Rotary Fund Economic Research: A Microscopic Mechanism, The Interest Rate Characteristics And Efficiency Of Significance

It is documented by recent empirical studies that informal finance, once considered as the byproduct of financial repression or insufficient financial marketization, persists and often flourishes not only in developing countries but also in many developed countries with well-established financial markets. As for this, there are at least two reasons which can be taken into consideration. First of all, informal finance can serve as the intermediate of resource mobilization and resource allocation in the lack of formal finance. For example, informal finance thrives in the county-level (or below) areas across China, providing important funding solutions to those private business owners such as small and medium enterprises and individual businesses, most of which can hardly obtain sufficient financial support from formal financial institutions due to their inferior credit profiles. More important, informal finance can in many cases solve problems poorly handled by formal financial systems. Actually, when talking about the current global economic downturn, tons of doubts and challenges have been raised in regards to the effectiveness of formal financial mechanisms, all of which lead to a reevaluation of the role of informal finance.The term 'informal finance' covers a broad variety of institutions and mechanisms, and hence is difficult to define clearly. To avoid possible misunderstandings, this dissertation will focus on the ubiquitous informal financial institution called 'rosca (rotating saving and credit association)', examining the rationales behind its fund allocation mechanism, providing empirical evidence to its efficiency, and accordingly delivering suggestive comments to the development of rural finance as well as the formalization of informal finance in China.The dissertation is organized as follows: Section 1 presents the background and the objectives of this academic research, coupled with an introduction to the two most impartant types of rosca. The previous theoretical analysis and empirical studies are reviewed in Section 2. The rosca mechanism of resource allocation and welfare improvement are modeled in Section 3, and an empirical analysis based on case study is conducted in Section 4 to evaluate the effectiveness of rosca through the comparison with outside credit markets (both formal and informal). In Section 5, a review is conducted on the key decisive factors which make rosca a success, with a policy analysis followed on the learning points from rosca to the establishment of cooperative financial institutions with sustainability and profitability in rural China. Conclusions and a further research agenda are provided in Section 6. The key results of the research are summarized as follows:1) The first key issue discussed is the micro-mechanism of rosca as a resource mobilization and allocation function, which starts from the modeling of the participants' incentives for joining this organization. The theoretical analysis indicated that rosca, as an informal financial system with a combination of both mutual benefits and investment return, can provide effective solutions to those who are inaccessible to outside credit markets for their meeting both expectable and unexpectable expenditures, with the bidding function being well leveraged as the 'invisible hand' for an efficient fund allocation.2) The second research focus is to evaluate empirically the effectiveness of rosca regarding its funding efficiency, especially when compared to the outside credit markets including formal commercial banks and informal lending shops. Through case study, the following conclusions are presented. As a means of investing, rosca can provide its participants with a higher interest rate than the commercial banks' deposit rate, and hence is an efficient investing mechanism. As a means of financing, rosca can provide an interest rate which is higher than that of commercial banks but lower than that of lending shops, and hence is an efficient financing mechanism in case that the formal finance is unavailable or of high transaction cost. However, it should be noted that the prerequisite for a successful rosca is the geographical or consanguineous proximity of its participants, which usually plays an important role during the course of private information screening and default behavior control.3) The third topic is about the value or instructiveness of the research on rosca, which is based on the analysis of the current rural finance development in China. Actually, as an efficient and competitive financial arrangement, rosca can achieve a well balance between mutual benefits amongst the participants and the profitability of investment, and hence can be well leveraged to support the development of the 'rural fund cooperative', a new type rural financial institution promoted by the banking regulator to build out the current rural finance supply in China.