By Lei LU
Director General of Research Bureau
The People’s Bank of China
It is known that financial inclusion has been greatly stated by the State and regulatory bodies of China. Back in November 2013, the decision of ‘comprehensively deepening reform’ and development of financial inclusion has been made in the Third Plenum of 18th CPC Central Committee. It is a mandate to improve financial system and for social inclusion. In order to relieve the financial constraints, high lending costs and monotonic financial services, China’s central bank constantly uses differentiated financial tools, such as differentiated required reserve ratio and reloading system for supporting marginalised people and firms. Besides, the China Banking Regulatory Commission (CBRC) has strengthened the assessment criteria to financial institutions. Since 2010, all commercial banks have to imply two "no less than", which mandates that the growth rate of small and micro enterprises loans are no less than the average growth rate of total loans; the growth amount of small and micro enterprises loans are no less than the average growth amount of total loans. What’s more, CBRC, CSRC and CIRC are jointly agreed the policy support of Fin-tech as means of financial inclusion. My speech will focus on the interpretation of these policies.
1. The essential needs for developing financial inclusion in China
History is a good perspective to understand how finance should serve society. In the 15th century, Italian Catholic Church provided community embedded loans for low-income groups through pawnshops as means against usury. In the 18th century, the Irish established guarantee fund to provide small loans to peasantry without collaterals. Until 1970s, the Grameen bank had extended financial inclusion to insurance and trust institutions, which promoted the concept microfinance in the world. Since the 21st century, the inspiration of microfinance helped conventional financial institutions to transform and to take care of the “long tail” customers with effectiveness and efficiency. The traditional financial service have been able to provide reasonable price and greater accessibility for vulnerable groups, which created opportunities and alleviated poverty. As a result, the context of microfinance transformed into financial inclusion with involvement of governments and financial authorities. China is in a stage of economic development and restructuring with great importance of having inclusive financial system with several reasons.
First, China is a large country with great diversity. After the 30 years of development, the overall level of economic development has been close to a moderately developed countries. However, the economic development and per capital income in central and western regions are still low. According to the report ‘the Report of Chinese Anti-poverty Development’ which published in 2014, by international benchmark, there are still 0.2 billion poor people living in marginalised place of China. The development of financial inclusion is benefit for the median and low income residents to get financial services and eliminate the poverty. The premier Li Keqiang stated the emergency and necessity to develop financial inclusion in the 3rd session of the 12th National People's Congress for the betterment of life of low-income population and small firms.
Second, financial inclusion helps the systematic transformation in China. With the system transition, the financial system has required the tremendous achievements in the midst of development. We have reliable financial infrastructure, and the profits of financial institutions have increased significantly. However, the profit oriented market operation does not mean the Pareto Optimality of the whole society. During the process of market reform in China, some financial institutions have been evacuated from rural and remote mountain areas, which seriously weakened the availability of financial services to low-income groups. We should adjust measures to local conditions and time. Developing various new financial organizations and financial inclusion provides the financial services for low-income groups in remote mountain areas to overcome the shortages of financial serves during the institutional transition process, which improve the social responsibility of the whole financial system.
Third, financial inclusion helps to develop better economy. During the “three period superimposed”, accelerating the economic transition and development has become a real challenge to government and business entities. Small and micro enterprises have been important forces in economic transformation. According to the State Administration of Industry and Commerce, by the end of April 2015, there are more than 72 million market entities including 19.28 million enterprises, 51.39 million individual businesses and 260 million employees in individual and private economy, which implying that target customers of financial services depend on the economic entity. However, the government financing platforms and stated-owned enterprises are more likely to gain credit loans from commercial banks and forming crowd-out effect to micro-enterprises. According to the statistics from CBRC, by the end of June 2015, the total loans balance of financial institutions was 94.43 trillion consisting 22.05 trillion by micro-enterprises, accounting for 23.35%, which is lower than the percentage of contributions made by them on economic growth. It means that the ratio of GDP to loans by micro-enterprises is larger than big and medium-size enterprises. Hence, the financial inclusion development relieves the financial constraints faced by and micro-enterprises to support the growth and innovation of small and micro enterprises, which improves economic development and transformation. In conclusion, it is the first point that explains why we need financial inclusion.
