Microfinance In China's Rural Financial Market:Operational Mechanism And Impact Of Market Entry

For a long time,high transaction costs and high risks caused by problems such as high information asymmetry,lack of collateral,obstacles to contract enforcement,and high levels of monopoly in the financial market have led to market failures in rural financial markets in developing countries.The rural financial market failure macroscopically manifested as supply-demand imbalances and market segmentation.That is,the rural credit market has long existed two segmentation sectors that have significant differences in interest rates and coexist in parallel—the formal credit sector and the informal credit sector.It appears that the micro-economic subjects(mainly farmers and small and micro enterprises in the rural credit market)are facing severe credit rationing.In order to solve the problem of imbalance between supply and demand in rural financial markets and credit rationing,theoretical circles and government departments have been exploring and reforming.After experiencing the old paradigm of subsidized credit and government intervention,and the new paradigm of rural financial marketization,a third path has emerged in the theoretical world:the microfinance revolution,whose most important innovative institutional arrangement is microfinance.Microfinance is developed by summing up the experience and lessons of traditional developing countries and state-owned policy banks in adopting subsidized credit for poor and low-income people,and absorbing the characteristics of private informal lending.Microfinance has innovated traditional rural finance in terms of financial instruments and financial organizations,and increased the coverage of rural finance through the miniaturization of formal finance.In terms of micro-operation mechanism,microfinance institutions(MFIs)use group guarantees,dynamic incentives and installment repayments to control the credit risk of unsecured loans.In terms of costs and benefits,MFIs have extended financial services to poor and low-income long-tail customers resulting in higher operating costs,thus MFIs charge higher interest rates(or commercial interest rates)to cover costs and increase revenue.However,while microfinance is developing rapidly around the world,what has been questioned and criticized the most is that it charges higher interest while providing credit to the poor.Further,the dispute over interest rates has also sparked discussions in academia on whether microfinance can improve the welfare performance of borrowers,which is still a hot research issue in the field of development economics.Existing research on microfinance focuses on analyzing the operation mechanism of microfinance and its impact on the welfare of farmers.This research is based on market competition equilibrium and other related theories and from the perspective of market segmentation and market integration to analyze the role of market entry of MFIs in alleviating rural credit market failures and promoting rural credit market equilibrium.Specifically,the main research contents include:First,we analyze the credit demand interest rate elasticity and its heterogeneity under market segmentation.We also examine the impact of MFIs' entry on market equilibrium from the perspective of interest rates and demand.Taking the special pricing strategy of MFIs as the starting point,we study the interest rate elasticity of farmers' microfinance demand.Based on the estimation of the point elasticity and the average(arc)elasticity of the microfinance demand points of farmers,we further analyze factors affects interest rate elasticity of credit demand,especially the impact of farmers' access to other credit sectors under market segmentation on the interest rate elasticity of microfinance.Second,we study the relationship between MFIs and the formal credit sector and the impact of market entry.MFIs are significantly different from formal financial institutions in terms of interest rate pricing,customer targeting,and risk control mechanisms.Based on comparing the differences between the operating mechanisms of the two departments,this paper examines the relationship between MFIs and the formal credit sectors through difference in differences(DID)identification strategy.After that we further examine the possible impact of microcredit on mitigating farmers' credit rations by formal credit sectors.Third,we analyze the relationship between MFIs and the informal credit sector and the impact of market entry.Analyze the differences between the operation mechanism of MFIs and the informal credit sector,and further examine the relationship between MFIs and the informal credit sector and the impact of MFIs' entry on the interest rate of the informal credit market.On the basis of theoretical analysis,this study uses the field survey data of 3988 farmer household samples from six provinces(autonomous regions)including Hebei,Inner Mongolia,Gansu,Liaoning,Sichuan,and Hunan,as well as standard empirical analysis of MFIs' internal business management data.The main conclusions reached are as follows:First,the average value of the elasticity of credit demand of microfinance customers in the sample area is estimated to be-0.899 using the value evaluation method,which is inelastic in economics,indicating that microfinance customers are generally insensitive to loan interest rates.At the same time,the elasticity of credit demand of microfinance customers is asymmetric,and farmers are more sensitive to the decline in loan interest rates than the rise in loan interest rates.After the loan interest rate has been changed downward,the increase in credit needs of farmers is larger.This may be a serious problem for farmers.Credit rationing is especially related to quantitative rationing.In addition,from the perspective of market segmentation,the factors and heterogeneity affecting the elasticity of microfinance demand of rural households are examined.The results show that the ability of rural households to obtain financing from other sectors is a key factor affecting the elasticity of microfinance demand.When credit financing and no other alternative financing channels are available,the credit elasticity of farmers is significantly lower,and the impact of restricted financing channels on the