Smartphone debt in Western China
In the Summer of 2020, we partnered with an Asian credit manager focused on impact investing opportunities. Their goal was to capitalize on the disruptive impact of financial technology on traditional lending in Asia, specifically by increasing smartphone access in underserved regions in China. Our research explored microfinance trends in global and Chinese markets, examining the potential impact of COVID-19 as well. More specifically, we broke down smartphone debt investment opportunities into Xinjiang and Tibet, focusing on how the client could collateralize point-of-sales smartphone loans.
We were interested in this opportunity due to the client’s mission to build a credit history for thin-file borrowers and make them bankable individuals, promoting financial access and inclusion. Our preliminary research concluded that there were a growing number of active borrowers from microfinance institutions (MFIs), especially in China where Small and Microenterprises (MSE) Loans averaged a 15.37% growth rate from 2013-2017. There was also strong ground for investment due to consistently positive returns - MFIs had over 20% portfolio yield and approximately 10% ROE from 2013-2017.
In China, we noticed potential within the MSE loan space. The microfinance industry has lagged behind the rest of the world due to strict government regulations, barring non-financial institutions from providing financial services to the public. Yet, Medium and MSEs contribute to more than 60% of China’s GDP. We focused our research on Xinjiang, which had several characteristics highlighting its potential. Most importantly, it was a region with a high level of investment but lagging in development compared to other regions in China.
We also examined the potential impacts of COVID-19, which we believed would emphasis the social value of microfinance. For our client, providing financing for smartphones will allow the newly tech-enabled to engage in economic activities such as e-commerce, as well as improve their communication with loved ones and the government for contact tracing. We expected an increased demand for credit as rural tourism dwindles, despite loosening monetary policy that has injected RMB 1.8 trillion into the market. With Chinese policy being relatively less aggressive, we expect some MFIs to be rendered insolvent, which will definitely shape the industry moving forward.
