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Hu Gaoyan, a farmer in Anshun village in Guangxi province, is thrilled that his daughter has found a husband. But he is also anxious about her wedding expenses. With limited savings and no access to bank credit, Hu turned to the only lender he knows: Shen Xiaoyang, the village veterinarian.
In Anshun, the vet makes a natural choice for those seeking a gao li dai, or high interest loan. Shen offers access; earning more money than many of his neighbors, who are predominantly farmers and small shop owners, he can afford to make loans. He also offers convenience; in this corner of Guangxi, the community is dispersed across mountainous terrain. Shen makes house calls, traveling by motorbike to care for villagers’ livestock—and, if needed, bringing money to loan.
Most importantly, Shen offers trust. Like most residents in Anshun, his family has been in the village for six generations. Shen can also trust his borrowers. As the professional who takes care of their livestock, he knows his clients will ensure timely repayments. No villager would dare risk the health of their prized assets.
Providers of gao li dai exist across China, and are especially prevalent in rural areas like Anshun, where access to financial services is limited. In recent years, China’s “Big Four” banks have closed a combined 30,000 branches in poor and rural regions, a result of market pressures and an increasing focus on high-margin, low-risk populations. On average, rural residents have access to 0.36 banking outlets per 10,000 people, far below the national average of 1.34. The People’s Bank of China has estimated that 64 percent of the country’s rural population is unbanked.
Informal service providers like Shen Xiaoyang help fill the gaps left by formal financial institutions by offering gao li dai. In the absence of formal credit ratings, gao li dai depend on the borrower’s reputation, almost always forming along the lines of existing relationships. Family relationships are at the heart of the strongest networks. Second-order connections through an individual’s hometown are almost as strong. In these locally-based trust networks, community members have a good sense of the trustworthiness and social capital of others, allowing them to enter into service relationships like gao li dai with fairly predictable outcomes.
Unlike formal bank loans, which are generally given only when a borrower can offer collateral, gao li dai are typically unsecured, driving interest rates as high as 40 percent. By comparison, the People’s Bank of China benchmark interest rate is 6 percent.
But borrowers like Hu Gaoyan have little choice. High interest loans are part of an informal economy that has grown out of a lack of viable alternatives. Market forces to encourage cost-savings, efficiency, and honesty are lacking. This is an economy of last resort, indicating a significant unmet need among China’s rural population, which numbers over 650 million.
Financial access is a key leverage point for individual economic mobility the world over. Safe, secure and inexpensive financial services allow individuals to plan for the future and lead more productive lives. At a time when even the Chinese government is calling the urban-rural wealth gap “relatively large” and stressing the urgency of resolving income inequality, the environment is ripe for the creation of new, more inclusive financial services.
The China Banking Regulatory Commission is making strides toward this end, encouraging the development of rural financial institutions to meet the credit needs of individuals like Hu Gaoyan. The opportunities are enormous. but so too are the challenges in design and deployment.
Service providers tend to create new offerings with a narrow focus on feature set, cost, or market opportunity. While these factors are important, the most critical—and often neglected—consideration is that adoption may require people to change how they protect, send, and save their hard-earned money. For inclusive financial services to become successful, they must take current practices, and the motivations behind them, into careful consideration.
Here, the lessons of gao li dai are instructive. High interest buyer-lender relationships are foremost rooted in trust, born of mutual reliance, and built on powerful and long-standing social connections. New service providers could tap into these connections by co-opting individuals like Shen Xiaoyang as agents. By building on existing relationships, new service providers can offer market competitive loans with the same promise to their customers as Shen: access, convenience, and, most importantly, trust.
This article is an adapted excerpt from Embracing Informality: Designing Financial Services for China’s Marginalized. The names of individuals in this article have been changed to protect their identity.