Financial Inclusion Highlights From China And Myanmar
In my (Chinese) New Year blog post of 2012, I predicted significant changes during the year of the dragon. I was not disappointed for sure. From a personal perspective I moved back to East Asia after several years of absence, and it was hard to recognize the region given the pace of development. In the last ten years poverty in East Asia has fallen from close to 50% down to 35% and economic growth has been relatively high compared with the rest of the world. Some of the most notable change has taken place in China, and in Myanmar more recently.
China is a difficult country to read when it comes to financial inclusion. There is limited data available publicly and a lot of information gets lost in translation. The World Bank Findex report and our recent research and publication on “Financial Inclusion in the PRC” have helped us better understand the rapid change that China has undergone in the past few years. The report shows that Chinese policies in the past seven years have significantly contributed to increasing financial access. For example by transferring social welfare to rural areas through bank accounts rather than delivering cash, the government has contributed to a rapid expansion of bank accounts, and by issuing regulations for new kinds of financial service providers, it has enabled the emergence of thousands of new suppliers of financial services for un-banked segments.
As a result, by the end of 2010, the Postal Savings Bank served one person out of three in China and close to 63 percent of people had used formal financial services in 2011. More than a hundred small banks have opened small business dedicated units in the past few years. While the rural poor, the migrant workers and SMEs still lack formal access to financial services, this could change, especially now that new technologies are being piloted to expand financial access.
Whereas financial inclusion in China might soon be comparable to developed countries, the picture is different in Myanmar. The great surprise in Myanmar has been the rapid opening up of the country in the past year. The government has embarked on a marathon of reforms in the financial sector. Within a year, it has made microfinance a national priority, has launched a new microfinance law, and appointed a new microfinance supervisor which has licensed over 120 Microfinance Institutions, with about half of them allowed to take deposits.
A recently published IFC/CGAP report called “Microfinance in Myanmar” attempts to describe this rapidly changing landscape. There is tremendous positive energy from the private sector and government is highly committed to foster financial access, but fast change does not go without problems. There are so many missing pieces in the puzzle that it will take years to build up a robust inclusive financial sector. It is estimated that less than 20 percent of the population uses formal financial services, which is one of the lowest for the region. It will also take a while for the supervisors to integrate international good practice on regulation and supervision of microfinance. One can hope that by strengthening promising domestic initiatives like PACT, and bringing in international good practices as well as international success stories like ACLEDA Bank, the sector will expand quickly.
I don’t dare making too many predictions for the coming year, but I expect rapid changes in China again this year. For example, if the branchless banking pilots being tested in China were successful, they could be rapidly replicated. In Myanmar, progress will mainly depend on whether the country builds the appropriate financial infrastructure, attracts the right international players (Telcos, banks, MFIs), and adjusts its regulatory framework to international best practices.
---- The author is CGAP's regional representative in East Asia.
An important question, I think, is whether China will continue to reduce poverty as it has done.
Since 2005, the Chinese government has been promoting microcredit as a tool for creating a more harmonious society, as in one with less rural-urban and regional disparities. To this end, it has supported the creation of MicroCredit Companies and a range of other New Type Financial Institutions.
However, at the same time, worldwide more and more doubts are being raised as to microcredit’s effectiveness in reducing poverty. Impact studies have not been able to provide concluding evidence that microcredit generally helps microentrepreneurs increase their income, grow their business and reduce their vulnerabilities.
Interestingly, the analysis of MicroCredit Companies and other new type financial institutions contained in "Inclusive Finance in the PRC" suggests that most loans are not going to microenterprises but rather to what in most countries would be considered SMEs. Many of these SMEs create jobs, which offer rural people from Western and Central China another possible path out of poverty.
I believe we are in the presence of a set of experiments with SME credit that are worth watching. Especially because these experiments are being executed at a scale and speed that are not achievable in other countries. Will the Chinese government’s particular approach to SME credit be effective in reducing poverty? Let’s hope that observers can soon obtain sufficient and reliable data to draw lessons for the rest of the world.