Research On The Management System Innovation Of Micro-Credit Companies In Jiangsu Province

In 2005, the People’s Bank of China (the PBC) launched on a trial basis the operation of micro-credit companies (MCs) which are allowed to extend loans but prohibited from taking deposits. The trial area covers five provinces and autonomous regions which include Shanxi, Sichuan, Shanxi, Guizhou and Inner-Mongolia. In May 2008, China Banking Regulatory Commission (CBRC) and the PBC jointly put forward the Guideline to Micro-credit Companies on a Trial Basis. The MCs mushroomed throughout China thereafter. The rapid development of MCs has been helpful in easing the financial difficulties of small and micro business as well as promoting private investment, which is applauded by various parts of the society. As a form of concrete practice of related theories, MCs symbolize both the institutional innovation of rural finance and the formalization of informal finance. However, there are still significant inadequacies in the theoretical study of MCs. In other words, the institutional design of MCs has to be improved more scientifically. This initial defectiveness in institutional design has resulted in many problems emerging from practice. Consequently, based on the practice of Jiangsu and under the background of economic transformation and upgrading in Jiangsu, this study tries to discuss issues related to institutional innovation of MCs from the perspective of government management.In a market economy, main goal of the system’s supply is to form a kind of system environment which is both fairness and efficiency, to make the enterprise realize own efficient development in the goal driven of business sustainable and profit maximization, and do their best to reduce enterprises’negative externalities but increase positive externalities. From this we can find out, that the goal of MCs’ system innovation is to realize the sustainable development and take their social responsibility. In order to achieve this goal, MCs’system innovation involves three aspects:management system innovation, supervision and management system innovation, and property management system innovation. On the basis of deep analysis of MCs’management and current situation of the development in Jiangsu province, this paper aims to explore the deficiencies of MCs’ management system and the possible innovation mode from these aspects mentioned above. Then we put forward relevant policy suggestions that can perfect MCs’management system. Overall this study has 8 parts with the main issues and conclusions as follows:Research Issue 1:MC’s appropriate financial leverage and innovation of management systemIncreasing financial leverage to an appropriate level is the key to innovation of Management system. Based on the profit model of MCs, this study puts forward a viewpoint that in order to achieve sustainable development of MC industry, its financial leverage must be heightened to an appropriate level. The study of two models (the supply separation model of parallel relationship and the market separation model of vertical relationship) on the relationship between MCs and commercial banks shows that the increase of Mc’s financial leverage is not only necessary, but also feasible. To develop small and micro clients in the credit market of vertical relationship, MCs can avail themselves of the advantage of "social capital". Comparative research among the financial leverages of various institutions shows that the present regulation system leads to an insufficient financial leverage and therefore a constraint on the profitability of MCs. From the perspective of government regulation, this insufficient financial leverage can and should be adjusted.Research Issue 2:Mixed operation and innovation of MCs management systemMCs’entering venture capital investment not only meets the needs of developing innovative economy in Jiangsu, but also contributes to MCs’ self-sustainable development. Research on theoretical models shows that small and micro innovative enterprises need venture capital investment on one hand. MCs have the motivation to invest in small and micro innovative enterprises on the other hand. MC getting involved in both loan business and venture capital investment is in conflict with the basic principle of "segregation of financial business and segregation of financial supervision". However, research on the core risk of mixed operation and the international trend shows that the risks inherent are controllable. Moreover, in regions where innovative small and micro enterprises are relatively concentrated, the mixed operation is fully capable to be one of the mainstream business models of MCs.Research Issue 3:Moderate supervision, social responsibility, and innovation of MCs’ supervision and management systemSupervision over MCs should abide by the principle of appropriate supervision instead of non-prudential supervision. By analyzing the essence of prudential supervision and non-prudential supervision, a middle-way proper supervision model embodying concepts of prudential supervision should be applied as the basic principle for supervision over MCs. Analysis of potential losses and negative effects brought by operational risks, social risks show that the current overriding risks of MCs are over-concentrated clients (or industries) and withdrawal of capital. These two risks are the main reasons leading to capital reduction and even negative capital of MCs. Logically and finally, MCs suffering from above risks shall not be in accordance with the requirements of prudential supervision. To fend off such risks, government supervision and judicial strike must be combined. At the same time, Management of MCs’ social responsibilities undertaken by MCs should be focused on incentives of policy and measures. By analyzing the relationship between social responsibilities undertaken and social capital, this study proves that undertaking social responsibilities is conducive to long-term development as well as risk-control of MCs. This study goes further to analyze the characteristics of MCs’social responsibilities, and points out the overriding indicators to measure social responsibilities undertaken by MCs. These indicators include the average loan interest rate and the extent of "being, small and being separated", especially the average loan interest rate. Analysis based on Economic Man Hypothesis shows that compulsory requirements on MCs to undertake social responsibilities are usually lacking in efficiency. Therefore, the incentives of government policies and measures play a crucial role in promoting MCs to undertake social responsibilities.Research Issue 4:Moderate equity scale, entry of private capital, and innovation of MCs’ property system.Based on an empirical study of data 2011 of MCs in Jiangsu, this study shows that ownership arrangement (including equity scale, equity concentration, equity nature and management equity holding) has an obvious influence on operation performance, risk-taking and social liabilities undertaken of MCs. Management of ownership is one of the most important parts in supervision over MCs. Via proper ownership arrangement, the institutional innovation of MCs can be improved significantly. The main empirical conclusions are as follows:The equity scale is positively correlated with MCs’ operational performance (but theoretical analysis show that over-scaled ownership could lead to the decrease of profitability), negatively correlated with risk-taking and positively correlated with social responsibilities undertaken to some extent; equity concentration is negatively correlated with operational performance, negatively correlated with risk-taking, but positively correlated with social responsibilities undertaken; equity nature (state-owned or private) has no significant correlation with either operational performance, risk-taking or social responsibilities undertaken; management equity holding is negatively correlated with operational performance, negatively correlated with risk taking to some extent, but positively correlated with social responsibilities undertaken. The conclusions of empirical analysis have provided theoretical basis for improving the ownership management system targeting at MCs’ sustainable development, appropriate risk-taking and more social responsibilities undertaken. Under these circumstances, both the "Guideline" and the related MCs’ management stipulations in Jiangsu have to be adjusted accordingly. In addition, the conclusions of empirical analysis have provided supporting evidence for channeling more private capital into financial sectors. On the prerequisite imposing effective supervision, financial sectors can be opened to a greater extent to private capital, especially to those with strong financial capabilities.Backed by the above basic conclusions, this study puts forward the following policy suggestions:evaluate MCs objectively to create a good environment for the industry’s healthy development; improve legal system to provide legal support for MCs’development; institute ownership scientifically and form an inherent incentive constraint for MCs’ normalized development; transform supervision concepts and improve efficiency via differential supervision over MCs; eliminate policy hurdles to implement various incentive measures targeted at MCs; establish service platforms to support MCs’innovative development; enhance communication and guidance to heighten the operating level of MCs.