In November 2013, China formally proposed the concept of developing inclusive finance for the first time at the Third Plenary Session of the 18th Central Committee of the Communist Party of China. In December 2015, the State Council launched the Plan for Advancing the Development of Financial Inclusion (2016–2020), elevating inclusive finance to a national strategy.

Over the past decade, inclusive finance has achieved leapfrog development and made remarkable results, marking a milestone in China’s financial development. First, the continuous expanding coverage of basic financial services. By the end of June 2022, the coverage rate of national village and township bank outlets exceeded 97%, and basic financial services covered 99% of the administrative villages. Financial services and institutions are basically available and accessible to the countryside. Second, the growing loan scale of inclusive finance. By the end of the second quarter of this year, the inclusive finance loan balance of financial institutions was 29.91 trillion yuan and the balance of inclusive loans to MSEs was 21.96 trillion yuan. Meanwhile, the average interest rate for new inclusive loans to MSEs in the first half of this year was 5.35%, decreasing by 0.35 percentage point from that in 2021.

So, what is the inclusive finance development path in China? What challenges does it face? What are the future trends? Dr. Duoguang Bei, President of Chinese Academy of Financial Inclusion (CAFI) at Renmin University of China, takes an exclusive interview with China Financialyst (CF).

CF: Many people believe that inclusive finance should be both “universal” and “preferential”. What is your definition of inclusive finance?

Dr. Duoguang Bei: In Chinese, “Pu” means “universal” and “Hui”, “preferential”, so naturally, many people think inclusive finance (Pu Hui in Chinese) should be both “universal” and “preferential”; other people think Pu Hui means“universally beneficial”. Then, what’s the origin of Generalized System of Preferences (GSP)? The postal service is the earliest product of GSP: the Constitution of all countries protects the basic communication right of every citizen. It is an inclusive service that is “universally beneficial”, but not “preferential”.

CF: Inclusive finance has been introduced to China for nearly a decade. In your opinion, what is its pathway? What achievements have been made?

Dr. Duoguang Bei: After establishing a modern commercial banking system and a capital market, we have entered the third stage to establish a high-quality inclusive financial ecosystem, which I think is a historic approach, not a makeshift.

Different from the Grameen Bank in Bangladesh pioneered by Prof. Yunus. China, however, has adopted a different approach: it aims to improve the financial structure so that existing financial institutions can better serve the financial needs of MSMEs and vulnerable groups. Since 2006, major banks, microcredit companies, and digital platforms have been exploring inclusive financial development patterns. At the end of 2015, the State Council issued “The Plan for Advancing the Development of Financial Inclusion (2016–2020)”. According to this landmark document, China needs not to reinvent the wheel, but instead encourages all commercial banks to engage in this cause each with designated quotas and tasks; it shows China’s institutional advantage, without which, it would be hard to make it work.

From the academia’s perspective, I think China has made three major achievements in financial inclusion in recent years.

First, the scale. No other countries in the world could mobilize such massive banking resources like China did. When especially large banks engaged in inclusive finance, remarkable progress has been made in alleviating MSMEs’ financing problems.

Second, rapid development in fintech. Digital payment’s catfish effect has propelled the rapid development of inclusive finance: it not only helped make digital finance more accessible, but also boosted digital credit, thus nudging the digital transformation of the traditional banking system.

China has been a global pacesetter in financial digitization for a long time. However, during the pandemic, many other countries have witnessed a rapid development of digital finance too with extensive use of contactless payment, so we should have a sense of urgence so that we will not be left behind. 

Third, awareness and coverage. Thanks to the close attention paid by the central government, the concept of inclusive finance has been known even by the grassroots and I find that China is enjoying a very favorable atmosphere for inclusive finance.

CF: What challenges does China face in inclusive finance?

Dr. Duoguang Bei: Here are some problems I have observed. Firstly, government interventions, particularly in prices, are still quite frequent. Intervention is a double-edged sword. Theoretically, the twisted price may lead to massive bad debts. Therefore, we should evaluate the existing policy to make it more market-oriented.

