Banking & Finance

Bitter harvest

Debt traps for rural microfinance schemes


Caution: loan sharks in area

“Credit is a human right.” So said Muhammad Yunnus, the Nobel Prize winning founder of Grameen Bank. It has become his most repeated quote over the past two decades as the motto of microfinance: the movement which has helped millions of the world’s most impoverished people gain access to financial services.

However, these days Yunnus nearly always adds a rejoinder after saying it, arguing that the movement he popularised has become too commercialised and lost sight of its original aims. In a New York Times op-ed he warned: “Poverty should be eradicated – not seen as a money-making opportunity.”

In China, his words have proved particularly prophetic. Millions of farmers have seen their savings wiped out as a result of investments in rural financial institutes known as ‘farmers financial cooperatives’ (FFOs), which were set up in the a decade ago as China’s answer to Grameen Bank.

The UN designated 2005 the year of microcredit in a bid to encourage governments to set up favourable regulatory environments.

China followed one year later with its own guidelines as part of its ‘New Socialist Countryside Campaign’. As Reuters reports, the document was pretty vague and left it to local governments to improvise. In many cases a group of at least 10 farmers could set up a credit cooperative to make small agricultural loans after applying to their local authority.

The first ever FFO appeared in Yancheng city of Jiangsu province as a pilot for the rest of the country to follow. Beijing News recently revisited the city, interviewing one FFO agent, Yan Chungyuan, outside the shuttered doors of his former workplace, now heavily covered in dust. The newspaper says word of their arrival quickly spread, prompting hundreds of farmers to show up, waving their deposit slips.

Yan tells Beijing News he invested Rmb135,000 ($20,927) of his own savings in the FFO. However, in an all too familiar tale from the world of Chinese finance, the agents were soon being financially incentivised to collect money from would be depositors who were, in turn, being offered interest rates of up to 12%. Few questioned rates that were four times higher than those on offer from commercial banks, as they believed the municipal government had sanctioned the scheme.

One depositor, Tian Rongfu, tells Beijing News he invested all the government compensation he got after being relocated to make way for the Three Gorges Dam. He recalls when he went to an introductory meeting, government approvals were very prominently on display.

However, it took only three years for the first FFO to go under. And in January 2013, reports began to spread that the Yancheng FFO was having financial troubles, Yan and many others rushed to get their money back. It was no longer available. Officials at the institition had invested 90% of the FFO’s deposits in a property project in Anhui province. They claimed to have been defrauded by their joint venture partners.

As cracks emerged, it rapidly became apparent the FFOs had a very unclear legal status. They were classified as ‘private non-profit enterprises’, which meant they should not have been engaging in moneymaking activities. Moreover, since they were not banks their clients were not covered by the CBRC’s deposit insurance scheme.

Both Yan and his fellow depositor, Tian, blame ineffective government supervision for the ensuing mess. Officials from the agricultural department also admitted to Beijing News they were simply not qualified to handle the scheme given their lack of financial expertise (Many FFOs had been duping the department with two separate bank accounts – a legal one that could be supervised and an illegal one, which was often channelling funds into property projects).

As Yunnus himself once said of the problems in the sector he spawned, “I never imagined that one day microcredit would give rise to its own brand of loan sharks.”

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