Make Credit Matter and Finance Better

Xiaoling WU  Dean of PBC School of Finance, Tsinghua University 


The theme of forum is ‘good finance, good society’. How to define good finance? My interpretation is that finance should have the role, not exclusively but fundamentally, that brings people opportunities to change their lives and transform their credit into wealth. 


Part I Definition and Connotation


There are a thousand Hamlets in a thousand people\'s eyes. This is only my interpretation of financial inclusion. The first time I learned this term was in 2005 when my colleagues and I from PBOC and CBRC were promoting microcredit in China as well as  the year of ‘International Year of Microcredit’ in the World Bank. The World Bank advocated that everyone “wants financial services that match their needs to better manage their households and business. Their requirements are practical and not surprising: convenient, affordable, flexible, permanently available, reliable and safe financial services.” In my understanding, this concept has following connotations.


First, price of financial service should be reasonable but also sustainable. Global efforts have been taken to tackle the inclusive access to financial services in the past decades, particularly for the disadvantage populations. In the late 1980s, global practitioners gradually reached a consensus that organizational and financial self-sufficiency should be a priority to the objective of financial inclusion. Donation approach is also wonderful but not sustainable. 


Second, financial service should treat each customer fairly and equally. It is not only for most poor people, but everyone who is capable and affordable. The financial service should be provided effectively, respectfully, easily and comprehensively. Everyone deserves such standard of financial service including the poor and low-income people.



Third, the financial needs of customers are not limited to loan, but also deposits, payment and settlement, insurance, investment and etc.


Fourth, the actors of inclusive finance system should serve those marginalized customers with capacity and work with government to serve the rest who needs care and subsidy. The mission of financial inclusion is not merely poverty alleviation. It is worth clarifying the challenges and complexities in serving various customers and the boundaries of different service providers.


Part II       Credit Creates Wealth in Inclusive Financial System

If you agree with my interpretation above, you may also intend to agree that the fundamental mechanism of inclusive financial system is to transform credibility into wealth in a better way. It is arguable that there is a gap in current financial system which failed in executing this function.  


Conventional financial institutions very often ignored serving their customers timely and effectively by only judging availability of collaterals or credit reports. 


History can tell banks were not designed for the poor. In the western counties, financial industry gradually developed in the process of reserving currency for capable merchants for the demand of surplus wealth, working capital, settlement and property insurance. Therefore, the financial industry in the western countries was born for the high net-worth individuals. When the People’s Republic of China was founded in 1949, financial institution was perceived as an authority for fiscal control and wealth distribution. By reviewing the evolution of banking history in different approach, we could conclude that both the western countries and China did not superiorly place low-income class into the range of financial service.


In Chinese financial system, except the government agencies and state-owned enterprises, individuals and private economy was not well positioned in financial service, much less for the low income populations. It is hard to confess the financial institution (in China) had drifted away from its nature as a service provider. We now have revisited and re-positioned our financial institutions into service industries, but again repressed its role to serve the creditworthy individuals by regulation and prejudice. The emergence of application of information and communication technology (ICT) surprising and significantly disrupted current financial service provision both in the western countries and in China. 


Second, inclusive finance system allows marginalized individuals who value their credits an opportunity to present their credibility and to be judged alternatively. 


Specifically, personal data that created and retained through social network site or applications have been regarded as credit record. It can certainly be used as alternative source in the age of Big Data as condition of financial service provision. 


Internet Service Providers (ISPs) in China have provided good examples on how credit can transform into wealth. Alibaba Group, for example, provides financial services through Alipay,YuE’bao and Sesame Credit, by utilizing enormous accumulated date generated through tons of digital record of online transactions. After convincing customers using their digital wallet and safe custodian service, Alibaba further provides wealth management service which increase the value of money that staying in the digital wallet. It provides an example that how an ISP is able to provide wide range of financial services, from deposit to wealth management and credit, through valuation of personal information and online credit history. In detail, credibility is portrayed through five dimensions as credit history, behavior preference, the contractual capacity, identity characteristics and social relationships. Similarly, other Chinese ISPs such as Tencent also provides similar financial services. It concludes that personal credit could be well valued and transformed into wealth by modernized financial services. 


Therefore financial institutions could also offer credit enhancing and life changing services to the low-income population through microcredit in the name of conscience and social responsibility.


Most micro-entrepreneurs (or individual lender) have provided small unsecured loans to low income borrowers. 


Those borrowers are excluded from conventional financial services because they have no credit history nor collaterals. However it is proven they are capable to do something to change their lives if they are trusted and financially supported. Why not start by issuing 100 Yuan loans as an enabler to see how capable this person is? We can increase the loan size or different loan price on this person if he has done well at the beginning and has repaid the loans. Collaterals and credit history are therefore not necessary in the process of credit building. In addition to a vision, financial inclusion should also embedded as the conscience and social responsibility of financial institutions. 


In addition, the information service accelerates the possibility of transformation from credit to wealth.  


Demanding on collateral or credit history is caused by information asymmetry between borrowers and lenders. Information service dramatically increases transparency and cost of discredit, which accelerates credit building and efficiency of financial service. 


Internet users should be accountable for their behaviors’ in information age if they are concerned their reputation. Internet is a blank space for every of us building an identity with credibility, responsibility, conscience, vision and opportunity. This identity will be able to exchange with credit as well as better financial service. 


Information technology embedded financing service helps to identification the value of individual and enable the change of lives.


Microcredit is critical for the poor with capacity, as venture capital is an essence for the success of Bill Gates. On this stage, I am not acknowledging Silicon Valley, but instead I wish to express my sincere respect to China Association of Microfinance. Without their constant effort since the 1990s together with UNDP, financial inclusion could be a different story in China. Personally I am impressed by the life changing moments of the borrowers who received 1000/2000 Yuan from their advocacy and sponsorship from their partner Citi Group. Their success not only changed their lives, but drove others in the community to shape a better community. Now I turned my eyes to tech start-ups and charities. I am waiting to see more miracles sparking from the magic little money at the beginning of the journey.  


I believe the most remarkable achievement for a banker is to make customers’ dreams come true. If I can compare financial career as the crown at the top of career pyramid, I wish to invite every financial professionals, with the equipment of information technology, to join the debate of what is good finance and good society and to maximize your contribution to fulfill other people’ dreams. 


Part III   Financial Education enables the accessibility of financial service


It is essentially important to stress the role of financial education in enabling the accessibility of financial service. Financial education helps people understand the nature of finance and the potential of themselves. Finance is not complex but building strong credit to convince each other. When finance became complex, it drifts away from its nature and turned fantasy into illusion just like the tragedy in 2008. It is never too much to state the nature of finance as an enabler of real economy with accountable risk. Financial education should serve ordinary people to understand the importance of credit building, reveal the nature of finance and ultimately work hard to reward themselves and contribute to the society. That is what good finance should be. 


Financial education also helps professionals to discover the value of their career which is fulfilling other people’s dream. They should guide their customers with good value, conduct and manner rather than the other way around. They should be alerted that purely profiteering may lead to bad finance.



In one word, financial inclusion should be the propellant of a good and a harmonious society.