Dr. Bei Duoguang:Limited Access and High Costs of Financing is Just Skin-deep


On August 28, at the press conference of 2019 International Forum for China Financial Inclusion, Dr. Bei Duoguang, President of Chinese Academy of Financial Inclusion (CAFI) briefly reviewed the financial inclusion development in China and answered questions from reporters. Below is a transcript of his speech and the Q&A session.

This year marks the fifth year of the International Forum for China Financial Inclusion (IFCFI), and I am delighted today to introduce it to our friends from the media. The theme of this year's forum is “Inclusive, Healthy and Responsible” . First of all, I would like to talk about the development of financial inclusion in China in the past decade.

When I began to engage in this field about five years ago, I noticed that many people didn't even know what financial inclusion is. Today, it has become sort of a buzzword, not to mention the attention it has attracted from the mainstream media here. There are also some financial behaviors that do not use the term "financial inclusion", such as P2P, payday loan, microfinance, etc., which in fact all have something to do with financial inclusion.

Looking back into the four decades of financial development since China's reform and opening up, the first two marked the stage of establishing a modern banking system. Before that, China implemented a centrally-planned economy. There was no real bank. The so-called banks at the time only did cashier’s work. In the process of establishing the banking system, people found that it is not enough to have only banks. Banks mainly serve to solve short-term financing needs of enterprises and can barely meet the long-term needs. Therefore, since the 1990s, China began to build a capital market, and this process also took 20 years. We have spent 40 years building a modern financial system based on banks and a capital market, but soon found that there were big problems. The existing financial system was exclusive, leaving quite a few small and medium enterprises and disadvantaged groups in the lurch. In other words, it was difficult for small and medium businesses to get loans or investment from the capital market or modern banks, and low-and-middle-income people had limited access to financial services. Since about a decade ago, China began to pay attention to financial inclusion, and there have been some progress and pilot projects. We have observed that on the basis of modern banks and capital markets, the financial system has become more extensive and more inclusive, which marks the third stage of China's financial development, the stage of financial inclusion.

Here are some milestone events for this stage. In 2005, China approved seven pilot microfinance companies, hoping to gradually develop microfinance in China. In 2007, the China Banking Regulatory Commission (CBRC) issued the Guiding Opinions on Banking Institutions to Develop Rural Microfinance Services, which required extending rural microfinance service providers to all banking institutions, and allowed provinces and cities to approve the establishment of microfinance companies in addition to the previously approved seven pilot companies, which provided an opportunity for the rapid development of the microfinance sector. In 2009, one of the milestones of the capital market was the emergence of the Growth Enterprises Market (GEM). Many people did not understand what the GEM had to do with financial inclusion. In fact, the GEM provides SMEs with an easier access to the capital market. In this sense, it helps to improve financing for SMEs, which constitutes a crucial aspect of financial inclusion. From 2013 to 2015, China's financial inclusion development has set off a big climax. The number of microfinance companies have reached 8,000 to 9,000. Internet finance, such as P2P lending with crowdfunding characteristics, was booming. It is said that there were over 8,000 P2P lenders at their prime time; however, trouble also started brewing.


In the whole process, the leaders of the CPC Central Committee, the State Council, and governments at all levels have always been paying close attention to financial inclusion, which has been set high on the agenda of multiple government documents. At the beginning of 2016, the State Council released the Five-Year Plan for Advancing the Development of Financial Inclusion, which officially launched China's financial inclusion development. China, as the host country of the G20 Hangzhou Summit in September 2016, led the drafting of a series of documents, among which, the most influential document is the G20 High-level Principles for Digital Financial Inclusion. The document provides universal principles for operation, execution based on international experience as well as the experience China has accumulated in its development of digital financial inclusion. The document has made a huge international impact by introducing China’s practices of digital financial inclusion to the world. Since then, China's financial inclusion has received more and more attention from both the media and the public. We need to note the irreplaceable role of fintech companies in promoting China's digital financial inclusion, as to a large extent, the disadvantaged groups they serve are underserved by the traditional financial institutions. Digital payment brings tangible benefit of financial services to almost every corner of the country.

