Study On Loan Pricing Of Microfinance Institutions In Rural China

In rural credit market, the difficulties of farmer and rural financing as well as the scarce financial support to agricultural develppment are crucial issues bothing regional development. Microfinance with rapid global development offers hopes for the dissolve of difficulties in rural credit market. Neverthness, loan pricing of microfinance institutions has been causing more and more attentions while they have greatly widen the coverage of rural finance. The poor mostly encounter higher interest rates than that of banks. Meanwhile, large amount of profit, from the poor customers, of some microfinance institutions have faced widely accusation.With the development of market-based interest rate reform, the floating zone of interest rates of financial organizations. After the floating zone of interest rates has been wideened since January 1st of 2004, The People's Bank of China wided it further whileas raising the level of deposit reserves from 29 Ocotober. The super limits of financial organizations except rural and urban credit unions have been given up, while the floor level remained 90 percent of base interest. Interest upper limitation as high as 2.3 times of base rate still been put into rural credit cooperatives because of the defect of financal competiveness. And for microfinance loan companies, the upper limit can be as high as 4 times of the base. Seven chapters are included in this theses, and the content of each chapter are seen bolow.Chapter 1: introduction. Based on international background and practical demand of loan pricing of microfinance institutions, this chapter offers the research theme. The clue of research thought, research content and research methods are determined after review of literatures home and abroad. The possible innovation of this thesis are also prompted.Chapter 2: fundmental of loan pricing theories of microfinance institutions. Microfinance institutions should trade off in loan pricing, either considering the burden ability of customer, or thinking over the necessary profit level to compensate costs. In this chapter, basic conceptions of loan pricing of microfinance inatitutions are defined, several formuals offered, theories on interest time limitations given, basic ideas proposed.Chapter 3: Loan pricing caculations of microfinance institutions. In this chapter, such issues as cost structure of microfinance institutions, influencing factors and calculation of effective intereat are declared. This chapter, through value simulation, offers a performance demonstration of effective factors to interests. From another perspective, it proves that microfiance institutions can waive the interest limitation policy although such policy have been put. Loan pricing of microfinance institutions is far from our thinking especially under the background of scarcity of consumer protection and financial literacy.Chapter 4: Selection of loan pricing samples of rural microfinance institutions. Several samples for interest reform are discussed in this chapter. It mainly introduces method, sequence, supervise and organizations of such samples, which aimes to offer same models for microfinance institutions.Chapter 5: Incentive effect during loan pricing of microfinance institutions: adverse selection model. This paper analyzes the incentive effect of borrower and lender when the Rural Credit Cooperatives (RCCs) implement the reform of interest rates pricing in West China. Based on an adverse selection model, this paper analyzes the optimal interests and lending conditions under individual & joint liability contract. The main propositions are offered as followings: i. Under the circumstance of imperfect information, RCCs encounter stronger constraints when offering individual credit loans and the defect of credit input should certainly exist to some extent. ii. The space of preferential interest rate is possible for super borrower under the guarantee & joint liability loan contracts. If the interest rates are raised globally by RCC, the borrowers will certainly reflect over higher interest burden. This paper tests these propositions through the case study of Baoji City and Hanzhong City in Shaanxi Province. A serial of public policy recommendation are suggested, such as perfecting creditworthiness of farmer households, advocating market growth of guarantee, enhancing cultivation of interest rates management talents, in the hope of promoting the efficiency of rural credit market.Chapter 6: Incentive effect during loan pricing of microfinance institutions: moral hazard model. In this chapter, we try to demonsrate the effect of moral hazard to loan pricing of microfinance institutions. Precisely, we study loan pricing under moral hazard under moral hazard, through a modification of Conning(1996) model. The effect of different loan techniques to moral hazard and the optimal zone for loan pricing are discused.Chapter 7: policy recommodations for government during China's Urbanization. Differentiated interest rate pricing can solve credit rationing according to theoretical reserch and international practice. This report investigates rural credit market in Shaanxi Province in order to analyze the following problems: i. the implementation of Interest Rates Pricing Reform of Rural Credit Cooperatives(RCC) since 2004; ii. the performance of Interest Rates Pricing Reform; iii. the experience and weakness of the reform; iv.the policy implication of perfecting the reform. The result is that interest pricing reform cannot improve credit input because of the objective conditions of RCC operation and the monopoly of rural credit market. A serial of public policy recommendation are suggested, such as perfecting the internal conditions of rural interest reform, constructing a competitive rural credit market, in the hope of promoting the efficiency of rural credit market.Chapter 8: Policy recomadations for loan pricing reform of microfinance insttutions in rural China. Such policy recomadations are proposed as the followings: i. Improving efficiency through market funcation based on competitions; ii. Implementing consumer protection; iii. Improcing financial literacy through consumer education; iv. Enhencing direction and supervision on implentation of interest floating policy; v. Setting rural credit collateral system; vi. Regulating and directing the sound development of informal finance.