The Asian Development Bank (ADB) has decided to help improve and expand financial services to the rural poor in underdeveloped areas of Guizhou Province, Southwest China, and the Inner Mongolia Autonomous Region, North China, through a US$1 million technical assistance grant.

The grant, from the Poverty Reduction Cooperation Fund, financed by the Government of the United Kingdom, will restructure and improve the regulation of existing rural credit cooperatives in the two regions, and promote the development of microfinance institutions as an additional mechanism for delivering rural credit, the bank said.

In Inner Mongolia, one of China's largest provincial areas, rural households account for 64 percent of the population and about half of the rural counties are classified as either national or regional poverty counties. In Guizhou, a mountainous agricultural poor area, 87 percent of the population lives in rural areas and poverty incidence is three times the national average.

Ying Qian, an ADB Principal Financial Economist, said "Over the last three to four years, Inner Mongolia and Guizhou have seen rapid economic growth, fueled mainly by nonagricultural sectors such as resource-intensive industries, small- and medium-sized enterprises, and tourism."

Betty Wilkinson, an ADB microfinance specialist, said a range of affordable and sustainable financial services must be made available to the rural sector in a bid to sustain this growth and ensure that it benefits the poor."

The bank said rural credit cooperatives are the only financial institution with a physical presence in many rural areas in the country. However they are plagued by unclear ownership structures, poor corporate governance, administrative problems, and poor financial performance. Several attempts at reform have proven ineffective.

In 2003, the Chinese Government piloted a program to clarify the ownership structure of these cooperatives and transfer the administrative responsibilities over them from the China Banking Regulatory Commission to the provincial governments. This latest reform program has generally shown positive results.

China started to encourage microlending as an alternative source of financing in 1994. Until recently, microfinance was restricted to a series of pilot projects, limiting the options for growth and ongoing institutional sustainability.

The technical grant will be implemented through two separate components respectively for Inner Mongolia and Guizhou, each responsive to the particular needs of the concerned regions and unique timing of reforms, said the bank.

Generally, the grant will ensure the adoption of suitable institutional restructuring strategies for various types of cooperatives as well as appropriate regulatory and supervision systems for the restructured ones.

It will also develop a sound policy and institutional framework for microfinance and microfinance institutions, to better inform policy makers and the public about the importance and feasibility of microfinance. In particular, the Guizhou government will adopt a bidding process for licensing of microfinance institutions.

The Chinese Government will contribute US$440,000 worth of equivalent toward the program's total cost of US$1.44 million. The Financial Department of Inner Mongolia Autonomous Regional government will be the project's executing agency for the component in Inner Mongolia, and the Guizhou Provincial Rural Credit Cooperatives Reform Office for the component in Guizhou. It is expected to be completed around November 2005.

(Xinhua News Agency March 5, 2005)