The year of 2017 witnessed frequent occurrence of bankruptcy and fraudulent scandals of campus loans, payday loans and P2P lenders, which plagued the booming industry. The authorities, concerned that it might lead to social unrest and bigger financial risks, began to rectify Internet finance. The financial regulators also moved to chill the traditional microfinance companies, requiring them to operate only on their own capital base, which means leverages or debt were off limits. As a result, the industry has shrunk dramatically.

Meanwhile, the state has been pushing the traditional banking system to the “front line” of financial inclusion. Last year, the state required all major banks to establish financial inclusion departments. If you look back on the past 40 years of China’s financial development, you will find that there are very few cases when the banks are ordered to set up a certain business department by the government; so this really speaks for the political will. We all know that 50% of the banking assets are in the hands of the major banks, and the rest are held by 4,000 plus small and medium-sized banks. Any movement of the major banks would change the landscape of financial inclusion. Nowadays, how to offer financial inclusion services is a hot topic in the banking sector. In this year’s forum we will have a special seminar themed “Who are the main players of financial inclusion”. Major banks? Small banks? Rural credit cooperatives? Microfinance companies? P2P lenders? Or fintech companies? We expect different views to be shared on these issues from different angles.

Furthermore, this year, the capital market has taken frequent moves, with the launching of SSE STAR Market being the most notable one. It marked a major progress of financial inclusion in the capital market, as the STAR Market mainly serves SMEs. In addition to directing financing resources to financial inclusion, the country's monetary policy has also started to tilt toward financial inclusion. The focus of monetary policy has shifted from aggregate targets to structural targets. I believe that no other country in the world has pulled such great efforts to promote financial inclusion. The effect of structural monetary policy remains to be seen, but it does speak volumes for the determination of China’s decision-makers.

Just now I briefly introduced the history of financial inclusion. As we can tell, this is a noble cause requiring arduous efforts no less than building a banking system or a capital market. I have worked in the capital market for 20 years and I know how difficult it is to build a capital market. But now I feel this is even more difficult as it involves complex social issues, such as values torn apart, which will make it difficult for people to get a clear idea of what financial inclusion is and how it can be promoted. For example, there was discussing about how to solve the problem of limited access and high costs for small and micro businesses to get finance. In my opinion, this barely scratched the surface of the problem. Recently we’ve been talking only about the limited access and not the costs any more, which our friends from the media must have already noticed. This is a great progress, yet I reckon the key to tackling the root cause is to build a sound financial ecosystem. We need to turn the exclusive financial system into an inclusive one and make not only bank credit and microfinance, but all financial services such as insurance, trusts, and funds inclusive. Efforts need to be made to provide the previously disadvantaged businesses and individuals access to transaction account first and then access to credit, insurance and diversified financial management services. When the vast number of rural residents can access funds, stocks and even QDII services and invests in dollar assets like their urban peers, then we can call our financial inclusion a success. In other words, the financial inclusion ecosystem we pursue is where everyone can access financial services that meet their needs no matter who, where or how old they are. In order to establish such an ecosystem, our research team, have identified three crucial elements, which we would like to emphasize at this year's forum.

The first element is "Inclusive". The Chinese translation of Inclusive Finance or Financial Inclusion is Pu Hui Jin Rong, which may lead people to think that Financial Inclusion is not only “inclusive (Pu)” but also “preferential (Hui), and hence some come up with the request to control interest rate and cut it by 1 percentage point per year. We have to repeatedly emphasize that Financial Inclusion is all about being “inclusive” to serve the underserved. In the preface of this year’s Report of Financial Inclusion Development in China, we put it this way, “What is the most important element of financial inclusion? Inclusive, inclusive and inclusive!”

The second element "Healthy" is also very important. We found that the disadvantaged groups are often also the ones with limited access to financial education, poorer financial literacy and competence. Their lack of financial competence makes them less discerning and more likely to get lured by the so-called high returns without thinking whether they can afford the high risks or whether the product they are buying is a fraudulent scheme. Eventually, the unwary investment will only lead to their loss of fortune. This is like scholars like us who pay little attention to exercise and eventually become unhealthy or sub-healthy with high levels of blood sugar, pressure and lipid. Such "unhealthy" status is the result of lacking awareness. Therefore, we would like to introduce the idea, which is already known in the international community, of adopting a financial health lens in financial inclusion work, so as to enhance people’s financial health awareness and guide people to measure their investment, savings, financial management and other financial behaviors by thinking whether they can keep them and their family financially healthy.

