The World Bank approved a $100 million loan yesterday to support China's efforts to direct credit flows to micro and small businesses.

The loan aims to help China Development Bank (CDB) develop a new business program of providing technical support and loans for local financial institutions that give credit services to micro and small enterprises (MSEs).

The project will be two-tiered, consisting of wholesale and retail operations. The CDB, as the wholesaler in the program, will lend to and arrange technical support for participating financial institutions (PFIs) at the retail level.

Some $95 million will be channeled by CDB to PFIs, with a maturity of up to 10 years and a grace period of up to five years for on-lending to MSEs. The PFIs will lend the funds to MSEs at commercial interest rates.

Related readings:  China has 25m small businesses  IFC invests US$600 million in China in 2007  Zoellick defends China loans  WB lends China US$1.475 billion in 2006

Another $5 million will be used to fund specialized and comprehensive technical assistance to the CDB and PFIs to strengthen their institutional capacity and skills for handling MSE-targeted lending.

"Micro and small enterprises play an essential part in China's efforts to build a harmonious society," said David Dollar, World Bank country director for China.

"We hope the project will demonstrate to Chinese banks that lending to MSEs can be commercially sustainable so that private-sector MSEs can expand, creating jobs and income growth and reducing poverty."

Germany's aid agency KFW has provided parallel financing under the MSE finance project with a loan of $50 million and a grant of 3 million euros from the German government.

To meet the challenges it faces in maintaining sustainable economic growth, China has shifted its strategy to diversify its economic and financial resources and raise the efficiency of resource allocation.

One potential source for more efficient growth, World Bank economists hold, is micro, small and medium enterprises.