INTRODUCTION OF CICETE/UNDP MICROFINANCE PROGRAM

I. BACKGROUND OF THE PROGRAMME:

Echoing the PA programme of Chinese Government, UNDP and China International Center
for Economic and Technical Exchanges (CICETE) initiated and experimented a Poverty
Alleviation and Sustainable Development Program in China. The common development objective
of the program is to demonstrate participatory, integrated and sustainable development approaches
for poverty alleviation in China. The general strategy of the program is to support the
implementation of the National 8-7 Poverty Alleviation Programme through: a) county-based
demonstration project that are intended to demonstrate innovative ways of PA; b) capacity-
building at national and local levels that include training, study tours and workshops for PA
officials, managers, community workers and the farmers groups; and c) policy support to help
improve the Government’s PA policy and programme. The main components of the programme
are: a) Community participation; b) Microfinance; c) Sustainable agriculture and resource
management; d) Social services; e) Capacity building. The program was started in Yunnan,
Sichuan and Tibet since 1994. And in 1996, based on the successful experiments of those pilot
projects, the program had been expended in a larger scale in 48 counties of 16 provinces and
autonomous regions as well as 4 districts in Tianjin City.
In order to strengthen the capacity of CICETE in implementing the PA programme, UNDP
provides a project: “Support to the UNDP Poverty Alleviation Programme in China” aiming at: a)
to improve the implementation of the ongoing and future UNDP-funded PA projects in China
through a unified and coordinated approach; b) to strengthen the national and local capacity in
managing and implementing sustainable PA programme through national level training and cross
project exchanges; and c) to promote the replication of the UNDP PA approach elsewhere in the
country within the framework of the National 8-7 Poverty Alleviation Programme. Under this
project, an Advisory Board is established to provide policy guidance to the project, and a Support
and Coordination Office (SCO) is set up as the secretariat of the Advisory Board. The SCO is
based in CICETE but functioning independently.
The overall budget of UNDP assistance to the program is US$19,316,000 in which
US$8,205,000 is provided as microfinance loan fund. The targeted beneficiaries are 88,000
poorest households in rural areas and lay-off female workers in the urban.

II. OVERVIEW OF UNDP/CICETE MICROFINANCE PA PROGRAM

As one component of a comprehensive PA program, Microfinance was designed as a village
bank system based on the community organizations at the beginning of the program start. only one
of the main components of the program at the beginning. But there was no progress in the first two
years as the designed approaches could not be implemented until the end of 1995 when we found
the successful case of Microcredit project of RDI/CASS. Supported by experts from RDI, we
copied the GB model in Yunnan, Sichuan and Tibet and got a very successful result in those areas
soon. In 1996, we started more PA projects in the poverty-stricken areas in China with the same
strategy. Some new methods of credit were used in new projects such as loan in kind, credit plus
company and so on. But finally we found microfinance is the most feasible approach of PA loan in
those areas. And now, microfinance is not only the common method of credit activity but also
becomes the core of UNDP PA program in China. The other components become supporting tools
for microfinance. At the end of 2000, we provided more than about 50 million Yuan of microcredit
to more than 51,000 poor households by the end of 2000. The total assets is more than 78,000,000
Yuan of RMB. The average monthly repayment rate is 90%.

III. THE COMMON VISION AND STRATEGY OF THE MF PROGRAM

Because the projects in various areas are designed by program approach, the MF activity also
has its common vision, principles and management system.
The vision of the program is: to provide non-collateral, non-warrantee microfinance service
to the poor population in rural and urban areas by establishing sustainable MF institutes so as to
promote economic and social development in the country.
Our microfinance project is based on the Grameen Bank model. We have following
principles:
1. Targeting the poorest of the poor;
2. Prioritize the poor females;
3. Participatory approach;
4. Non-collateral;
5. Solidary-proud loan;
6. Repayment discipline;
7. Transparency of the management;
8. Flexibility to the innovation;
9. Financial viability and sustainable development;

At present, our loan product is still based on GB and RDI model with following designs:
■ Small scale: the ceiling of the first loan is l,000 yuan of RMB (about US$120);
■ The management fee (8-10%)is charged according to the market rate;
■ The loan shall be used for production purpose;
■ The first loan in a group is handed out in the order of 2-2-1;
■ The loan is paid back in installments of every week;
 ■ Require group fund and compulsory savings.

