From private bank client to farmer: a Chinese model of social lending
Financial services group CreditEase runs an app through which its private banking clients can be connected to needy women farmers in China’s rural interior. It’s a remarkable initiative taken up by 200,000 farmers and shows what can be done with low-level credit. But how does the risk management work?
Euromoney’s final interview in Lankao, China, is accessed through a small hobbit-sized dirt tunnel that descends precipitously into a 90-metre-long makeshift greenhouse of sloping transparent tarpaulin over an earth-built barricade. Inside, several women are tending to peach trees and vegetables. When our chat is done, we are presented with a fine but surprisingly spiky cucumber, which has now been formally declared as a corporate gift.
This is a long way from China’s sophisticated east coast financial centres – five hours on a high-speed train from Shanghai into the interior of landlocked Henan Province – but it represents one terminus in an innovative model in Chinese private banking. The many farmers Euromoney meets here, all of them women, are recipients of a programme called YiNongDai, a public welfare microfinance scheme launched by CreditEase, a Beijing financial services group better known for peer-to-peer lending and for trying to bring international norms like fund-of-fund products to Chinese high net-worth clients.
It works like this. Many private clients in China want to help those in poverty in their country but not always just through philanthropy, instead hoping to help people to build something themselves. Through NGOs and rural cooperatives, they are matched with women farmers in China’s poorest areas – Lankou county is one such – and give them small loans, typically from as little as Rmb100 ($14.71) up to Rmb20,000, for a year in order to buy crops, livestock or to develop a business such as a small shop. They get 2% interest for this, nothing in the heady world of Chinese funds, which routinely promise double digit returns.
These people need a small loan to support them to do planting or open a mammy-pappy store... But they cannot get financial services from the banks because they are poor and do not have any credit records. This platform helps farmers to change their lives - Selina Xu, CreditEase
The clients decide on the recipient through an app. Each farmer gets a profile – a photo and a brief explanation of their situation and needs – that is put together by the cooperatives on the ground. (Many recipients can’t read or write, much less use the internet, although smartphones are widespread and everyone seems to be able to use WeChat.) If the clients see a farmer they wish to help, they simply click through and say how much they want to lend.
It typically takes no more than a day to link the lender to the ultimate borrower. Once recipients have their funds, some will repay the interest monthly and the principal at the end, others the whole lot upon conclusion. The whole thing uses blockchain technology to keep track of the loans.
So far, 200,000 farmers have been funded in this way.
Selina Xu, CreditEase
CreditEase says that default rates are practically zero, and in our time in two villages in the county we only hear of one person who has ever failed to repay on time (she did so not long afterwards). We meet people who have founded shops and restaurants, diversified crops, bought sheep or simply stayed afloat because of the loans.
It is a lot cheaper than classic microfinance, where interest rates can be over 30%, although borrowers do typically pay as much as 10% in total, albeit much of it recycled into the community. Terms vary from one cooperative to another.
The women farmers typically tend the fields alone, their husbands having gone to the cities to seek work, and they are trying to sustain modest agriculture while also raising children. Others support elderly relatives, and while the dwellings are well made – nothing like the poverty one sees in Indian villages – none had any form of heating and it is well below freezing when we visit.
One farmer sets out a pot fire of peanut shells, but unfortunately it explodes into dense white smoke and has to be removed. Life is hard graft here.
Nor do they have other options for credit.
“These people need a small loan to support them to do planting or open a mammy-pappy store,” says Selina Xu at CreditEase, who directs the project. “But they cannot get financial services from the banks because they are poor and do not have any credit records. This platform helps farmers to change their lives.”
And it fits with a desire among private clients too, she says.
“Most lenders are our clients. They have wealth and they want to help others, but they don’t know how. We built this platform to make a connection.”
Euromoney visits two rural collectives in Lankao county. First, we meet Zhang Yanbin, chairman of Nanmazhuang Ecological Agricultural Products Cooperative.
