The World Bank Board of Executive Directors today approved a US$100 million loan to China to support the country's efforts to promote credit flows to micro and small businesses.

To meet the challenges it faces in maintaining sustainable economic growth and addressing rising economic and social inequalities, China is seeking to diversify the sources of economic growth and raise the efficiency of resource allocation. Ideally, these new sources should contribute to employment without exerting extra pressure on an already strained environment. One potential source for growth is micro, small and medium enterprises (MSMEs), which have already contributed to GDP growth, job creation and export earnings.

Promoting micro and small enterprises (MSEs), the majority of which are privately owned, is a government priority in its drive to build a well-off and harmonious society. But over time, the MSEs that have become a forgotten segment, as banks have tended to consider enterprises in the upper end of the SMEs as bankable.

The Micro and Small Enterprise Finance Project supported by this new loan to China aims to expand credit flows to MSEs on a mass-market and commercially sustainable basis. It aims to help the China Development Bank (CDB) develop a new business line involving wholesaling of MSE subsidiary loans and provide related technical support to participating financial institutions.

The project is two-tiered, consisting of wholesale and retail operations. CDB has been chosen as the wholesaler for this project and will lend to and arranging technical support for participating financial institutions (PFIs) at the retail level. Under the project’s two components:

•US$95 million will be channeled by CDB to PFIs, with maturity of up to 10 years with grace period up to 5 years, for on-lending to MSEs.  The PFIs will on-lend the funds to MSEs at commercial interest rates;

•US$5 million will be used to fund specialized and comprehensive technical assistance to CDB and PFIs, to strengthen their institutional capacity and skills to effectively engage in MSE lending. 

"Micro and small enterprises play an essential part in China's effort to build a harmonious society," said David Dollar, World Bank Country Director for China. "We hope the project will demonstrate to Chinese banks that lending to MSEs can be commercially sustainable so that private sector MSEs can expand, creating jobs and income growth and reducing poverty."

Germany's aid agency KFW has provided parallel financing under the MSE finance project with a loan of US$50 million and a grant from the German Government of 3 million Euros.

(China Development Gateway June 20, 2007)