2. “Three important relationships’ on the development of financial inclusion
In 2012, the ex-president Hu Jintao advocated the development of financial inclusion in China at the G20 summit in Mexico. After that summit, financial inclusion has been improved greatly in China. In 2013, the destiny of bank branches and the national per capital of banks ranked the 89th and 123rd, have been at the middle level in the world respectively. The destiny and per capital share of ATM machines have been at the advanced level, ranking the 37th and 68th respectively. To further improve financial inclusion in China, the following relationships should be handled carefully.
Relationship between government and market. Under the market economic system, micro entities are self-employed and self-financing. The governments do not involved into their businesses. As a result, the commercial financial institutions have experienced great development over the past few year. Governments have to guide the downward of financial organisations through variety of political measures and develop new finance and quasi-financial institutions like small loan enterprises and financial guarantee institutions. However, the downward of financial institutions and new quasi-financial institutions are the autonomous behaviour by enterprises, which cannot be replaced by government. The executive orders by governments cannot intervene enterprises’ business, so as to ensure the long-term sustainable development of financial inclusion.
Relationship between finance and fiscal policy. Financial inclusion is mainly service for the low income groups and micro enterprises on financial businesses. Compared with traditional finance, financial inclusion has lower profit targets. Some financial inclusion may not be profitable. Most of financial inclusion institutions provide break even and low profit financial service. However, due to the financial market failure in the long term, government should make a full use of the ‘visible hand’ to guide the market through fiscal policy to efficiently and indirectly support the financial inclusion institution. But the government should not intervene.
Relationship between market order and market entry. The order in financial market determines the stable and healthy operation of financial system. For a long time, our government has set up entry barriers, which can be seen as an international practice. Most countries in the world have entry barriers of financial institutions. However, due to many reasons, financial constraints and higher cost of financing faced by enterprises in China have not been solved. Besides, due to the uneven economic development, there are gaps on the supply and demand of financial service in various regions. In order to improve the effective supply of financial inclusion, it is necessary to reduce the entry barriers of financial market. Greatly developing the medium and small financial institutions and enriching the types of financial services targets are general trends. In addition, due to the different levels of economic development in different regions, government should apply different regulatory measures according to different levels of economic and financial institutions development. We should not impose uniformity in all cases. If we are failure in dealing with these three relationships, a good thing may be screwed up.
3. Prospective directions
Just a few days ago, two colleagues of mine from the Central Bank of China who is working at research institute and consumer protection institute joined the fourth meeting of G20 in Turkey Anka Seville. They discussed the implementation of the financial inclusion in 2014. I would like to introduce the working plan that was agreed by majority of members in G20 in the future 5 years.
Enhance the MSMEs accessibility of credit loans.
The accessibility of credit loans include the following items: accelerating the financial political reform on micro enterprises financing channels; establishing the global forum on micro enterprises financing channels to promote and discuss the successful policies and practices; improving the availability of micro enterprises financing channels through financing agreement and innovation.
Financial consumer protection and education.
The financial consumer protection and education include improving the capacity of the government and other stakeholders; implying the measures on financial consumer protection and education; promoting good practices in financial consumer protection and education in order to adapt to the digital interactive products and services. Why do we put financial inclusion and financial education together? As we all know, there is a very important platform about the modern payment system and Internet technology. We can ensure the majority of financial consumers to gain the training on modern technology and financial knowledge through financial education.
The modernization of market and payment system.
The modernization of market and payment system include helping analyse and solve the issues on closed bank accounts on cross border operation; reducing the exchange costs; enhancing the responsibility of financial inclusion, increasing the employment opportunities and incomes of the poor through technical innovation.
In the upcoming 2016, China as the G20 presidency, will discuss financial inclusion with other countries. Thus, we hope that researchers, financial institution practitioners and financial institutions provide more valuable advices and researches on financial inclusion development. We believe that the people’s bank of China and other financial institutions will absorb the valuable research topics and recommend these topics to be discussed in G20 meeting.