Financial Inclusion in China: Will Innovation Bridge the Gap?
In the past ten years, China has made great progress in financial inclusion, thanks to conducive policies, strengthening of the banking sector, and innovation. China’s policies from the State Council, China Banking Regulatory Commission (CBRC) and People’s Bank of China (PBOC) to commercialize its banking sector and promote government to person transfers have been particularly effective. As a result, Chinese banks now serve over 60% of adults and have expanded outside of cities with 108,000 bank branches in rural areas. The Postal Savings Bank of China alone has 39,000 branches serving 400 million clients, and in 2012, 96% of China’s townships had access to a bank branch. Many banks have started to serve small and medium enterprises (SMEs) and lending to these businesses has increased by over 30% between 2006 and 2011.
Photo Credit: Eric Duflos
Despite this progress, is too early for China to claim victory on the financial inclusion front. Several hundreds of millions people still do not have access to formal financial services, leaving China home to a huge unbanked population, second only in size to India. The rural poor, migrant workers and SMEs are some of the most underserved groups in the country, especially when it comes to access to credit. Rural areas are home to close to half the country’s population, but lending to these households only accounts for 5.4% of all outstanding loans in the country. As for SMEs, only a minority access bank loans and they often rely on informal channels to do so.
There are several barriers that prevent the large number of unbanked from accessing financial services.
- High costs of delivery, especially in rural areas;
- Technology, although widespread, has not yet been applied to solving the financial access problem for the poor or unbanked;
- China lacks a financial inclusion strategy, which has resulted in an uncoordinated approach from the many government agencies and institutions involved;
- Data on financial access and usage is limited, and tracking progress is difficult;
- There has been little research to date on what products or services unbanked customers in China actually need;
- With a predominantly public banking sector, government policies and regulations do not always foster the expansion of financial inclusion on a commercially sustainable basis.
Despite these challenges, there are also great opportunities that could offer a breakthrough in bridging the gap between the unbanked and the banked populations in China. As highlighted in the newly published report, China: A new Branchless Banking Paradigm?, technology and innovation hold great promise for deepening financial access in the country. Branchless banking could significantly increase the ability of banks and non-bank actors to deliver services to hard-to-reach segments of the population. Right now, we are watching several developments closely for a positive impact on financial inclusion. These include applications that leverage the world’s fastest growing ecommerce market; an exponential growth of online and mobile phone-based payments; and pilots of bank agents, mobile banking, and self-service kiosks in rural areas.
Over the next several weeks we will discuss these preconditions for successful innovation as well as the biggest barriers to financial inclusion in China in a multi-part blog series. In the comments, let us know what you think about China’s ability to close the financial inclusion gap.