The Research on Microfinance Modes for BOP Market in Rural Areas of China
This article studies the financial innovation modes for the market of low-income group (BOP, Bottom of the Pyramid) in rural areas of China and aims to find out a new financial innovation path that could reflect the viewpoint of sustainable development and also link the financial institutions' economic goals with their social responsibilities. Microfinance business for BOP clients can not only bring economic profit to financial institutions, but also solve the poverty problem of BOP by increasing the purchasing power, smoothing the consumption, and supporting the entrepreneurial activities of BOP to improve their real income. This article explores the innovation modes and general principles of microfinance business for BOP market in rural areas of China from the perspective of BOP theory, and compares the similarities and differences between microfinance business in rural areas of China and Grameen bank to find out how supporting policy system, culture and institutional environment influence the microfinance activities, and analyses the mode selection strategy for financial institutions to develop the BOP market in rural areas of China.
Based on case study, this article finds out four main types of microfinance modes for BOP market in rural China according to the current rural microfinance practices. The four types of microfinance modes are the mode of microcredit for rural residents, the mode of co-guarantee loans for rural residents, the mode of innovative mortgage loans and the mode of third-party involvement loans.
Through in-depth investigation, this article analyses the characteristics, process and mechanism of each microfinance mode. The mode of microcredit for rural residents is generally based on the credibility of rural residents, and the financial institutions provide the loans to rural residents in the approved amount limit and duration without mortgage or security. Financial institutions prefer this mode to others because it is easy for financial institutions to operate and the term of the loans, principal and interest repayment is flexible so that it suits to the economic condition of rural residents. However, financial institutions usually consider the poor people as bad credit people based on the following assumption that poor people can not pay the loan because they usually can not earn enough money in the future. As a result, it is difficult for rural residents to get approved for their loans and even if they get the loans, the credit amount is quite low. The mode of co-guarantee loans for rural residents is that rural residents apply for loans from the rural financial institutions through the establishment of mutual guarantee group, and access to credit under joint and several liabilities amongst team members. In this mode, financial institutions are at lower risk than they are in first mode. And at the same time, it can solve the difficult problem that rural low-income group can not access to credit to some extent. The mode of innovative mortgage loans is that financial institutions allow the rural low-income group to provide their economic resources as qualified and effective mortgage, such as forest tenure, coastal land tenure and pigs in vivo. In this mode, the restrictive conditions are higher because the rural residents need to have the property which can become mortgage by innovation. The mode of third-party involvement loans is that the third-party entity involves in the loans from financial institutions to rural residents, which usually has benefits relationship with the rural residents, playing a role in security for rural residents. It is universally regarded as a financial innovation in rural areas, because it helps the rural residents to get loans without mortgage. The third-party company is the most common entity in this mode, particularly the agricultural company exploiting the resources from BOP. The affordability of this mode is relatively high, especially if the company can purchase the agricultural production or output from rural residents at a pre-agreed price, so that rural residents can have certain income in the future. Besides, the company can obtain the custom agricultural production at a reasonable price and financial institutions can make profits with low risk. Therefore, all the stakeholders will benefit in this mode°ª°ª Rural residents can improve their living condition and eliminate poverty; Financial institutions and companies can link their economic goals with their social responsibilities.
In the comparison of the strengths and weaknesses of these four modes in the environment of financial innovation in rural China, this article explores the microfinance mode strategy for the financial institutions to enter the microfinance market for rural low-income group in China.
This article presents three principles of microfinance innovation for BOP market in rural China: (1) Ensuring the affordability of microfinance service. (2) Developing the applicability of microfinance service. (3) Making the best use of the social capital of the financial institutions. Furthermore, by comparison with the activities of Grameen Bank in Bangladesh, this article figures out whether there are principles in common and whether the institutional environment, culture and the political and regulatory support lead to the differences of the microfinance activities.