Sustainable Microfinance to Alleviate Poverty —— A Review of UNDP/CICETE Microfinance Program in the Past Decade

1994-2004: Ten years' Microfinance Experience of UNDP/CICETE

1994– UNDP/CICETE approved the Poverty Alleviation and Sustainable Development Program, and launched the first pilot project in Yunnan. It aims at demonstrating integrated, participatory and sustainable development approaches for poverty alleviation in China. Micorcredit to the poor is one of the project components.

1995– Pilot projects began to be implemented in Yilong county of Sichuan and Mount Qomolangma Reserve of Tibet. UNDP/CICETE investigate microfinance project in Yixian county, Hebei province, and decided to introduce Grameen Bank model to the program.

1996-1998 -- Microcredit was implemented in forty-eight counties of seventeen provinces/autonomous regions. The total amount of the revolving loan fund for microcredit is about RMB 90 million. The program demonstrated that microcredit is an effective tool for poverty alleviation, which boosts the dissemination of microcredit in national poverty alleviation program in China.

1997- CICETE set up the Support and Coordination Office (SCO) for UNDP's Poverty Alleviation Program in China, whose task was to provide professional management service to the local MFIs.

1998- The microcredit project designed for laid-off female workers in Tianjin was initiated and became the first successful urban microcredit project in China, which then promoted the development of urban microfinance.

2001- The Poverty Alleviation and Sustainable Development Program was closed. In order to facilitate the sustainable development of microfinance, UNDP/CICETE set up two follow-up projects: Comprehensive Approach for Poverty Reduction and Sustainable Microfinance to Alleviate Poverty (SMAP), at the same time, established Policy Consultative Committee and SMAP office.

2003- 2004 Cooperating with People's Bank of China (PBC), UNDP/CICETE carried out the sub-project of microfinance development and policy study in China under the SMAP.

2004- The Comprehensive Approach for Poverty Reduction and SMAP were completed. UNDP/CICETE began to devise the third phase microfinance project and continued to support the sustainability of microfinance in China.

Achievements of UNDP/CICETE's Microcredit Program

•  Having supported a large number of the poor population. The number of clients maintains about 50,000 every year.

•  Having promoted the application and dissemination of microfinance in both rural and urban areas for poverty alleviation.

•  Having set up a batch of microfinance institutions, some of them have realized operational self-sufficiency and become rare MFIs with the potential of sustainability in China.

•  On the basis of successful experience of international microfinance institution, a series of comparatively perfect management systems have been designed, including loan management, financial management, and management information system (MIS) etc.

•  Having facilitated the improvement of microfinance policy.

SMAP

SMAP was implemented in the second phase of microfinance projects supported by UNDP/CICETE. It aims at building sustainable MFIs in China and playing a demonstration role in microfinance industry in China.

In order to utilize resources effectively, the project has selected four pilot institutions from forty-eight MFIs in accordance with certain conditions. They are Yilong Rural Development Association (YRDA) in Sichuan, Chifeng ZhaoWuda Women's Sustainable Development Association (CZWSDA) in Inner-Mongolia, Xingren County Rural Development Association (XRDA) in Guizhou, and Anding Urban and Rural Development Association (DXRDA) in Gansu.

Expected Objectives:

1. Creating a sound policy environment for microfinance development.

2. Improving four pilot institutions' management capability, including accounting and loan management, product improvement and modification, business planning and MIS software etc..

3. Managing fund by an open and transparent method and providing microfinance service to a large number of poor population.

Project Results:

The project was initiated in January, 2001 and basically finished in June, 2004 ， which lasted for three and half years. The main results of SMAP are as follows:

1. Macro policy environment for microfinance development has been improved through a series of activities. The involvement of People's Bank of China (PBC) in the subproject under SMAP-Microfinance Development Research in China has strengthened the information sharing and communication between MFIs, the government and financial institutions, and promoted the formation of legal and policy framework for microfinance development in China.

- Microfinance Consultative Committee was established in May, 2001, and five meetings were held in the past three years.

- Two international workshops were held in February, 2003 and August, 2004 respectively, and some policy suggestions were raised to the government during the workshops.

- Entrusting PBC to conduct the subproject under SMAP- Microfinance Development Research.

2. Improvement of four MFIs' management capability through technical support.

a. Having improved accounting and loan management system. Based on the international standard, SMAP has compiled accounting manual and management information system (MIS) guideline for each institution. The new accounting system and MIS play a positive role in the following aspects,

- Internal control system was strengthened through the improvement of data collection, recording and reporting system.

