Rural financial infrastructure as the new focus of financial inclusion

Since the rural revitalization strategy was proposed at the 19th National Congress of the Communist Party of China, rural finance and financial inclusion have become a new blue ocean. In China, there are close to 560 million farmers and about 126,666,673 hectares of arable land, with a total agricultural output of nearly 10.5 trillion yuan, an agricultural material market worth 2 trillion yuan, and about 200 million units of agricultural machine. Therefore, there is huge scope for the financial sector to serve agriculture, rural areas, and farmers.

Against such a backdrop, many financial institutions begin to be engaged in financial inclusion for rural revitalization. However, there is still much debate about issues such as how to use financial inclusion to promote rural revitalization, how to build rural financial infrastructure, what are the roles of different financial institutions, and what should be the focus of financial inclusion in rural areas. The author believes that the development of financial inclusion in rural areas faces three major challenges at present.

First, high requirements for financial inclusion assessment. The high demand for both quantity and speed in conducting inclusive financial business in rural areas has made some financial institutions operate in a haphazard fashion; some even engage in a zero-sum game by distorting the real price of the market. In rural areas, due to intrinsic risk management requirements, high-quality customers usually attract many financial institutions (the Matthew effect); however, those financially challenged clients still do not have much access to financial services. Such a zero-sum game runs counter to the original purpose of promoting "accessible and affordable" financial inclusion.

Second, lack of valid collateral or credit among farmers. Many regions have made useful explorations. For example, some regions have pilot programs to use homesteads as collateral, and some financial institutions introduced a series of innovative mechanisms that recognize pigsty, agricultural machinery, and fruit trees as collaterals. Other regions have tried to establish a village-level credit system or a village-wide credit granting mechanism to cover as many farmers as possible. However, these innovative approaches still cannot address the problem of inadequate collateral and incomplete credit system in rural areas. Given China's land system, the issue of rural assets liquidity cannot be solved in the short term, so priority should be given to the building of rural and agricultural credit systems. Due to less active economic and financial activities and a lower level of digitization in rural areas, credit behaviors are not fully recorded, which leads to an incomplete personal credit database and personal credit profile.

Third, less developed rural financial environment where farmers are not well-educated, their financial illiteracy and participation enthusiasm for financial activities are yet to be improved. Our research has the following four findings: First, farmers' financial literacy varies considerably across the regions, with the east, central and west regions showing diminishing financial capacity. Second, most farmers in China are financially illiterate, and thus are vulnerable to financial scams. Third, farmers generally lack understanding of risk and return and financial planning; therefore, they are not aware of the importance of financial asset portfolio, income and expenditure balance, and they are not good at family wealth preservation and appreciation. Fourth, farmers need to improve their knowledge of financial responsibility and legal awareness.

To solve these challenges, it is necessary to build rural financial infrastructure, including building a multi-level, wide-coverage rural financial ecosystem, improving the rural credit system, and enhancing the financial literacy and capacity of farmers. In particular, the credit system is the most important priority. In this regard, two ideas for promoting the building of rural financial infrastructure are proposed based on the representative cases found in the research.

The first idea is to promote the integrated development of total-factor and whole-process supply chain services and the financial inclusion credit system. For example, Beijing Yundi Nongfu Technology adopted a business model of total-factor and whole-process supply chain services in Xinjiang. The model covers agricultural materials procurement, supply chain optimization, services for farmers, and demand anchoring; it uses the Internet and agricultural technology to optimize both the supply and demand sides of the supply chain. It provides farmers with optimized supply of agricultural materials at the early stage of agricultural production through efficient and rational resource allocation, such as seed propagation, fertilizer storage in winter, unmanned fertilization, and procurement and processing of the TC (TK) of pesticide. During the production process, services related to agricultural machinery, techniques, and technology are offered, including the scheduling and operation of agricultural machinery, collective buying of agricultural machinery, transfer of agricultural machinery and parts maintenance, and the Internet of Things (IoT) in agricultural production. During the harvest period, quality contract management, customized production, and agent procurement at the place of production are available.

The model brings two major benefits. First, it helps to reduce agricultural production costs, ensure the quality and efficiency of production, and improve labor productivity throughout the supply chain, which is the ultimate goal of the service. Second, it creates a total-factor information platform, which is the new focus for rural financial inclusion. From suppliers to optimization and data collection module of the supply chain, to farmers and land, then to primary processing (commissioned) firms, and finally, to the points of sale (POS), this complete supply chain, supported by agricultural technology, can collect full-chain information about the procurement of agricultural machinery and materials, basic land information, production history, and market demand. With the full-chain information, a production-based credit information platform, which is similar to a credit reporting system, will be formed. For instance, if one has agricultural machinery and materials procurement information, it can prove to some extent that they are willing to engage in agricultural production and have relevant assets. Such information can provide a reference for risk management of inclusive finance. With market demand as the anchor of risk management of inclusive finance, the information about market demand and the production history can also be used as valid credit credentials and can provide the government and the market with solutions to optimize production, thus achieving the "Pareto improvement" of the society. In addition, the ultimately formed database or platform can provide governments at all levels with the information basis for the rural credit system and help to build a credit evaluation system extensively recognized by financial institutions in accordance with local conditions. Hence, it can provide effective financial infrastructure for the development of financial inclusion and form a system with the supply chain serving farmers at the core and the full-chain information database as the support. It can help to solve the inadequate collateral and incomplete credit system issues in the rural areas and provide a new focus for the development of financial inclusion in rural areas.

The second idea is to address the lack of a credit system with a community-level autonomous evaluation system. For instance, the Hunan Branch of China Construction Bank (CCB) launched a pilot program of the "Houde Tongxin" community-level credit point system in Meihua Village, Hengyang City. This bottom-up credit system complements the top-down social credit system and is recognized by all stakeholders. Under this system, community-level organizations can evaluate the credit of farmers based on a series of indicators such as reputation, credibility, family harmony, and peer comments. Farmers with a good reputation, a happy family, and great enthusiasm to engage in production will be endorsed by the village credit system, which can serve as a reference for financial institutions. Such practices make it easier for village farmers to access financial services. However, the system has many flaws too. For example, the peer evaluation system may trigger social tensions or even conflicts, competent and prestigious village leaders are scarce, and material rewards are not sustainable, all of which hinder the further application of the credit system.

In a nutshell, priorities should be given to the following three aspects when promoting the development of rural financial infrastructure. First, we should develop a multi-level rural financial supply system and form a harmonious rural financial ecosystem, so as to ensure the harmony between financial institutions and alternative financial service providers and prevent zero-sum games. Second, we should build a rural credit system in innovative ways, such as developing a credit system anchored by a new type of supply chain services and a community-level autonomous system. Third, we should further enhance the financial literacy and financial capacity of farmers by promoting financial education and financial service apps (such as the National Anti-Fraud Center App and Financial Health App), and providing supply-side financial support. For the financial community to better promote rural revitalization, it is necessary to achieve rapid and high-quality development of financial inclusion, in which the building of rural financial infrastructure will become the new focus.