Funding a Better Future for Chinese Students

A good education is a stepping stone to a better life. That's just as true in China as it is anywhere else, but attending university requires financial resources that many Chinese students, especially those coming from poorer rural areas, don't have.

While bank loans are available for university students in China, the application process can be confusing and complex. Instead, many students fund their educations by borrowing from relatives and family friends. Hoping to make it easier for students to secure the funds they need, Calvin Chin and his partners saw an opportunity to build an Internet-based microfinance service that matches individual lenders with Chinese students looking for loans to fund education.

The result is Qifang, a peer-to-peer lending site that roughly follows the business model of other lending sites, such as U.S.-based Prosper.com and Zopa.com, of the U.K.

"Our mission as a company, and the philosophy governing it, is to build a social enterprise, a for-profit company that's trying to do good," said Chin, who serves as Qifang's CEO.

Qifang -- which means "blossom together" in Chinese -- earns revenue by acting as a middleman, connecting lenders and borrowers and collecting a fee on these transactions and the loans they manage.

"By making money, we can build a sustainable enterprise that's able to help more people," he said, citing micro-credit pioneer Muhammad Yunus, the founder of Bangladesh's Grameen Bank and winner of the 2006 Nobel Peace Prize, as an inspiration for the company.

Ultimately, Qifang aims to harness Web technology to improve the efficiency and transparency of loans. The company, which now manages a few thousand loans, isn't the only one that hopes to do this. PPDai.com and 51Give.com also offer peer-to-peer loans in China, but Qifang is the only company that's exclusively facilitating loans for education.

Prospective lenders can peruse loan requests on Qifang's Web site, see pictures of the students asking for loans and read descriptions of how they plan to use the funds. Funds for tuition are released directly to universities to avoid the possibility they will be misused, Chin said.

Nevertheless, there are risks. The loans are unsecured, which means if a borrower decides not to pay back the loan, or is unable to pay back the loan, and attempts to recover the money fail, lenders lose their money. To date, no Qifang borrowers have defaulted on their loans, Chin said, adding the company is looking at insurance and recovery options to mitigate this risk for lenders.

In any event, the loan amounts that student borrowers are seeking through Qifang are small by Western standards, including a current request for a 4,000 yuan (US$585) loan to purchase a computer and another one for 5,000 yuan to pay for a training course on J2EE, a version of the Java programming language. For some lenders, the satisfaction of helping a student pay for university or purchase a computer may well outweigh the risk of default.

To be successful in its mission as a social enterprise, Qifang has to keep loan costs low and avoid putting a heavy financial burden on students.

Chin expects the average interest rate on loans made through the site to be in the range of 5 percent to 15 percent, low by microfinance standards.

A July 2008 report by the World Bank's Consultative Group to Assist the Poor (CGAP) puts the global average for microfinance rates at about 35 percent but said rates vary greatly by country, from a low of 17 percent in Sri Lanka to more than 80 percent in Uzbekistan. By that standard, the loan rates on Qifang are a bargain.

High microfinance rates are caused by different factors, including significantly higher operating costs for microfinance lenders relative to banks and high demand for loans in lightly regulated markets, allowing lenders to charge very high rates. Risk is rarely the reason.

In the case of China, the government caps the interest rates that non-bank lenders can charge. The policy appears to protect poor borrowers from high interest rates, but actually reduces the funds available to borrowers since microfinance lenders that cannot issue a loan profitably at the set interest rates will not lend money. The result is a surplus of prospective borrowers and not enough money to go around -- a situation Qifang hopes to avoid.

"There are a couple of reasons why our interest rates might be lower. First of all, our overhead is different. We don't have loan officers walking out to villages, so the cost of serving a loan is going to be different and, therefore, can be lower than it would in a traditional microfinance model," Chin said.

Another reason lenders may offer lower interest rates through Qifang is for social reasons, such as a desire to help society by funding low-interest loans for students.

"Where there's a career-development component or a social benefit, or corporate social responsibility aspects, then you're going to see a tolerance for a lower rate of return," he said, adding the site plans to soon expand beyond loans into grants and scholarships.

That's good news for Chinese students, and China's future.

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