elasticity of credit demand is more pronounced among low-income groups.Second,the existing research on the substitution or complementarity relationship between different credit sectors in the rural credit market is full of controversy.So far,no consensus conclusion has been reached.An important reason behind it is that the existing research needs to improve the identification strategy.In this study,a representative branch of a sample microfinance institution in Inner Mongolia was selected,and the suspension of credit supply due to severe credit risk in the contractor bank in 2019 was used as an exogenous shock.The possible impact of risks is to examine possible alternative or complementary relationships between different credit sectors from the perspective of risk transfer between different credit sectors in the credit market.The estimation results found that the impact of the Baoshang Bank incident caused the loan application of the experimental group's MFIs to decrease by 31.1%,and the risk loan ratios greater than 1 day and greater than 30 days increased by 105.3%and 153.3%,respectively.Evidence of credit risk transmission between different credit sectors shows that there is a complementary relationship between MFIs and the formal credit sector,and it is a complementary relationship of financing based on joint lending.Further,the heterogeneity test found that the impact increased the risk of refinancing loans and group loans,while the risks of equal principal and interest loans and digital microfinance were not significantly affected,indicating the relationship between MFIs and the formal credit sector.There are large differences in different credit submarkets.Third,the farmers in the sample area still face serious credit rationing.Among the farmers with credit demand,the proportion of farmers receiving demand-based credit ratio is about 33.08%,and the proportion of farmers receiving supply-based credit ratio is about 19.11%.This study further tests the possible role of microfinance on easing the credit allocation of farmers from the demand level.Empirical test results show that obtaining microcredit can significantly increase the probability of farmers,especially farmers with lower household assets,entering the formal credit sector.This study believes that the underlying mechanism is that formal financial institutions strategically use the information advantages of MFIs to screen borrowers through co-financing requirements.The specific manifestation is that farmers receiving microfinance support are rationed by formal credit.The probability is significantly lower,so relying on a special operating mechanism,microfinance can play the role of "information discovery".The acquisition of microfinance can be a signal that farmers' good credit is transmitted to the formal credit sector.At this time,MFIs There is a strategic mutual cooperation with the formal credit sector.This conclusion is mutually corroborated by the conclusion that there is a complementary financing relationship between institutional MFIs and rural banking institutions.In addition,customers who have repeatedly received microfinance support a stronger signal that the probability of receiving a quantitative allocation is significantly lower.In areas with low levels of competition in the formal credit market,the "information discovery" effect of microfinance is even more pronounced.That is,when the level of local formal financial market development is low and formal credit supply is inadequate,formal financial institutions will strategically refer to microfinance.The credit decision of the credit institution provides loans for farmers,and at this time,the complementary relationship between the departments is more significant.Fourth,compared with the formal credit sector and MFIs,the informal credit sector is the lowest threshold credit channel in rural areas.A large number of low-income,low-asset farmers still rely on informal credit to deal with the shock.However,this research survey found that even "zero-interest" relatives and friends borrowed have a low hidden cost.Interest rates are even higher,with a village-level average of approximately 18.41%.Examination of the relationship between MFIs and the informal credit sector found that MFIs and the informal credit sector showed a clear substitution relationship.At the same time,because the threshold for obtaining microfinance is higher than informal credit,farmers with higher assets and income have a higher probability to replace informal credit with microfinance.This study further examines the impact of microfinance on the price of funds in the informal credit market and finds that the interest rate of informal credit will increase with the increase in the coverage of microfinance,because microfinance replaces the lower risk Farmers,the average risk level of informal credit customers increases,and the informal credit sector will charge a higher risk premium.Therefore,after MFIs entered the rural financial market,they affected the original market equilibrium by affecting the customer structure and capital price of the informal credit sector.For farmers with higher assets,income,and lower risk,it formed Significant substitution relationships.In summary,the research in this paper found that microfinance can effectively alleviate market failures in rural financial markets.At the micro level,obtaining microfinance can pass signals to farmers that they have good credit,thereby reducing credit rationing from formal financial institutions;At the macro level,the rural financial market shows a dual structure of the formal credit sector and the informal credit sector.When microfinance enters the market,it connects the formal credit sector and the informal credit sector to a certain extent.Specifically,it helps Some farmers reduce their reliance on informal credit and encourage some farmers to integrate into the formal credit system by obtaining microcredit.Therefore,this study believes that microfinance has played a role in integrating the rural financial market to a certain extent.Against the background of the long-term equilibrium of the rural credit market,this research provides a new idea for promoting the integration and cooperation between different credit sectors to improve the efficiency of the rural financial market.