The third element is “Responsible.” Many institutions are involved in the financial inclusion ecosystem. We call them financial inclusion service providers. There are large ones and small ones; some are new players; some of them are licensed and some are not. In my opinion, what matters is not whether the service provider is licensed, but rather whether it is responsible. Responsible service providers always bear in mind that their customers are the disadvantaged groups and they should help them to improve their financial competence, rather than ripping them off whenever possible. We’ve all heard about the story of Muhammad Yunus. The key point of the story is not that he lent 27 dollars to 42 women. The key is he helped to develop the competence of these women and helped them see the value of educating their children and the health of the family. These women resultingly sent their children to schools and installed toilets in their homes, and helped more people to improve their competence. This is the core of Yunus’ spirit. We should also emphasize the protection of financial consumers while developing their competence. The protection of financial consumers has now become an increasingly urgent and important topic for financial inclusion. I believe it will continue to be an essential topic in the future, which all financial inclusion service providers should pay attention to. When facing the disadvantaged groups, it is crucial for service providers to undertake the responsibility to not only serve them, but also protect them. These elements will be the theme of the 2019 IFCFI. So much for my introduction, thank you all!


Q: The Beijing News

Just now you mentioned the three elements: “inclusive, healthy, and responsible”. I think these are really good points, especially “inclusive”. You also said “inclusive” is the most important. Now online lenders, the main players of financial inclusion, are probably facing a one-size-fits-all regulation. What is your take on it

A: Dr. Bei Duoguang

In my opinion, online lenders are not the main players of financial inclusion. There are different views on the main players of financial inclusion in the international community. For example, Professor Muhammad Yunus believes that traditional banks do not have the genes of financial inclusion, so they cannot be the main players of financial inclusion. Professor Muhammad Yunus established the Grameen Bank, which was born as a financial institution to serve the poor. Bangladesh has passed special legislation for it. He has been working in the field for more than 40 years and has achieved fruitful results. But in my opinion, the case will be different in China. I have exchanged views with Professor Muhammad Yunus. As banks are still playing a major role in China’s financial system, developing financial inclusion without the involvement of the existing banking system is not realistic. Therefore, a basic approach we should probably take is to make the existing banking system more inclusive.

Who are the more important and more professional players in the field of financial inclusion? This can be a good topic. The current national policy tends to encourage major state-owned banks to take the lead. However, my personal view is that the real “main players” in China’s financial inclusion development are small and medium-sized banks, rural credit cooperatives, and rural commercial banks. These institutions have already been doing these things, only their technical competence, philosophy or technological means are relatively less competitive. In this case, we should first empower them with international experience and digital technology, etc., and then give full play to their advantages. I believe they will do a good job.

Financial inclusion also needs to bring in new blood, including traditional microfinance companies and fintech companies with cutting-edge technology. They may initially play the crucial role as the catfish to stir the water and lead to the reform of the entire financial industry. Besides, as these companies have their respective competitive edge, they can also play a major role in a number of market segments. I once drew a diagram of the institutions. From the top to the bottom of the diagram, the institutions were put in descending order of their target market size. Grameen Bank was put at the bottom of the diagram and above it was China’s CD Finance Management, Ant Financial, CredEx Fintech, Zhejiang Tailong Commercial Bank and China Zheshang Bank, with the size of the loans they offer ranging from 5,000-6,000 RMB to 1 million RMB. No banks will have problem offering loans larger than 1 million RMB. However, special techniques will be required for loans smaller than 1 million RMB. In other words, to deliver financial inclusion services, market segmentation is the necessary.   

The role played by online lenders is, in my opinion, financial innovation, as they are vibrant. The model of online lending was originated from UK and US and has maintained a steady development there. While in China, the growth was exponential and suddenly there were several thousands of online lenders. Later, we found that a considerable part of these lenders were doing disintermediation rather than financial inclusion. They were merely attracting people to withdraw their money from the bank and invest online with higher interest rates and higher returns. According to my observation, the problem lies in that the money comes from people’s wallets.