IV. UNIFIED MANAGEMENT SYSTEM

A unified management system has been established by UNDP project in two aspects: a) setup
of SCO and b) development if unified management information system (MIS).
An Advisory Board has been organized by UNDP, CICETE and the National Poverty
Alleviation Office with the representatives from People’s Bank of China (PBC), Agriculture Bank
of China (ABC), bilateral and multilateral donors and some relative national government agencies.
The board is a forum for sharing information and coordinating policies in the fields of poverty
alleviation and microfinance in China.
A Support and Coordination Office (SCO) has been established as the secretariat of the
Advisory Board to support and coordinate, on a day-to-day basis, the activities at provincial and
county levels. SCO is based in CICETE but function independently with following tasks:
 Organize various technical and financial support and services activities
(including management, technical and financial training);
 Advise CICETE in formulating and executing unified monitoring and
evaluation (M&E) system;
 Advise CICETE in formulating and implementing unified management
information system (MIS) including financial reporting, monitoring and auditing
procedures for MF.
 Promote awareness raising in best practices in poverty alleviation in the world
among the local PA project authorities;
 Facilitate CICETE in raising funds from other donors to support the UNDP-
assisted poverty alleviation program in China;
 Facilitate CICETE in identifying national and local needs for extension
assistance;
 Coordinate and network among the local project authorities;
 Promote publicity of the project approach by publishing reports, newsletters
and other prints;
 Report to the Advisory Board and CICETE on the progress of the project;
 Follow up on the decisions/recommendations made by the Advisory Board;
 Provide other relative support and services required by CICETE, UNDP and
local project authorities and other donors;

A computerized management information system (MIS) for microfinance has been developed by
CICETE based on CGAP’s MIS. The main characteristics of this MIS reside in its flexibility and its
unexpected transactional capabilities. The software has two main parts: the operational level CPO MIS
and the monitoring level SCO MIS. The only input made at the SCO level is the product description.
The SCO MIS has a set of financial index that can automatically analyze MF performance in each
CPO.
The operational CPO level integrates transactional features by handling day to day transactions in
its voucher while the product management component completes the data input needed to produce
automatically the 3 basic financial statements. Reporting is very flexible as suggest the choice of 41
indicators from which we can select as a menu. Other reports includes:
 Delinquent loans by loan officer
 PAR by loan officer, branch and product
 Detailed aging of PAR
 Portfolio concentration report
 Detailed delinquent loan history
 Loan write-off and recuperation report
 Aging of loans and calculation of reserve
 Daily payment report
 Loan account activity
 Active loan per loan officer
 Staff incentive report
 Dormant savings account report
 Active savings account by branch and product
 Savings report
 Saving account activity
 Group membership report
 Actual to budget report
 Capital adequacy report
 Projected cash flow….
CPO MIS is now in Chinese since this level is where most of the entries are made but it will
soon be possible to switch from Chinese to English by a click of a button. The SCO MIS is now in both
Chinese and English.
The security was addressed by incorporating a user name and password approach. Both are
needed for every entry, this information is then added to each record of the database making it possible
to retrace unauthorized transactions
The software was developed with Delphi 3.0 Client / Server supporting Multiple Document
Interface. Excluding the database, the software uses 26 Megs of HDD and runs smoothly in a range of
32—64 Megs of RAM. Options for operating the system includes:
 The implantation of this system is an occasion of establishing a culture of transparency that can
only serves replication of sustainable microfinance schemes. But it has not been effectively used by
CPOs because the lack of qualified staff at the local level and strong maintenance support from SCO.

