China's Shifting Microfinance Landscape: New Players, Old Problems

City commercial banks , meanwhile, stand out for their "professionalism as financial institutions," but in terms of their potential to provide microfinance in rural areas, they face the disadvantage of being very much urban based, Giehler said. And NGOs, while the "forerunners" in microfinance in China and in working with the very poor, have governance issues of their own: "It's actually unclear who owns them," he said. This is not their only shortcoming: "Their size is a problem. Most of them are really tiny institutions."

But a new candidate has brought hope to the microcredit field. In one of the most talked-about developments in recent times, the China Banking Regulatory Commission last year granted permission for the Postal Savings Bank of China (PSBC) to provide credit. "I think it will be one of the most important players in microfinance in China," Giehler noted.

Nonetheless, he acknowledges that it is going to be a "huge task" to turn the PSBC, which began micro-lending operations in March 2007, into a credit-providing institution. As the bank has been fashioned out of the Postal Savings and Remittance Bureau into a subsidiary of China Post, it faces the challenge of transformation. The new entity will need to build everything from new IT systems to a new culture on top of developing a new range of banking functions, specifically with regard to microfinance.

It also needs to learn to handle risk , he added. Prior to its restructuring, it had no experience providing credit. Indeed, even its clients' deposits were kept by China's central bank. Qinghua's Wang Jun pointed out that the PBSC could be vulnerable to corporate governance problems, given that the state remains its largest shareholder. One participant suggested that, due to its inexperience and resulting high risks, the PSBC's move into microcredit may be cautious and gradual.

Retraining staff will be another important priority. "You have to change the whole mindset of the people," Giehler said. "You have to train them how to extend credit, how to assess creditworthiness , to manage risks."

On a more optimistic note, Wang Jun noted that, in contrast to the RCCs, the Postal Savings Bank has no historical legacy and no record of financial scandals.

According to Giehler, the PSBC has a "multiple advantages" over its potential competitors, and it has a significant advantage over the RCCs: its unified, nation-wide structure. The PSBC has a wide network of about 30,000 branches providing financial services, in addition to access to 30,000 branches of China Post, which could act as agents for some services, he noted. Some studies suggest that a significant portion of remittances sent back home by migrant workers (of whom there are typically estimated to be 100 million in China) are actually achieved by depositing cash in one part of China, and then simply making a withdrawal in their home town thanks to the bank's unified structure. The range of the PSBC's services, and the fact that it is allowed to take deposits, also distinguishes it from the MCCs.

The fact that the bank has a pre-existing client base in the region of 250 million also promises to give a significant boost to its efforts to build credit services. "The most crucial part of banking is information," said Giehler. "If you have information about 250 million clients -- this is one-fifth of the Chinese population -- then of course you have a big advantage in comparison to many other institutions."

And in terms of both average income level of its retail banking clients and its product range, it lies in the middle of the spectrum of the RCC alternatives, and is therefore well positioned to do things that they, with opportunities to widen the range of its services. Giehler believes they have the option to extend their range to small and medium sized enterprises or expand their activities in the retail market.