A Study On The Development Of Rural Informal Finance System

"How will financial development benefit people better" is one of research subjects of the financial development theory. The development of the financial industry plays a very important part in improving efficiency of resource allocation, optimizing the economy structure, balancing urban and rural development, accelerating the development of urban and rural area, and increasing the income of urban and rural residents. Also, as an indispensable system arrangement, rural finance system connects capital supplies and demands, fostering the prosperity of rural economy. However, as a large agricultural country with the largest population, China develops in an imbalance way, varying in different areas, different provinces, and even in different places of the same province. The rural financial development, including formal and informal finance, as a whole, develops and improves itself in a fast way. But, at the same time, the development of formal rural finance lags behind the development of informal rural finance. Actually, the development of formal rural finance can not meet the needs of rural economic development. Therefore, in most rural areas, the informal finance has become an indispensable part of the whole finance system, playing an important role in both promoting the growth of the rural economy and increasing rural residents’income. Based on the fact right now China emphasize on the development of rural area, trying to solve rural areas’problems, this dissertation explores both the current situation and operation mechanism of rural informal finance, and its effect to rural area’s economy and rural residents’income, overall analyzing the development of china’s informal finance system, making some suggestions, in order to provide theoretical and empirical support to strengthen rural financial service.This dissertation goes in this way:theoretical induction--statistical analysis and empirical test--logical exposition. First of all, this dissertation does the literature reviews about the definition、the origin and the development of rural informal finance, and thus confirm the research ideas and structure. Then we give the definition of rural informal finance, which is financial activities, made by participant voluntarily, out of effective supervision from authorities. It is usually unmanaged, shady. And it is out of supervision and protect from laws or regulations. In china, it exists in several ways, like borrowing or lending money, civil financing, related loan, and so on. It is also different from rural formal finance, playing a unique role. From macroeconomic theory, it comes into being because of its Endogenous Advantages like minimum transaction costs (broad sense) and relatively complete information. Of course, it is also because of a typical binary economical and financial structure. China’s rural formal finance develops rapidly because of induced institutional change. As well, there is maybe another reason which is the financial restraint system of China and other developing countries.Secondly, the dissertation studies the mechanism of rural informal finance from the aspects of micro and macro analysis, screening, pricing, and supervision. The study found that the consumer surplus formed from the formal financial demand and supply curves is less than the one formed from the informal financial demand and supply curves, because of the interest rate regulation and credit rating, thus increasing the total welfare of the people and providing financial allocation efficiency. Through the analysis of investment on farmers or township enterprises or other economic activities, the dissertation also found that farmers or township enterprises choose informal finance based on the success rate of investment or economic activities, how easily it access to money, the interest rate difference between formal finance and informal finance, the cost difference between formal finance and informal finance. Informal finance has the information advantage; it can directly find suitable candidates, without adjustment of loan treaties. Therefore rural informal finance can select borrowers directly, rather than indirectly select borrowers. Also pricing of rural informal finance is called cost plus pricing, which includes the opportunity cost, management cost, transaction cost and risk premium. Due to complete information, informal financial organizations do not have to spend much in supervision. It is always true that borrowers will return money in time because of social pressure and personal constraints. From the mathematic model of rural informal and formal finance we can also find that:First, rural informal finance can use info advantages to separate rich farmers and normal farmers with little cost, so that both farmers can get loan from rural informal finance. Second, due to smaller cost of supervision and better supervision results, scope of the contract may effectively expand. Third, rich farmers will choose rural informal finance with high interest rate, if rural formal finance demands high value collateral. Fourth, poor will not get loan from rural informal finance with info advantage, because they know it is hard to get money back.Thirdly, after a review of rural financial system reform and change and the development of urban and rural economy, it is conclude that china’s rural informal finance was born "endogenously", but grew "externally". In the statistic study about rural informal finance, we find that the scale of rural informal finance continuous to grow, increasing from822.9billion yuan in2003to2654billion in2010. different areas enjoy different increase rate. The highest rate is from east area, followed by middle, while west area has the least. There is significant spatial correlation among different areas in the development of China rural informal finance, but there is only relative β convergence tendency rather than absolute β convergence tendency. This significant spatial correlation among different areas only decreases the speed of convergence, rather than changes the direction of convergence. In theory, rural informal and formal finance exist and compete together. However, in empirical study, it is only found that government may fail if it wants to adjust informal finance thought the adjustment of formal finance.In some empirical tests, it is found that the expansion of rural formal finance has significant and positive effect on rural economic growth. However, this effect is lower than investment and employment in non-agricultural industries in rural areas. This dissertation also finds that the expansion of rural informal financial system has a little negative relationship with rural economic growth, which is explained by the entity economy bubble effect. After comparing different places’effect, from developed east area to developing middle and west areas, it is found that this negative relationship decreases as the development of economy. So, overall it is in line with U shape. In the long run, the development of rural informal financial system promotes rural GDP there. In fact, the development of rural informal financial system promotes rural GDP only if the binary economic and financial structure has been eliminatedHaving usd30provinces’panel data from2004to2010, we established fixed effects, variable intercept model, about how rural finance affects rural residents’ income in east, middle, west areas. It is found that overall expansion of rural informal finance can increase the rural residents’income. But expansion of rural informal finance increases the rural residents’income differently in different areas. The most obvious effect is in east area, followed by middle and west areas.According to experience about japans’informal financial organization Mujin’s reform, it is believed that the existence and development of japans’informal financial organizations depend heavily on help and strict regulation of government. Then these informal financial organizations support local agriculture and development of SMEs, which is a good example to china. Also, according to experience about development of Indian’s micro-credit Company, china government should make relative policies and rules, to promote the development of public welfare services. Then, micro-credit Companies or other state-owned organizations can offer some small and efficient loans which are anti-poverty programs, to fight poverty through market, and to help to build a comprehensive and systematic micro credit system.Last but not least, after study about current situation of the development of rural non formal finance, the operation mechanism and various development effects, suggestions are given. The governments at various levels shall guide and support the development of rural non formal finance. First a system which all rural informal financial organizations can be registered in and relative rules and laws must be established. Then, some rural informal financial organizations which meet requirements can develop after reforming. During the implementation process, several problems should be handled well, such as legislation, supervision, regulation and deregulation of interest rate, anti-financial crime, etc.