability of rural financial services and oversee new type  of rural cooperative financial institutions. In 2016, the inclusive financial research and consultative institution sub-program established the China Research Center on Financial Inclusion attached to Shanghai Jiaotong University, to study innovative models of financial inclusion, especially internet finance. However, for a variety of reasons, the research work of the center was not implemented as planned.

Since the beginning of UNDP engagement in microfinance in China, microcredit projects have operated under the monitoring and support of CICETE. At the beginning of 2019, UNDP and CICETE decided to transfer the ownership and the monitoring functions of the programs to local governments. At the same time, they still provide technical support based on the needs of microcredit projects and institutions.

The Financial Inclusion Program's main achievements can be summarized as follow:

1) The Program introduced the concept of an inclusive financial system to China and promoted China's inclusive financial policies. The Research Bureau of the PBoC strengthened the research capacity and organized various events exchanging financial inclusion theories and practice. These activities promoted the concept of an inclusive financial system among financial regulators, academia and financial audiences, and facilitated the understanding of domestic and overseas  theories and practice of financial inclusion, and thus promoted inclusive finance in China at policy level.

2) The program tested commercial models for sustainable inclusive financial services. With the support of the Program, Bank of Harbin established a successful microcredit management system and transferred its know how to other banks. Baotou Commercial Bank established a microcredit social performance management system, which has proved invaluable to other banks.

3) The program promoted a new rural financial development model. For example, the People's Wealth Center in Gutian County of Ningde Municipality in Fujian Province improved the efficiency of rural financial resources distribution and incentivized rural financial institutions to increase agricultural loans. The People's Wealth Center in Yilong County in Sichuan Province solved problems encountered in the monitoring and guidance of new rural cooperative financial institutions.

4) Certain microcredit institutions were transformed into legitimate financial institutions, as in the case of the microcredit programs in Tianjin and Xiangxi Prefecture (Hunan Province), obtaining legitimacy in doing loan business from the relevant financial institutions as Chinese financial entities, independent from UNDP's financial support. This removed the legal barrier for their sustainable long-term development.

4. Conclusion

The cooperation between China and the UNDP was designed on the basis of China's economic development and poverty reduction strategies and was in line with the UN's development priorities and country development cooperation framework. Targeting the ineffectiveness of financial services in poverty reduction and rural development, the programs were responsive to the demand of China's socioeconomic development.

The UNDP, through these cooperation programs, introduced advanced and cutting-edge concepts and experience into China. This helped accelerate China's integration intothe international community and promoted its financial reform. It also supported trials and pilots for financial reform and promoted financial innovation in poverty reduction and sustainable development.

The UNDP's programs pursued innovate the practical level and cooperated with policy makers in policy research, systematically supporting the financial sector in poverty reduction. Indeed, the microcredit projects put great emphasis on institutional development. They set up a top-down organization and management structure, built a unified management system, and trained grassroots staff teams, creating the essential conditions for the success of the programs.

Finally, the continuous efforts over a long period, together with local government support, and the stability, dedication, professionalism and compliance of the managerial teams, all ensured the programs' successful outcomes.

This said, along the long life of the programs, challenges and obstacles arose. First, the programs were not influential enough to trigger a harmonization of the existing regulations or policies at the national level with a focus on sustainable development, specifically for microcredit institutions targeting poverty reduction.

With a few exceptions, the institutions still have no authorized status as Chinese financial entities, and it is hard to scale them up. Cooperation with the PBoC and other policy makers should be enhanced to conduct further policy research and discussion and improve the outcomes.

Second, the SCO, as the microcredit management institution, was not properly transformed into a microcredit investment management company, limiting its coordination and monitoring capacity over the microcredit projects, and its policy, management and technical support. If the SCO could have operated independently from the beginning or had been set up attached to a third-party institution, it might have encountered fewer difficulties in transforming microcredit institutions into fully registered lending companies. 

Third, some microcredit projects or institutions failed to establish professional management teams, or their staff lacked expertise and capacity, leading to poor management and operation.

5. Outlook

The microcredit, SMAP and Financial Inclusion programs launched by the UNDP in China realized a synchronous development with the global microcredit and inclusive financial sector, covering the whole process of microcredit, from micro finance to inclusive finance.

To build upon their success and further raise the effort towards achieving the sustainable development goals, the UN recently launched the SDG Financing Strategy to bring in all parties, especially the private sector, to invest in sustainable development aligned business. Microcredit, inclusive finance and digital inclusive finance are all incorporated into this new strategy. From the Chinese side, MOFCOM has already reached a consensus with the UNDP to collaborate in SDG financing, and jointly established the Research and Promotion on Financing for SDG in China. Based on the projects described here, this new program will establish a financing platform for China's realization of the SDG, carryout policy research, formulate China's SDG financing impact management system and promote the development of SDG financing tools. The evolution from microcredit to SDG finance reflects the UN system's prospective and practical guiding role in pursuing global development, the core value of the UN system's cooperation in China.

As China is now an upper middle-income country, UNDP has transitioned from a donor of traditional development aid to becoming one of China's development partners. In this new era, the cooperation will continue, and UNDP will still play a critical role in using its innovative capacity and strengths in the field of development cooperation.

References

1. Bai Chengyu. Development History of Microcredit Programs Supported by UNDP. In Du Xiaoshan & Liu Wenpu (eds.). From Microcredit to Inclusive Finance —Festschrift for Retrospect and Prospect at the 25th Anniversary of China's Microcredit Development. China Social Sciences Press, 2018.

2. CaoZijuan(ed.).Research on China's Microcredit Development. China Morden Economics Publishing House,2005.

3. Feng Xingyuan. Final Review Report of the Establishing Inclusive Financial System in China Program. China International Center for Economic and Technical Exchanges,2018.

4. Sun Tongquan & Pan Zhong. Report on the Evaluation of Non-governmental Microcredit Institutions' Development Conditions under the UNDP Programs. China International Center for Economic and Technical Exchanges & UNDP, 2018.

5. China International Center for Economic and Technical Exchanges & UNDP. Handbook on Management Information System of Microcredit Poverty Reduction Programs. 1999.