Abstract

Microfinance in China originated from poverty alleviation projects in the mid-1990s. Most of the projects were financed by international aid organizations. In order to provide financing service for the low-income people, many aid organizations and local authorities set up microfinance institutions（MFIs）on the basis of the microfinance projects at the end of the 20th century. Because microfinance funds come basically from philanthropic donations at home and abroad, the aid-the-poor funds of Chinese government, they are mostly in non-governmental organization（NPO）, private non-enterprise and foundation, and so on. The organizational forms of the MFIs are mostly in non-governmental organizations, which can also be called nonprofit organizations. The purpose of NPO MFIs is to provide the financial service for the poor. Therefore, NPO-MFIs and the MF projects in China are also called public-interest MFIs.

Public-interest MF solved some difficulties, such as the development of production of the poor and financing for improving the living standard, greatly impelled people in the service zone of the microfinance to get rid of the poverty. It played a experimental and model role in these innovation, such as the use of poverty alleviation funds, financial organizations in village, products and mechanisms. It became the forerunner of the formation and development of other forms of microfinance, improving reformation for ways of poverty alleviation（PA）and financial market in village. Microfinance is an important part that rural finance served three rural issues. Therefore, in the central documents between 2004 and 2010, the development of microfinance is an important measure that improves farmers' income and the rural development.

However, public-interest microfinance face some barriers to its growth in recent years, some organizations have started to shrink. Its development relies on the endowment, but the endowment can not provide a stable support for the sustainable development of microfinance, because of instability and limited quantity of source of funds. In recent years, the socially responsible investment and the commercial capital greatly make use of the market of microfinance. However，public-interest MFIs are the lack of legal status that operates finance business, using the pattern of nonprofit organizations, so it has barriers to integrate into these capitals, its expansion is influenced.

In this context, public-interest MFIs started to transform into commercial organizations, some institutions transformed societies into private non-enterprise, some transformed non-profit organizations into joint-stock loan companies, some was transformed into asset management corporations that targeted poverty reduction. Some new microfinance institutions registered as non-profit corporations that targeted poverty reduction. Some institutions seemingly did not transform, but absorbed employees to buy shares in various forms.

Why PI-MFIs develop so difficultly? How to explain the difficulties？Can PI-MFIs continue to adhere to their social goals when they are transformed into profitable organizations? All these questions are important for the PI-MFIs development, as well as for the social development.

Based on the definition and formation of the organizational system, the authors of this book argue that, an organization is formed under a series of mechanisms, including efficiency mechanism, legality mechanism, common -goals mechanism，free-will determination and interests-balance mechanism. According to institutional economics, transaction is the basic unit of economic analysis, any transaction has costs. In order to reduce transaction costs, an economic organization will be formed when the transaction cost is high enough. When the internal transaction cost becomes high enough, the expansion of the organization will stop. Then the organization and its corporation are created, a stably relational contract is formed. This is called efficiency mechanisms. According to the sociology of organizations, the organizations will form a network to cooperate with each other. The elements that form the networks are the common goals of the organizations in the networks. This is the common-goals mechanism. Any organization or the structure and operating mode of the organizational networks shall abide by the law, social regulations（including moralities, customs, and social expectation, etc.）. This is legality mechanism. The setting of organizational goals reflects the free will of its founder, which is called the free-will-determination mechanism in the book. And the interest of internal stakeholders greatly influence the change of organizational system, which is called the interests-balance mechanism. The formation of organization and evolution of the system result from the above five mechanisms.

The authors argue that the institutional transformation of PI-MFIs, from project to NPO, and then from NPO to FPO, is the result of above five mechanisms. NPO is a correction of the market failure and government failure. But on the basis of the public endowment and the restriction of the nondistribution constraint, NPO is also at the risk of failure, such as philanthropic insufficiency, paternalism, amateurism and insider control, and so on. And its service ability is influenced. The correction to NPO failure is the social enterprises.

The social enterprise（SE）is a new pattern of social intervention to promote social justice and development. The essential characteristics of SE can be summarized in two points. Firstly, the purpose of SE is to solve social problems, improve the social development. Secondly, market-oriented business activities are means of the organizational survival, development and solution of social problems. So SE is legally not a new organizational form, but a new combination of organizational purpose and action. Only when the organizational form of SE meets the above two characteristics, can organizational form be charity, company or cooperative, NPO and profitable organizations. More importantly, SE does not only service social welfare, but takes into account the interest of investors and practitioners. It connects personal interests with public social interests, motivating investors and staffs. And this greatly contributes to solve the philanthropic insufficiency, amateurism, paternalism and effective supervision of insiders. Therefore，the transformation of NPO into SE is the function of above-mentioned three mechanisms.

