The Xiaolan revolution

In this era of internet banking and high tech finance, it may seem odd that China is copying a banking model established in the UK in 1810. But distinct parallels can be drawn between the Xiaolan Rural Bank and the world’s first mutual savings bank, Britain’s Savings and Friendly Society.

These 19th century banks were children of Britain’s industrial revolution. They grew out of local communities and their need to finance the endeavours of local entrepreneurs and industrialists.In towns like Elizabeth Gaskell’s Cranford, where self-help was the order of the day and London seemed a long way away, the early mutual saving societies became mainstays of the local economy.

So what does this have in common with Guangdong Province?

Surprisingly quite a lot. The founder of Xiaolan Rural Bank came to the same conclusion as the Scots and Lancastrians of Britain’s industrial era. He realised that local industrialists – particularly of the small and medium-sized variety – were having trouble getting the necessary finance from the country’s big four banks, whose lending decisions have increasingly becoming centralised in Beijing. A more local source of lending was required, with a personalised knowledge of borrowers and credit histories.

Huang Biaoquan, the bank’s founder, wanted a local bank for local businesspeople. It helped that he was also the local communist party secretary. He explains: “Today’s commercial banks are businesses. They do not want to, or dare to, or are able to help these small and medium-sized enterprises, or start-ups.”

And just like the original mutual banks in industrial Britain, Huang recognised that the source of funding would need to be local. By late February this year, Huang had managed to raise Rmb240 million of deposits from 1,600 individuals and 120 corporates. In this pioneering banking experiment, Huang hopes that what he terms ‘Xiaolan Peoples Bank’ will include every local citizen on the shareholder register – which, again, would give it the distinct characteristic of a mutual bank.

Xiaolan is a township in Southern China. But it has 25,000 industrial business, of which 95% are private sector, and a local GDP of Rmb15 billion ($2.19 billion).

The bank’s loans already stand at Rmb100 million, and what sets it apart says Huang is that it takes a more “flexible” approach, especially in relation to loan collateral.

Many homeowners in China lack valid ownership certificates. Without this, banks will not make a loan against a property, even if it has been under the de facto ownership of a person or company for decades.

Huang says that Xiaolan Rural Bank – thanks to its connection to the local township government – can be more accommodating. Even without the documentation, the local government will sign off on loans for people that it knows well enough. Approvals take two to three days.

Being a ‘rural’ bank, Xiaolan will lend to farmers, but given the township’s increasingly industrial orientation, the bulk of its lending is targeted at businesses. The president of the bank, Xu Cao cites the example of an export-oriented firm with sales of Rmb200 million which faced cashflow problems during the current credit crisis. After a week inside the firm, the bank’s loan officers concluded the management was competitive, and a loan of a few million could safely tide it through the cash crunch.

The business owners in Xiaolan township are mostly local and according to the Nanfang Daily the non-performing loan ratio in the area is less than 1%, with businesses maintaining good credit histories.

However, there are concerns that some of the bank’s clients will suffer from the collapse in exports – and default on loans. There are also fears of corruption creeping into the lending process.

Huang is unfazed and says the bank’s objective is to break even in year one. The bank thinks that a loan book of Rmb330 million will ensure profitability, even in this low interest rate environment.

In fact, Huang’s biggest headache is persuading the central bank to allow a ‘rural’ bank to join the interbank payment system. Presently his customers cannot even write cheques. He admits this is a major problem but hopes to resolve it through an agency agreement with another bank. Watch this space.

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