Banking & Finance

Lender of last resort

Earthquake-ravaged Fangbei tries a financial experiment

Lender of last resort

In ruins: a scene from last year's Sichuan earthquake

After narrowly losing out in the Masters at Augusta last weekend, golfer Kenny Perry cut a very dignified figure. The 48 year-old commented: “If this is the worst thing that happens to me, then I’ll have had a pretty good life.”

Perry is, of course, right. Losing a golf tournament is a setback, but there are infinitely worse things in life. At the other end of the scale is the death and destruction of tragedies like the Aquila and Sichuan earthquakes.

The fallout from the Sichuan quake saw 4.8 million made homeless and 69,000 dead. The task of rebuilding was never going to be easy. But in a small village in the suburbs of Mianyang one man has sought to make a difference.

He Zhiyi is an academic, but an unusually practical one. After visiting the quake-affected areas last year he realised that the villagers faced a financing shortfall. The monies available from local credit associations and government subsidies were insufficient for the average villager to rebuild his two storey, 100 square metre home. He calculated that – at a construction cost of Rmb100,000 ($14,600) – they would need to borrow a further Rmb20,000.

He, who is deputy dean at Shanghai Jiao Tong University’s An Tai School, decided to approach companies to see if they would help. Using the concept of ‘one company, one village’ he tried to find firms willing to provide loans to Fangbei’s 405 families. He failed. Undeterred he recalled a practice from the 1960s in which a ‘one-helps-one’ system was used to get city families to donate funds to rural disaster areas.

But he modified the idea. Professor He proposed that each prospective city donor could lend Rmb20,000 to a Fangbei family; it would be interest-free and repaid five years after the home was built.

The professor then drafted a loan document based on the five-family guarantee system that Grameen Bank pioneered in Bangladesh. Under this, five families get loans, and act to guarantee the loans of their four fellow borrowers. The system pushes its members to supervise each other at the local level – ensuring better creditworthiness.

As a further show of good faith, Fangbei’s villagers came up with another idea, writes the Oriental Morning Post. If a family could not repay, its one hectare of ‘land use rights’ would be ceded to the city family that lent the money. That would ensure the lender still received around Rmb2,000 per year (if the land is cultivated). The system is policed by the village committee – to whom each borrower has to mortgage its land use rights, as a safeguard against default.

Sounds good, but what about the cold hard cash? Professor He, who is also the executive editor of PKU Business Review, raised funds through an appeal in the publication. This also got publicity online, through bloggers. Rich city ‘donors’ then came forward, making it possible to make 218 loans by August. By January the borrowers had moved into their new homes.

One beneficiary is Wang Defu, who works on a local construction site. His total family income (including his 22 year-old son’s salary as a chef) is Rmb40,000 per year. His annual mortgage repayment to the bank is Rmb13,000, and he pays another Rmb5,000 to his city benefactor (whose identity he does not know).

Wang’s wife, despite the trauma of the earthquake, is optimistic: “We can get extra income by rearing pigs. As long as we have jobs, keep working hard and are thrifty, it will be no problem to pay off all the debt in five years.”

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