If we look at the pattern in US or UK, in their regulatory environment, attracting deposits with high returns is not allowed, unless it is crowdfunding for specific projects. However, in China, online lending registered a rapid growth. As the number of marketplace lenders grow, so do risks. My take on this issue is that the ideal scenario would be institutions that collect people's money loan to disadvantaged groups through microfinance companies or online lenders. In US, rather than simply attracting personal funds with high returns, such institutions are managed as securities and regulated in accordance with the standards for qualified investors and information disclosure.

I believe that online lending will remain vibrant, but its structure will need to be adjusted to minimize potential financial risks. Thank you!

Q: Caixin Weekly

Now we can clearly see the trend that many P2P platforms have turned into credit institutions. According to their financial reports, about a half of the funding sources of P2P lenders have become institutions like banks or trusts. Dr. Bei, could it be the way forward? Or should they be securitized? The No. 175 document encourages turning online microlenders into lend aid platforms or consumer finance companies. Talking about consumer finance companies, a recent topic in an international forum I’ve heard is “Is consumer finance inclusive finance?”. At present, the consumer finance license is still hard to get. Early this year, Mr. Guo Shuqing, Chairman of CBIRC, said that we need encourage consumer finance by issuing more licenses. That’s why the leading platforms all want to obtain the license for consumer finance. Dr. Bei, what’s your point of view on this? By encouraging consumer finance, are we encouraging financial inclusion or simply increasing household debt ratio? Is it a good thing or a bad thing?

A: Dr. Bei Duoguang

Recently, we are working on a project about lend aid platforms and the report will be published in October. Lend aid platforms, I believe, will be a new format in financial inclusion, and should be positively reinforced and regulated by the authorities. There are indeed many problems in the development process. Our report has tens of thousands of words. I would like to briefly share some views of the report. Our researchers believe that the key is not to complicate things by establishing special lend aid institutions, which may need to get new licenses. What we need to do is to distinguish whom they are providing services to, businesses or consumers, that is, banks or consumers. At the current stage, the regulators should make it clear that the lend aid platforms should be mainly serving businesses not consumers. The biggest lesson we have learned from the bad examples of online lending is that we need to be extremely careful when facing consumers. Why do we keep emphasizing consumer protection? Because they are vulnerable to risks. Lend aid itself is a good thing but it should be guided to serve banks rather than consumers. On the other hand, banks do have such demand. Why has it been difficult for banks to reach financial inclusion customers in the past few decades? Because their business models put certain restraints on the types of their customers. Institutions that help bring in customers to major banks will also contribute to financial inclusion. The financial inclusion ecosystem should cover links including wholesale, retail, customer acquisition, and even institutions that specialize in risk control. But it must be made clear that lend aid platforms should provide services to businesses, that is to banks in this case.

Regulators may ask how we can tell whether these lend aid institutions are good or bad. I think the decision should be left with banks. Some local documents emphasize that since banks are responsible for lending, so they should also be responsible for the risks entailed and the risk management shall be their core competitiveness. In my opinion, this is not necessarily true. The core competence of banks lies in its ability to judge and select lend aid institutions by quality of the customers they offer, rather than the ability to evaluate each end consumer by themselves. Banks will build trust and sign contracts with lend aid institutions after a certain period of cooperation. Our perception of the core competence of banks should keep up with the time.


Regarding consumer finance, we just had a closed-door meeting the day before yesterday in the CAFI conference room with many attendees. The State Council has recently released a document on consumer finance, which specifically emphasizes the promotion of domestic consumption. As I studied macroeconomy, I have said long ago that consumer finance is part of financial inclusion. Such opinion may be contradictory to the classic ideas of the economics of microfinance, which believes that financial inclusion is about offering credit for production activities. If the disadvantaged groups invest the borrowed money in consumption activities, how can they pay it back? Where does the incremental revenue come from? Such concerns sound reasonable. However, we’ve invited international experts to discuss about it and get to know another perspective. For those who spend the borrowed money on consumption, even though their income doesn’t increase, the income volatility can be eased. Certain demands are inelastic, such as tuition and other costs for children, but the family income can be volatile if, for example, the breadwinners suddenly lose their job. In such case, finance inclusion can come to aid by easing the volatility of their income and expenses, thereby reducing social problems. There are many good examples in this regard. According to an academic research, financial inclusion has helped to reduce the crime rate in a state of USA by easing the income volatility of the low-income people. Because people tend to take desperate moves when they are left with not much options.

