Shoes and 'Shadow Lending'

> Posted by Charlotte Connors
My generation is the first in four in my family not to go into the shoe business. Instead, I work in the microfinance industry, and never expected the two to show up in the same story. On my way home from work last night, I was taken in by an NPR piece about a credit crisis in Wenzhou, China resulting in the suicide of a shoe entrepreneur. He owed 60 MILLION DOLLARS to loan sharks and other underground lenders because private business owners in China have very little access to loans from state banks.
Having spent the last three years focused on client protection in microfinance and the Client Protection Principles, the circumstances that Shen Kuizheng found himself in (owing US$15,000 in interest every day), seem to make the case for more attention to the prevention of over-indebtedness in China. But, where do you start when state-run banks only lend to state companies?  “Shadow financing has grown dramatically in recent years.This summer, it stood at US$2.6 trillion — nearly one-third of all lending in China,” according to GaveKal, a global financial research firm based in Hong Kong.  
Maybe China needs a shadow client protection campaign. My dad (whose company makes all of its shoes in China) says that the local businessmen call the loan sharks “credit unions,” – but what kind of credit union breaks your legs if you fall too far behind on payments? If the government doesn’t acknowledge that all of this lending is taking place, and businesses need loans to keep functioning, who protects the folks who take out the loans? Tough question in a very complicated market. Perhaps a region for the Smart Campaign to focus on in the coming years…  My take-away (sorry Dad) is that I’m glad I didn’t follow in your footsteps.
Image credit: Martin Kozák
Have you read?
Microfinance for All Alliance Spotlights Smart Campaign
‘Client Protection: Are We There Yet?’ – Smart Campaign Director Isabelle Barrès Blogs at CGAP
The Only Solid Basis for Microfinance Having a Bright Future?