Zhang had welcomed Euromoney to Lankao at a dinner the previous night where a fellow cooperative owner got things going with a scalding rice wine, distilled from his field and a hearty 38% alcohol. Well used to such things, today Zhang is all smiles, greeting everyone in his community and proudly showing us a picture of himself with Grameen Bank’s Muhammad Yunus, clearly a role model for much of what the YiNongDai programme attempts.
“We founded this cooperative in 2004,” Zhang says, “and later, when the government wanted to set policy standards for cooperatives, we provided a lot of guidance on our practices to them.
“But in our early stage, we developed very slowly because we had limited funds. The cooperation with CreditEase allowed us to grow much faster.”
That cooperation began in 2013, after an NGO brought the two together; so far, the 1,300 farmers covered by Zhang’s cooperative have borrowed about Rmb20 million, pretty much all of it repaid on time.
Cooperatives, by bringing farmers together and negotiating collectively when they need to buy or plant seeds, save their farmers about 25% on costs, he says.
“Farmers pay less money to get the same results and they can work with the cooperative to get extra money. It’s win-win for both the farmers and the cooperative.”
In Zhang’s community, covered in an overnight snowfall, we are introduced to several borrowers. Ding Lingye, 57, borrowed money to set up and stock a shop. It has ‘Good neighbour supermarket’ proudly written above its entrance.
Zhao Meiqing, 44, borrowed in 2018 for planting and has a generous stack of corn outside her front door. Wang Huili, 49, whom we meet at a rice processing factory, also borrowed for planting. She shows how word of mouth is important in a programme like this: she tells her colleagues in the rice plant about it, and they then seek out the opportunity themselves.
At this cooperative, the borrower pays 10%; 2% to the individual lender, 1% to CreditEase and a further 7% that the cooperative puts into a public welfare fund that is then used in the community for things like street lighting, health checks for the over-60s, cash awards for village students who gain admission to colleges and holiday gifts to villagers whose partners have died.
The second cooperative, a little more distant in a village to the east of the town, is Huzhai Brothers Agriculture and Animal Husbandry Cooperative. (There are no Huzhai brothers. Huzhai is the name of the village and the word brothers, in Chinese, sounds like green, with its environmental association, as well as suggesting the idea of following wise big brothers.)
The structure is similar to the one at Nanmazhuang, but they do different things with the pooled funds. Here, members of the cooperative benefit from a free kindergarten, a discount on agricultural equipment leasing, group procurement and sale for planting, as well as up to 50 tonnes of clean water for free. This cooperative, also founded in 2004 with loan services commencing in 2013, began covering five villages and now embraces eight, with 600 members.
|Wang Yinhuan and Liu Meirong
In this group, we meet Gao Xiang, 45, who renovating a restaurant funded with borrowings from 2017 and 2018. We see a kindergarten funded with cooperative fees, where children in voluminous puffer jackets proudly hold up small presents they have received through the scheme. We meet Wang Yinhuan, in her 50s, and Liu Meirong, 54; both have borrowed to plant peanuts and corn, and in Wang’s case to raise sheep in a pen next to her house. Finally comes our interview in the tunnel-accessed vegetable garden, with Wang Yan, who has borrowed to plant peanuts and corn, and whose financial standing has improved so much that she can now borrow from the bank if she wants to. She is now planting peaches.
Through these meetings, several patterns emerge. One is that use of the programme has often brought people from basic self-sufficiency covering a single field, to something more expansive – a shop, a restaurant, a new crop or another field. Another is that none of them find it particularly challenging to repay the loan; the translation “no pressure” keeps coming back.
Funding inspires left-behind women... When they have funding, they begin to think about doing something: they develop a start-up spirit - Zhang Yanbin, Nanmazhuang Ecological Agricultural Products Cooperative
Most of these people have borrowed and repaid multiple loans now and plan to continue to do so. Ding Lingye wants to do up her shop with a better entrance, Zhao Meqing wants to plant grain, Wang Huili will buy more fertilizer seeds and Gao Xiang will develop the outside area of her restaurant and cater for outside weddings.