China is now a country with excess capacity, exporting a huge quantity of products. Does that mean the domestic consumption is already saturated? No, the consumption needs of a large number of low-and-middle-income people in China are far from being met. By improving their ability to consume, we can sell more consumer goods, promote the development of production and businesses and advance the steady development of the national economy. Consumption now plays a bigger role in advancing the development of the national economy than investment and will play an even bigger role in the future. Therefore, efforts need to be made to improve the ability of low-and-middle-income people to consume and the goals of financial inclusion include improving people’s consumption power and their well-being. That’s why we say consumer finance is part of financial inclusion.


Among the journeys that Western countries have traveled, in the wake of economic fluctuations after World War II, three measures were mainly taken to address low-income people and social imbalances:

1. Charitable donations. People like Warren Edward Buffett and Bill Gates have donated tens of billions of dollars. The annual charitable donations in the United States reach 2% of its GDP.

2. Capital markets. People used to call it people's capitalism. A typical example is the 401(K) plans in US, which can help participants lower their tax brackets by allowing them to pull a certain percentage of their taxable income to invest in capital markets. The 401(K) plans allow the continual growth of capital markets. Money keeps flowing into capital markets and people’s property income increases as they buy funds and stocks. The entire income structure of the average people will change.

3. Consumer finance. Consumer finance is the most fundamental one. If we take a look at the balance sheet of the major US banks, the item on top of the credit structure is consumer finance, rather than corporate credit or real estate credit. Consumer finance is crucial in the macroeconomy of these countries. The national economy will be buffeted if the proportion of credit card loans goes down. I believe there is a lot of room for consumer finance to develop in China and the low-income people, rather than high-income people, will be contributing the most.

Recently, CAFI has also organized a panel discussion about whether consumer finance will cause excessive debts. First, such problems will occur, but it will only be isolated cases. Second, customers will continuously develop their competence in the process, from immature to mature. In time, consumer finance will become more and more standardized, and people will become savvier.

Q: FT Chinese

Recently, we have paid a lot attention to the reform of liberalizing interest rate. As far as China's inclusive finance is concerned, is the interest rate liberalization adaptive enough? Is it necessary to reform in some areas? As a dedicated researcher of inclusive finance, what reform orientation do you think we should take?

A: Dr. Bei Duoguang

This has been a hot topic recently. A few days ago, a friend of mine posted a WeChat moment about the interest rate reform immediately after State Council announced it. I commented that the idea marks a progress, but clearly there is still some misunderstanding. In fact, China hasn’t really achieved interest rate liberalization, and of course, we understand it can’t be achieved at one go. We have had a closed-door meeting to discuss whether the interest rate cost is high or low for financial inclusion.  CBRC and PBOC representatives also attended the meeting and said the interest rates have already been liberalized and immediately they got the feedback from bank outlet personnel that they have not yet. 

The interest rates in our country have yet to be liberalized. One manifestation is that the funds in rural area flow to cities, from backward regions to developed regions. Capital is smart. If the interest rates in rural areas does not have a certain premium, the capital will certainly flow to urban areas where the returns are higher. Yunus’s Grameen Bank offers higher savings rate and hence can attract the capital in the rural area and keep them circulating in the rural area. Interest rates are the crucial lever to guide capital flows. When interest rates are artificially held low, capital will certainly flow the other way around. This is an essential issue regarding the healthy and standardized development of financial inclusion. Price twist usually means market distortion. We are currently at a transitional stage, and interest rates should be further liberalized in the future. The liberalization should be achieved gradually, and the credit interest rates and deposit interest rates for customers of inclusive finance, small and micro businesses, and rural areas should be liberalized first.

Of course, such moves must be calculated. For example, if the capital both comes from cities and rural areas. The deposit interest rate in rural areas can be allowed to rise and we need to observe whether the capital is gradually flowing to rural areas for higher returns and whether the loans will be further increased. We need to tackle the root cause of interest rate problems. The current moves to lower the lending rate for small and micro businesses seem to be a good starting point, but it may backfire. The preferential interest rate may still not be able to reach the really poor farmers. Of course, we need to research to find the truth. But I really hope our friends from the media can be more professional in describing these issues and get to the key points in your report. Because the media plays a crucial role and can influence decision-making to a certain extent.