Secondly, the rights and interests of financial consumers have not received as much attention as the financing issue. In the new Five-Year Plan for Financial Inclusion, we began to advocate the high-quality development of inclusive finance, which is a great progress. The major difference of inclusive finance as contrast to traditional finance is the clients it serves are financially more venerable. To better serve their needs, we need to pay special attention to protecting their rights and interests. Institutionally, we should address the conflicts between the oversight and business models. For example, consumers can access to multiple financial services on their cell phones, but if a problem occurs, they don’t know where to complain or which department is responsible. Institutions involved sometimes pass the buck and the red tape is really frustrating. Therefore, we suggest that when it comes to the protection of the rights and interests of financial consumers, the competent department should oversee all services, such as banking, insurance, and wealth management. 

Thirdly, an inclusive financial ecosystem. We have given due attention to credit granting, now it’s time to set up a financial ecosystem, which will treat all the fishes, big or small, and even the shrimps as equals; they are co-dependent and together make a healthy ecosystem.

CF: What’s your opinion about the future trends in inclusive finance?

Dr. Duoguang Bei: I’d like to quote Prof. Michael Chu from Harvard Business School: fintech reshapes the world. Over the past ten years, artificial intelligence, the Internet, and smartphones have developed as three fundamental technologies that have significantly improved financial services and reduced financial transaction costs.

Many examples can prove that technology has disrupted the original financial framework. In its 40-year development, the Grameen Bank, founded by Prof. Yunus, has delivered services that have benefited about 9 million poor farmers in Bangladesh, while China’s Internet banks accumulated 30 million clients in just three years without face-to-face contact.

Here is another example. Several years ago, I visited Kenya, a country in East Africa, where the bank account penetration rate was less than 30% among adults, and more than 70% of people did not have bank accounts. However, M-Pesa, a mobile phone-based money transfer service, has covered the 70% in just a couple of years, and become the largest mobile phone-based financial platform in Kenya.

In this sense, digitalization is the future trend. Through digitalization, financial services are no longer limited to high-net-worth individuals (HNWIs) but are also accessible to MSMEs and vulnerable groups. It will significantly enhance the accessibility of inclusive finance. Globally, there are still 1.7 billion people who need access to financial services through inclusive finance.

CF: Inclusive finance in China has another important role – to empower rural revitalization. In your opinion, how should it work?

Dr. Duoguang Bei: In rural revitalization, public facilities, housing construction, and farmland upgrade all require substantial financial support. Obviously, many small and medium-sized financial institutions in rural areas are seriously short-funded. Furthermore, micro-business entities consisting of farmer households usually have but very limited credit support from formal financial institutions.

Rural capital has long been flowing to cities and capital markets. How to make the fund flow back to rural areas is our current concern. What roles should large banks and local small and medium-sized banks play in this process? If large banks crowd out small banks by leveraging their advantages in lower interest rates and more advanced technology, the financial structure will not be optimized, and a series of problems could emerge.

When it comes to serving community-level MSMEs and vulnerable groups, a purely commercial approach may not be the best option. Therefore, we hope financial institutions can set up community banks, which are not purely profit-oriented, and it is critical that they are not. Looking at the well-developed community banks around the globe, we find that they are no longer commercial banks, and many of them have become national cooperatives. For example, not long ago, the United States amended the Community Banking Act to encourage the expansion of community banks.

CF: Do you have any specific suggestions for the future development of inclusive finance?

Dr. Duoguang Bei: As Chinese economy has moved from high-speed growth to high-quality development, inclusive finance should move in tandem. We find that demand-side capacity building has received much attention at home and abroad. However, supply-side capacity building, namely the capacity building of financial institutions, should also be valued.

First, the governance structure of financial institutions should be optimized. Take rural banks as an example, some village banks and rural commercial banks are well-developed because originally inclusive finance has been part of their business and therefore can financially empower their customers. On the other hand, other village banks struggle to stay afloat after operating for over ten years as they haven’t truly understood the business model of inclusive finance. The major problem is that their top-level design and governance structure are not fundamentally in line with the characteristics and requirements of inclusive finance. Therefore, we need to develop and improve supply-side capacity building urgently.

Second, the regulatory capacity should advance with the times. In recent years, China has built a number of pilot zones for inclusive financial reform. Such pilot projects certainly require proper guidance and support from regulators, and we should seize opportunities to develop them.

Third, on the social level, everyone has to enhance their inclusive financial capacity building. In the digital era, we will be easily left on the wrong side of digital divide if we fail to improve our capacity accordingly. It may create barriers to financial services, which is also the most fundamental problem for inclusive finance to address.

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