Role-reversal: Americans provide loans to Chinese
Posted: Tuesday, July 28, 2009 9:55 AM
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Beijing, China
By NBC News' Ed Flanagan
BEIJING – As Americans struggle to dig themselves out of debt and soldier on through recession, one U.S- based organization is asking them to loan their spare dollars not to the needy at home, but to those residing in the United States’ largest foreign creditor: China.
Wokai ("I Start" in Chinese), is a small Oakland, Calif.- based microfinance organization that is working to provide micro loans to an estimated 200 million Chinese who live on less than $1 a day.
Founded two years ago by 25-year-olds, Casey Wilson and Courtney McColgan, Wokai is the convergence of the pair’s shared interest in economic development and China. The pair, who met in a Chinese language program at Beijing’s Tsinghua University in 2006, created a microfinance program to help provide assistance to some of China’s estimated 228 million people who have no access to basic financial services.
Wilson and McColgan created a Web site that they’ve coined "Facebook for Farmers" – it features many of the core characteristics of Web 2.0: social networking, blogging and interactive media.
Functioning similarly to the one of the more established microfinance sites, Kiva.org, Wokai’s online system of peer-to-peer loans allows potential lenders to scan the profiles of pre-screened rural Chinese borrowers and decide for themselves who they want to loan money to.
The loans are small – the average loans is around $300 – and are mostly used by farmers to invest in simple business improvements such as adding additional livestock or buying new products for dry goods stores.
To attract loans and help develop the organization, Wokai has enlisted an army of young volunteers both in the United States and China. They have assisted in everything from website development to working directly with field partners in China to screen potential borrowers. Meanwhile, member chapters in San Francisco, Seattle and New York help drive awareness and donations through localized fund raising events.
Loosening government regulation
Wokai and other microfinance organizations' development was assisted by the Chinese government, which in 2006 granted legal status to microfinance entities and allowed a gradual relaxation of lending regulations in rural areas.
China has had microfinance projects operating in rural areas since the 1990’s. However, the early startups operated with no legal government status, denying them basic banking standards required to achieve long-term sustainability such as debt investment and higher interest rates.
Unlike traditional banks that can achieve low interest rates through a high volume of low interest rate loans, microfinance relies on high interest rates – often two or three times the rate of regular banks – on smaller, fewer loans. This difference is critical due to current government regulations that prohibit private microfinance projects like Wokai from doing deposit banking – requiring the organization to cover operating costs through donations and interest generated from loans.
Global players gather
While microfinance institutions in China have had only moderate success here, their work hasn't gone unnoticed by the bigger banking players.
Late last year, sensing the economic potential of millions of Chinese, Citigroup, HSBC and Standard Chartered all announced their intentions to enter the China microfinance market by starting smaller rural banks.
The entrance of these global players might appear to spell trouble for existing microfinance organizations, but Wokai CEO and co-founder Casey Wilson believes that the banks bring significant leverage and legitimacy to the industry and potentially more funding opportunities for Wokai.
"What we’ll probably see is big banks downscaling to serve small to medium enterprises and maybe [the] upper middle class," said Wilson. "But there is still that gap of the poor that won’t be served by those institutions."
However, Wilson expects a sort of trickle-down effect to happen as these players establish themselves and government de-regulation allows for increased domestic investment. "[One thing] that’s really going to be an asset to China in terms of microfinance is the fact that while there is this huge population living under the poverty line… there’s also a huge amount of affluence and wealth," said Wilson. "And a huge amount of capital in the financial sector that could fund microcredit."
"As regulations change, as it becomes basically possible and financially viable to start developing microcredit and a source of microcredit that’ll actually serve the poor, I think we’re going to see basically an explosion in that development of microfinance here in China."
China truly in need?
But some wonder why, especially in light of China’s soaring ownership of U.S. debt, American dollars should continue to flow to the Far East. The comments section of a San Francisco Chronicle article profiling Wokai reflected the often hostile position many Americans take when it comes to donating to China.
"That's nice, but who in China is helping small businesses in rural America," read one comment. Another one wrote, "I applaud their dedication, but let's get real: entrepreneurs in rural China have a MUCH greater chance of success than those in rural America."
And the response? "I get this question all the time: Why China?" Wilson said. "I just say that while you know the cities are growing very quickly [the] countryside and most of the rural areas are still 20 to 50 to some places 100 years back."
"In the U.S., the most developed economy in the world, we still have the issues of poverty," said Wilson. Adding that in China, "It’s a bigger problem…so it needs to be a combined effort in a lot of ways."