THE MAIN ACHIEVEMENT OF UNDP/CICETE MF PROGRAM

5.1 The program has proved that microfinance is an effective approach for poverty alleviation
and rural development and promoted the replication of it in the countrywide. GB model was firstly
experimented by RDI in eastern areas in China that is not so persuasive to the government. By
showing the achievement of microfinance in the most remote and the poorest areas, CICETE has
successfully promoted some provincial governments to replicate microfinance projects. And at the
last, the state government also recognizes the effectiveness of microfinance in poverty alleviation
and requires local government to use microcredit as the main method of PA loan disbursement.
5.2 Over 90,000 poor households have obtained microfinance loans through the program in
the past 4 years. More of them have increased their income and are now living a much better life.
The women participating in the program have not only benefit from the economic income but also
improved their social status in the community. Out program has also generate extensive social
benefit to local communities. While issuing loans to poor households, we have launched a variety
of community programs in line with local requirements, such as public healthcare, environment
protection, demonstration of ecological friendly farming methods and extension of practical skills.
5.3 We have established a group of grassroots people’s organizations, the Rural Development
Associations (RDA), based on the participation of project beneficiaries. In order to avoid the
disappearance of project activities after the project completed, efforts also focus on the
institutionalization by the programme. We require local authorities to establish RDAs at the start
point of the project and it will continue to undertake the project activities and provide services to
the poor households after the project completion. The microfinance revolving fund has been
established for each RDA. The capacity of the RDA staff has been improved by strong training
provided by CICETE. And the most importance is that they have enjoyed the trust in the local
community. The setup of RDA has also promoted the organizational rehabilitation of community.

V. FUTURE ARRANGEMENTS
Demonstration projects in microfinance supported by UNDP and CICETE from 1995 in
China showed that the poor are bankable. Most projects report good repayment rates and
demonstrated to have a positive impact on the living standards of poor households. The result
of these projects encouraged the Government to provide additional capital (poverty alleviation
loans) to target poor households. The People's Bank of China decided to allow these projects
to continue their operations despite the absence of a microfinance specific regulatory
framework, as long as donor financing was involved. The development of microfinance,
which targets the lower income groups in poor counties in China, is at a nascent stage. This
stage is characterized by experimentation with yet little concern for sustainability and "best
practices" in microfinance. The challenge is now to build on the initial experience gained
from the demonstration projects in order to establish unsubsidized and sustainable access to
financial services for poor households in poor counties of China. The 48 counties based
demonstration projects have had a positive impact on the living standards of a large number
of poor households living in poor counties in China. However, at present, it is perceived that
the none of the demonstration projects is fully sustainable and that they will not reach a
sufficient level of sustainability if they do not considerably increase their capacity to provide
microfinance in line with international best practices. The followings are the problems, which
need to be addressed with a view to, apply sustainable microfinance practices:
1) The 48 counties based projects are dispersed over China which makes hard to build
sufficient capacity of each project to become sustainable.
2) Sustainable microfinance schemes should focus on microfinance services and not to be
involved in the management of other multi-sectoral activities.
3) The management structure and capacity of most projects are too weak to become
sustainable
4) The projects operate in a legal vacuum, but are allowed by the Peoples Bank of China to
continue operations as part of foreign donor experiments.
In the new century, UNDP and CICETE will still focus on microfinance for poverty
alleviation but will adjust the strategy. The basic idea is to setup some pilot institute to
demonstrate the MF with fully financial self-sufficient and, at the same time, continue to
support the other RDAs on potential sustainability and new approaches for poverty
alleviation. For this purpose, UNDP has approved two new projects for poverty alleviation: 1)
Support Microfinance to Alleviate Poverty (SMAP) and 2) Comprehensive Approach for
Poverty Alleviation (CAPA).
Under the first project, four pilot institutions will be selected out of the 48 microfinance
schemes on the basis of their potential to become self sufficient and the commitment of their
local Government to fully support the pilot institution to build this capacity and to adopt
sound microfinance principles. The selected pilot institutions will receive intensive technical
assistance from international and national consultants specialized in microfinance to build
their capacity in areas like financial accounting, financial management, management
information systems and reporting, product development, business management and business
planning in order to be able to function as a self-managed organization.
The second project will have two components. One is to support the central government
on policy research, demonstrate village development planning and setup management
information system for poverty alleviation. The second is to provide technical assistance to
the other RDAs and implement village development planning is those areas. After 18 month,
some best practitioners supported by CAPA project could be supported by SMAP project for
sustainable development.