China’s banks lent $671.6 billion in the first quarter of this year. The problem is that hardly any of this money went to small and medium-sized enterprises (SMEs).
SMEs represent the lifeblood of an economy. They are typically the most dynamic, and fastest growing companies – and perhaps most crucially, on aggregate they are the biggest employers. But in China they find it hard to get a loan, particularly from the nation’s biggest banks.
Liu Mingkang, who used to run one of those banks (Bank of China), now chairs the China Banking Regulatory Commission. At the Boao Forum he participated in a panel discussion where SME financing was the chief topic of discussion. He was asked why the big banks still found it so hard to lend to SMEs.
“We have made special efforts in this area for three years, but to little effect,” admitted Liu. “Last year we even required all banks to establish special SME divisions.”
The issue for banks is determining credit quality. Lending to a state-backed company, or an infrastructure project is a much easier task. Liu told the forum that the SME divisions needed to assess loan applicants in much the same way that a private equity investor would assess making an investment. They should look at the moral quality of the owner, the company’s products and its market share; and they should check the water and electricity meters, as well as customs declarations. “A meter machine will never lie, and will mirror the real state of the factory; and the customs declarations will tell its export standing.”
But while the big banks mull Liu’s credit assessment techniques, Jack Ma reckons he can step into the breach and help. Ma, the entrepreneur who founded the highly successful business-to-business website Alibaba.com, has developed a product called Ali-loan, specifically designed for SMEs. With his typical rhetorical flourish Ma told the media: “Let’s make the most of the financial crisis to change our banks.”
Ali-loan is – yet another – modification of the micro-credit model developed by Nobel Prize winner Muhammad Yunus, who pioneered such techniques in Bangladesh. In this case, Alibaba acts as an online platform where three SMEs can meet on ‘blind dates’ and decide whether they trust each other enough to join an ‘Internet Associate Guarantee’ programme. This allows three (or even more) companies to apply for a bank loan together and guarantee their counterparts.
The loan itself is made by a bank – Alibaba has been collaborating with Postal Savings Bank (see WiC1) and China Construction Bank (which is piloting the scheme in Zhejiang province). Adding a second layer of comfort for the lender is that Alibaba also acts like the electricity meter Liu Minkang referred to. The borrowers are Alibaba users, and so its systems track their client orders. An official from Postal Savings Bank told China Business: “Many small companies do not have financial statements, so Alibaba’s transaction records offer accurate monitoring data. Actually, through the Alibaba data we can save large amounts of cost, because we don’t have to monitor the small companies ourselves.” Alibaba currently has 40 people in its credit department.
In 2008, Ali-loans were made to 700 SMEs, and the amount lent was Rmb1.4 billion. This year Ma’s target is Rmb6 billion ($876 million). But he thinks the potential is there to lend far bigger sums.
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