Microcredit Companies and Village Banks - Competition or Pluralism

This paper provides an overview of new rural financial institutions in China and compares their advantages and disadvantages. It states that the Chinese Government has recognized the need for the development of the rural financial sector and the potential of microfinance in this area. This has resulted in the establishment of the following two types of rural financial institutions in China.

• The Peoples Bank of China Microcredit Company that aims to establish microcredit companies (MCCs) with a predominant investment by private capital;
• The China Banking Regulatory Commission New Policy that encourages the establishment of village banks.

The paper examines:

• The challenges of China Banking Regulatory Commissions (CBRC) New Policy;
• The challenges of the MCC model;
• The advantages and disadvantages of MCCs versus the village banks.

It concludes that:

• The MCC model is better suited than the village bank model for offering the informal financial sector in China a viable organizational type;
• The MCC model is also more attractive to national and international investors, because its shareholder structure offers more flexibility.

The paper recommends that the following two approaches be followed in the future for the development of the rural sector in China:

• Encouraging a variety of institutional types for microfinance;
• Passing a new legislation that combines the advantages of both the MCC and the village bank model.