Therefore, the institutional restructuring of the public-interest microfinance can be explained with the above three mechanisms, to find that ways of restructuring not only solve financing and legal status but also the failure of nonprofit organizations. Through institutional restructuring, public-interest microfinance encourages investors and internal staffs to buy shares, or uses the pattern of profitable organizations，to expand funds and potential effects. Firstly, in terms of ownership, it introduces investors through the pattern of the profitable organization, transfers“the enterprise within owners”into“the enterprise without owners”, to improve the governance structure, the power and effect of the internal supervision. This should be the fundamental restructuring of nonprofit organizations. Secondly, in terms of the insider incentives, it can be corrected in the past one-sided emphasis on dedication and social responsibility or ignoring the personal and family interest of managers and employees, balances the personal interest of insiders and the social interest. This contributes to make employees more likely to work hard, stay in their works, and improve their work skills and performance. Thirdly, under the influence of the above two transformations，the efficiency and effect of MFIs funds can be improved, these effects have emerged in some MFIs after restructuring.

In the pattern of SE, personal interests of insiders receive more attention than that in a traditional NPO. But is it possible to ignore the public interests when personal interests are emphasized, and result in a social enterprise failure? In order to avoid the situation, the national policy and regulation and the organizational system should have a clear restriction. In Britain, the government asks social enterprises to lock their asset and restrict their profit sharing, requires that their asset must be used for the public welfare, and their profits must be used to reinvest in the public welfare. The law in U. S. provided that the scope of business of social enterprises was limited to the low-margin industry and was given tax preference. The law in Bosnia provided that the share percentage of the original non-governmental organization was not less than 51% in the new commercial MFIs if the nongovernmental pattern of MFIs was transformed into the commercial pattern. In China, now there is no legal system appropriate for microfinance social enterprises, but new MFIs, firstly transformed or using profitable pattern, have greatly made practice and exploration. For example, the China foundation for poverty alleviation would be the largest shareholder when it transformed the microfinance department into the Zhonghe Nongxin project management corporation. You Change Purong Information Advisory Co, Ltd was founded by China Social Entrepreneur Foundation, its shareholders including two non-governmental organizations, a social enterprise and two commercial investment companies, and its articles stated that most of its profits would be invested in microfinance business.

Even though Social enterprises and commercial patterns solved the failure of non-profit organizations to some extent, this does not detract from its advantages, such as financing, social mobilization, tax and preferential policies. The development of MFIs of non -profit organizations from abroad greatly proved its advantages, some well-developed MFIs of non-profit organizations in China also proved this point. Motivation and performance of managers in non-profit MFIs can be improved if it has a good governance structure, greatly handling incentive and restraint mechanisms of internal managers, greatly dealing with the relation between themselves and the external funding, supporting institutions. Therefore, non-profit MFIs can be healthily developed. However, in the current trend of commercial restructuring of the Chinese public-interest MFIs, some public-interest MFIs still face inter nal and external pressures that it is transformed into a small loan company. It is still too early to judge the effect of their restructuring.

Through the evolution of the system of the Chinese public -interest MFIs, it is seen that the formation and evolution of organizational system has its own law. The law reflects that the formation and change in organizational system results from the efficiency mechanism, the legitimacy mechanism and the common goals mechanism. The design and change of any organizational systems is able to improve its efficiency, is accepted by policies and regulations and social concept, and corresponds to the interest of stakeholders. These mechanisms result in that non-profit organizations correct the failure of the government and market, and social enterprises correct the failure of non profit organizations. No matter how transform organizational systems, nonprofit MFIs should adhere to the social welfare known as its core objectives，take into account the interest of investors, internal employees and other stakeholders.

The Chinese government urgently needs to provide policies and regulations for social enterprises and micro finance, in order to ensure that nonprofit MFIs adhere to the social welfare, avoid the failure of social enterprises. China should learn from legislative practices in some countries, such as Community Interest Company in UK, low-interest Ltd in the U. S. and the restructuring of non-profit MFIs in Bosnia, some important contents should be explicit. For example, any non-profit MFIs should be given the legitimate position. The asset locked and limited distribution of surplus should be regulated, owners and investors of the organization should be asked to make a clear and public commitment. Non-governmental organizations after restructuring should have holdings in the new MFIs. Preferential tax policies should be given, the development of socially responsible investment should be promoted，and the establishment of financing platform should be improved. The compulsory information disclosure mechanism should be developed. Through a variety of measures, non-profit MFIs are healthily developed, continuing to provide financial services for the low-income population.