Today, vast swathes of China’s countryside still have insufficient access to basic financial services. In rural areas compared to towns and cities, simple tasks such as withdrawing cash, organizing loans, and settling invoices remain anachronistically challenging for citizens. Ten years ago, the government pioneered the establishment of village banks — useful subsidiaries of larger banks that operate independently on a day-to-day basis. Village banks’ capacity for quick decision-making and flexible service has played a key role in the economic growth of China’s rural areas. However, doubts still remain today about whether or not such banks are truly providing support to their core customers, who are often from impoverished or disempowered rural backgrounds.

By definition, village banks are supposed to offer high-risk, high-cost, low-profit loans of small amounts of money; obtain funds from prosperous urban areas in order to support rural areas; and focus at least 80 percent of their business operations on providing agricultural loans. Village banks have developed rapidly since their establishment in 2006: A total of 1,412 had been opened by the end of June 2016, representing more than 30 percent of legally recognized banks in China.

During the decade from 2006 to 2016, village banks broadened their financial services, which improved their competitiveness in the financial market and brought rural households more ways to borrow money. By the end of 2015, the total amount of capital sitting in the nation’s village banks had exceeded 1 trillion yuan ($146.3 billion). Some of these banks may even be listed on the stock exchange in future as they expand their roles within the Chinese banking system. 

Despite these developments, village banks are still relatively weak in terms of competitiveness and corporate governance, and several hundred have yet to make any profit. In the coming decade, it will be difficult for some of these institutions to avoid being bought out by larger banks. Village banks are also notorious for mismanagement and ill-advised risk-taking, despite restrictions confining their operations to their local areas. Consequently, one way for foreign investment firms to gain a foothold in the Chinese banking industry is to capitalize on the sell-off of village banks.

Village banks have come in for criticism ever since their creation. First, it is said that these banks are not injecting money into rural areas but are instead drawing money away from them and reinvesting it in towns and cities. This is evident, for example, in the large number of village banks that locate their headquarters in county towns or even in urban areas.

In reality, village banks are community banks, and the communities they serve must be primarily rural in composition. Due to high transport costs, staff recruitment and relations with government departments are better conducted from county towns than from less accessible villages. In addition to providing support to village banks during the early stages of business, parent banks also expect village banks to stand on their own two feet, ensure their own growth, and not rely solely on their parent institutions. Village banks say that this model prevents them from drawing funds away from the villages; instead, they attract deposits from business clients outside of their immediate areas, which they can then reinvest in local projects.
 
Second, village banks have been accused of providing insufficient funding for migrant workers who choose to return home and start their own businesses. After hearing that village banks had opened in their hometowns, many workers assumed that these banks were government-sponsored poverty-alleviation programs. When their applications for loans were not granted, migrant workers complained that village banks are no different from regional or national commercial banks.

However, village banks are established for profit, not charity. Many village banks have done well in adapting to the local banking needs of small companies, private businesspeople, farm owners, budding entrepreneurs, and the local population in general. By providing loans to rural households, giving joint-guarantee loans, taking out rural mortgages, and permitting the use of woodland and standing water as collateral, village banks have established bold innovations with regard to the size, guarantees, terms, and interest rates of rural loans.

Third, it has been argued that village banks have not been significantly involved with so-called inclusive finance: a range of banking products and financial services made available to poor populations whose low incomes usually lock them out of the conventional banking system. Many people believe that village banks should pivot on inclusive finance, build up large-scale databases, and operate online in the same way as small loan companies and internet-based loan brokers. Put simply, if clients deem village banks’ business models identical to those of conventional banks, they will just decry our services as old-fashioned and not innovative enough.

In the last two years, inclusive finance has grown faster in China than in developed areas like the United States, Japan, and Western Europe. However, inclusive finance remains high-risk, as debtors are often poor people betting on their ability to fashion a livelihood for themselves. Inclusive finance has also been riddled with high-profile scams involving, for example, the abuse of peer-to-peer lending systems. On a more positive note, however, village banks have ventured as much as they can in raising the upper limit of loans to each household — allowing rural dwellers to fund their own startups and finance cash-strapped farms — while remaining creative in satisfying the demands of their clientele.

The deficiencies in financial services in China’s countryside have existed for a long time, with at least 50 percent of the demand for loans going unmet. This gap has not narrowed in the decade since village banks were established; rather, it has widened as waves of migrant workers return home to start private businesses. These customers clearly put pressure on the rural banking sector, but they could also be its greatest opportunity. It’s time for village banks to put their money where their mouths are. They will either remain faithful to serving the villages, or betray their rural communities and fade into obscurity as a result.

Correction: A previous version of this article contained an error. No village banks have yet been listed on the stock exchange, although some may be in future.

(Header image: A local woman collects eggs on a chicken farm in Zhangjiajie, Hunan province, Jan. 16, 2013. VCG)