Non-formal Financial Institutional Change Of China's Rural Areas: Observation From The Farmers Perspective

The formal financial institutions, such as the agricultural bank and rural credit cooperatives, were not only in distress because of bad loan ratio, but also contracted their branches in the rural areas, so that they were obviously away from rural areas since the economic system reform of China in 1978, and the effect of aid-agriculture was very weak. At the same time, in addition to formal financial markets, there was a spontaneous market which was composed of friendship credit, related credit, rotating saving and credit associations, rural cooperative fund associations, rural mutual cooperatives, non-profit micro-credit organizations, illegal money shops, usurious institutions, and so on. Spite of its being official opposition, the informal financial market has been booming especially in west less developed regions, still has higher institutional efficiency, and remains extremely low default risk. In fact, many investigations also indicated that the informal finance plays an essential role in course of development because it can increase households'income, promote agricultural growth and rural development. And someone contributed our economic growth for 30 years to its development. So this raised economists in deep thought. Why has it a relatively high efficiency spite of lacking of official property rights protection? What is the execution mechanism in an informal finance market that is evergreen? How it evolves? In the context of the global financial crisis, is its continuing existence default, or is it guided to normalization? Obviously, the study on problems of rural informal finance can not only provide a theoretical guidance for helping China build modern rural financial institution, to the practical sense, but also help us solve the three rural issues and promote the urban-rural integration. Maybe other developing countries in transition can learn theoretical and practical experiences from this study.The dissertation started the research from the household, and limited the scope of the informal financial activities of households after economic reform in 1978. It was worth emphasizing that this dissertation used case studies to focus on classical problems of rural finance development. Of course, this dissertation described a complex picture of rural informal finance in real-world, through field investigation, or historical data collection, or visiting the parties concerned in case, so that these case stories not only showed the real phenomenon about rural informal finance to the extent, but also characterized its future trend. Then we could get policy implications about difficulties in financing, and even confirm or expand classical theories in institutional economics.Based on the theoretical analysis and empirical research, the conclusions drawn from this dissertation are as follows:First, the households'preference to borrow from the informal financial market out of the calculus of costs and benefits is a rational choice, and more poverty-stricken households have more preference to rural informal financial market, so it means indigent and low-income households make a choice for maximizing personal interest driven by economic rationality in a given constraint.Second, an initial condition of the rise of rural informal finance is the price change of capital factor, the basis of rural informal finance is that it can effectively reduce the transaction costs in borrowing process, one of necessary conditions for its rise lies in that the net income from institutional innovation is greater than the net cost expected, and the local government can push its rise forward from the outside. But rural formal financial institutions under the current system are hindering factors.Third, the private governance of credit contract depends on social network to spread information, and the effective dissemination of information leads to the establishment of village trust, moral constraint is made up of informal institution in rural society.Besides, the credit games indefinitely repeated and various transactions in embedded association are incentive to repay for borrowers, and also increase the cost to break a contract, and as a result of the flexible security mechanism filtering out high-risk borrowers, the default risk of private lending is reduced further.Fourth, when the power center can not make a clear definition of property rights, or it is difficult to define clearly, individuals would seize the fuzzy property in public domain in an illegal way. Because regulatory cost and information cost is too expensive, the regulatory authorities only combat or eliminate a part of informal financial activities. On the other hand, the cost of maintaining the binary financial system is getting more expensive and the domestic economic situation also makes financial deregulation inevitable, so the implementation of the financial oppression policy would be finally reduced under the joint effect of these factors. Fifth, the regional cultural difference leads to geographical difference of rural informal finance development; Local government as a major organizer can initiate an innovation of informal financial institution in order to enhance the control of scarce financial resource; when a rural mutual cooperative operates secretly and illegally in rural areas, it has a high institutional efficiency. But, after it has had access to legitimate status, its institutional efficiency would decrease.Sixth, the external macroeconomic environment prompted the power center to change policy preference to informal finance, which reduced the normalization cost. So someone driven by profit motive is willing to respond to new profitable opportunities from the legalization of informal finance with relationship resource. However, the normalization of informal finance will be still faced with many obstacles in China.Seventh,. the policy conclusions drawn from this dissertation include that, our government should give households the freely contract right, eliminate legal barriers of the normalization of informal finance, streamline constraint rules of new rural financial institutions, strengthen fiscal and tax policy to support its normalization, make an incentive to link informal finance and formal finance, and establish a scientific monitoring system and withdrawal mechanism.