- Accuracy, timeliness and integrity of data and information were assured with the reinforcement of internal control system.

- Managers were trained to use basic financial analysis tools to analyze their institutions' trends with financial information and reports, and timely find out their MFIs' weakness and problems.

- More unified, scientific and standard evaluation indicators and management policies in line with international standards were introduced to replace the preexisting ones so that senior-level management can apply them to assess the performance of the pilot MFIs.

b. Having helped the four MFIs work out their five years' business plans. By making these plans, the four MFIs have preliminarily formed their own strategic direction for further development and set institutional sustainability as their targets, thus pushing their organizations converting from a poverty alleviation project phase to an institutional development phase.

c. Having assisted the four MFIs to conduct market survey, improve original products and develop new products as well as compile new products manuals. Pilot institutions' loan products began to develop from unification to diversification. The diversity of products is presented as follows:

- Individual loan form has been developed.

- Lump-sum loan has been developed.

- Seasonal loan with short term has been delivered.

- The target clients have also experienced a change, and sole proprietors in the town or city have been paid more attention.

- The guarantee method has also gone through the diversification. In the past, the group guarantee was the only method, but now individual guarantee is available as well.

d. Having revised and improved original accounting and management information system software; undertaken the training regarding the financial and the computerized MIS system for managers; and also renewed some computers in order to adapt to the application of the new software.

3. SMAP paid more attention to increase the transparency of fund management and gradually expand microfinance services.

It entrusted one accounting company to design and compile external management auditing manual, and to implement external auditing including financial management and project operation for the four pilot MFIs every year.

In order to enlarge the portfolio scale and the scope of microfinance service, SMAP helped the four pilot MFIs build new international cooperation relationship with other organizations such as Grameen Trust and KFW.

4. The governance of the pilot MFIs.

The common weakness of the four pilot MFIs influenced the effect of technical assistance from SMAP. The fact shows that, unless technical assistance is combined with institutional construction, it can hardly get expected results. The strongest weakness of all pilot MFIs is presented prominently in the organizational structure, governance and management system. Most MFIs lack independence, and are operated by a certain governmental department, thus the non-separation of government function and enterprise management has become a big burden; main managers are governmental officials rather than full time staff. The management has strong government behavior, but rarely adopts financial institution or enterprise's management system. Staff incentive scheme is especially insufficient.

The target and task of organizational construction is to realize the separation of government function and enterprise management, and make the MFIs have independent rights in daily operation, income distribution and recruitment sovereign; reduce part-time staff step by step, and ultimately employ full time managers; improve decision-making, implementing and supervising system; and design feasible management system according to basic principles of modern corporate system.

Institutional construction has made positive results. It has helped the MFIs register to be legal non-government organizations (NGO). The MFIs have adjusted the relationship between the government and NGO, and improved their independence, administrative structure and the governance system. The structure of board of directors of MFIs has been modified so that it can play a role as the decision-making entity. Supervisory committee has also been set up. More full time managers have been enrolled so as to improve the specialization of their staff.

In addition, SMAP has also employed two domestic specialists to devise performance assessment and incentive scheme manuals, as well as the management policy manual for MFIs.

General Experiences of SMAP Project

(1) The improvement of a MFI's organizational structure and governance should be combined with the technical assistance to achieve the goal for strengthening the MFIs' overall management;

(2) Human resource is as important as financial and technical assistance to MFIs;

(3) Poverty alleviation target and financial self sufficiency target should be well balanced by MFIs;

(4) MFIs should attach importance to the selection of market and project region.

(5) Diversified technical assistance to MFIs should be developed;

(6) The establishment of independent, professional and full time project office at the national level is necessary to ensure the project management efficiency.

Challenges for the Further Development of MFIs

1. The policy environment needs to be improved further. So far, MFIs do not have legal status as financial institutions.

2. The management of MFIs needs to be improved.

(1) Although the administrative structure of MFIs has been reformed, many aspects still need to be perfected. Performance assessment and incentive scheme are still not sufficient enough. Some contradictions (for instance: property ownership is not clear) constrain the MFIs' development.

(2) The staff's low ability and improper knowledge structure have become the biggest challenge for several MFIs. We should improve managers' ability through strengthening train, and change the human resource structure through enrolling professionals.

(3) The internal control system used to prevent risk needs to be strengthened.

(4) The skills of designing business plan need to be improved for the purpose of expanding communication with external world, and enlarging dimension steadily. Two issues shall be focused on:

- The shortage of financial source used to enlarge dimension.

-The tradeoff between the target of poverty alleviation and financial self-sufficiency.