Microfinance and Poverty Alleviation:
United Nations Collaboration with Chinese Experiments

Paper prepared by: Susan H. Holcombe, Xu Xianmei
September 1996

Executive Summary

United Nations collaboration with microfinance schemes in China dates back to 1981 and coincides with the evolution of Chinese poverty alleviation policies from a relief to a development strategy. As economic reform began in China in 1979, they had an immediate impact on reducing poverty levels. Direct poverty alleviation measures were, however, largely oriented to relief measures. By the mid-1980s, Government poverty policy began focusing on a regional development strategy, seeking to increase production in areas that remained poor. The 1994 Ba-Qi (8-7)Poverty Alleviation Plan moved to a focus on poor households, not just areas, and set goals for moving households out of poverty. During this period, the United Nations contributed new ideas to Government implementing units and sometimes served as a catalysis for new approaches. Because of their own mandates, UN organizations have served as an advocate for a focus on households not just regions, and for reaching the poorest.

The earliest UN supported credit projects were not, strictly speaking, poverty alleviation projects. IFAD, for example, was providing credit to households for improved agricultural production. In fact this credit went to relatively poor households. As China was transforming itself from a planned to a market economy, the projects introduced new ideas. UNIFEM introduced the idea of revolving credit and re-enforced the role of women in production and poverty alleviation. The UNFPA projects were not intended to be poverty alleviation projects, but they did operate in poor counties and introduced the concept of group organization at the village level as a basis for managing small loans and for introducing social development opportunities. Sometimes UN assistance was small, as in the case of UNICEF support to the Luliang Federation, but it allowed a local organization to experiment with and expand credit mechanisms.

Recently, UN support has been targeted directly to poverty alleviation. The World Food Programme/IFAD projects as well as the UNDP projects seek to serve the objectives of the Ba-Qi Strategy, using credit as one tool to assure food security and improve production and income. The lessons from UN collaboration with Chinese experiments are still emerging. The experience of UN agencies and their partners suggests that the following design elements are important to microfinance for poverty alleviation.

  1. Group Formation - Groups are important for several reasons. Group liability and peer pressure are the principle means of controlling risk of lending to poor households. Groups that have requirements for frequent meetings and regular repayments provide a targeting mechanism that assures inclusion of poor households; attendance at meetings is an increasingly high opportunity cost for not-so-poor households. Groups are a platform for technical training, social development and confidence building.
  2. Training - The reliance on groups as a key to microfinance has created new training needs. Recent projects have drawn on the experience of Grameen Bank and the replications here in China, but they also invested in training staff for group mobilization and supervision, and training for clients.
  3. Operational Self-Sufficiency - UN agencies have increasingly urged their counterparts to plan for sustainability of microfinance for the poor. This has led in some cases to the creation of autonomous institutions that can manage microfinance services for the poor and with the potential to move toward a cost-covering position.
  4. Integrated Models - While projects use the Grameen model of groups, they are not minimalist microfinance models. They include technical support, infrastructure development and social inputs. The new UNICEF funded project starting in 20 counties uses credit for poor women and group organization as the mechanism for reaching social goals.

If United Nations support is to enable counterparts to implement group based microfinance services for poverty alleviation that are sustainable and operationally self-sufficient, the UN needs also to collaborate with Government on building management capacity, particularly in the area of financial management, efficiency and quality control.

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