Although living modest lives, none were starving before CreditEase came along and many have some savings, which are taken into account when people decide whether or not to lend to them. What is being offered here is not just the ability to earn more money but also the opportunity to make use of dead time.
“Funding inspires left-behind women to do something positive,” says Zhang. “Previously they have children to take care of and cannot do anything else, especially between the [planting and harvesting] seasons. They would just play cards and mah-jong, they had nothing to do.
“But when they have funding, they begin to think about doing something: they develop a start-up spirit.”
|Entrance to Wang Yan's vegetable garden|
The intentions are all well and good, but what about risk management?
There are two layers to this. CreditEase isn’t doing due diligence on individual farmers on behalf of clients; it is doing due diligence on the rural cooperatives, assisted by an NGO to link them. Then the cooperatives themselves take responsibility for knowing the end borrowers.
They seem to be remarkably effective at this. Euromoney meets Wang Guizhu, a field officer with the job of going to see cooperative members to consider their suitability for lending. Having joined the cooperative at all is something of an endorsement – there is a vetting stage there – and beyond that it helps that everyone knows everyone in a village.
Wang has known each of the four clients we meet in her village for many years and, while they lack formal credit ratings, she knows who does what, what their family circumstances are, whether or not they are reliable and hard-working, what they spend their money on and what they bring in from their crops or livestock.
Villagers have a particular way of assessing one another, something one sees all over the world, from Palestine to rural Indonesia: people who have no formal credit rating are nonetheless rated by their peers and there would be an unthinkable loss of face in being known as a bad debtor.
Zhang points out, for example, that Zhao Meqing, the woman with the corn outside her house, won a cooperative award for being a good daughter-in-law, because she took care of her husband’s grandmother, whose photo still sits on a table in her living room.
Apart from being a decent thing to do, this seems to figure in the assessment of credit as a measure of good character.
There are occasional practical nuances. People tend to be more comfortable lending to those who raise crops rather than animals, as the feedstock prices for animals can move around, making the financial outcomes less predictable.
There is also the sense of pulling together, which is the whole essence of the cooperative in the first place but also works at a more micro level.
“We learned this from Muhammad Yunus and Grameen,” says Selina Xu. “We use the team guarantee system.”
She says a group of five women will form a team guaranteeing one another at the beginning; each covers the other financially, alleviating the pressure to pay back if, for example, a crop is damaged.
There is a vast need here. There are thought to be 50 million farmers in China living under the UN standard definition of poverty of $1 a day. The National Bureau of Statistics, which defines the poverty line at Rmb2,300 a year, says there are 30.5 million rural poor (down from 99 million at the end of 2012).
And YiNongDai has ambitions to do more than alleviate poverty; the empowerment of women, environmental improvement, education support and community services are all part of the mandate.
Many of the borrowers Euromoney speaks to are repeat users of the programme. Having borrowed once and repaid on time, they do so again, sometimes for more of the same, sometimes to do something new, such as improving their home. Along the way they develop a credit profile, although when asked what other sources of funds they have, only one of them mentions banks, which don’t seem relevant to their lives.
Similarly, many lenders are also repeat customers. When a loan is repaid, lenders are given a choice: have it credited back to their account or put it towards another borrower.
One wonders what the secret of a good profile is – is there a particular kind of story or photo that most appeals to donors?
“The stories play a very important role,” says Xu. “Most of them are funded, but the speed will be different if she has a good story or photos; she will get money faster than others.”
That sounds blunt, but in practice, she says, everyone gets funded within a week and often loans are disbursed ahead of a lender being matched, particularly when there are seasonal considerations for the funds – the right time to plant corn or peanuts, for example.
Donors are attracted by different things, she says.
“Some like Tibetan people and are touched by their photos. Some might look for someone with two children who wants to support their schooling. Some lenders like to support their home town.”
Once a year, CreditEase runs a tour allowing private clients to meet recipient farmers, most recently in the far northeastern Jilin province in December. It is, by all accounts, quite an emotional time: the wealthy can see at first hand the transformative effect of a few renminbi, placed into the right hands with the right guidance.