Analysis Of Formal-Informal Financial Linkage In Rural Areas: Reference Of Financial Exclusion

As the development of economy in China's rural areas, the demand for financial resources has been increasing and tends to be much more diversified. The development of financial system in rural areas has become the focus of concern. However, through the analysis of the data of the formal financial institutions, we could easily find that financial exclusion exist in rural areas. We use the theory to explain the this phenomenon and then another phenomenon attracts our attention that the informal financial activities which had existed for several thousand years flourished again in most rural areas of China, especially in some developed coastal regions where informal financial activities are very popular and in some parts informal finance even overrun the formal ones. This is obviously caused by the lack of formal financial supply which results in the imbalance of the demand and supply and the financial exclusion in the end. Because of the advantages, informal financial institutions could ease financial exclusion effectively. But we can't ignore the risks and problems by the existence of the informal financial institutions. We hope to straighten out relations of the formal and informal financial institutions. Though the financial linkage between formal and informal institutions, the advantages of formal and informal institutions could be complemented, and then the issues could be solved and financial exclusion would be alleviated.We propose a model to show how the informal sector can help to solve certain problems faced by formal sector lenders and to find out under which condition the financial linkage could be preferred. We then use the model and the analysis of the existing cases to design the terms of the financial linkage and predict the policy implications concerned. And then, we further consider the significance of the financial linkage to the development of financial system in rural areas. This dissertation is divided into 5 chapters:Chapter 1:Introduction. This part induces the background and the significance, the methods and structure of this paper, introduces the innovation of the article. Chapter 2:Review of Rural Financial Theory. This chapter is the relevant theories, particularly on the national financial exclusion. Lay the foundation for the analysis of the formal financial exclusion in rural areas latter.Chapter 3:The development of financial system in rural areas:reference of financial exclusion. Analyze the financial demand and formal financial supply in rural areas according to financial theories and illuminate the reasons for financial exclusion in rural areas. Then we classify that the informal financial institutions could ease financial exclusion effectively. However, we also point out the potential risks and issues of the operation of the informal institutions and the impact of the financial system.Chapter 4:The financial linkage between formal and informal institutions. Raise the importance and necessity of financial linkage. And propose a model to show how the informal sector can help to solve certain problems faced by formal sector lenders and to find out under which condition the financial linkage could be preferred.Chapter 5:Conclusions and policy recommendations. This chapter combined the analysis of the model and existing cases to design the terms of the financial linkage and predict the policy implications concerned, especially the significance of the financial linkage to the development of the village banks in rural areas. Finally, point out the inadequacies and further research of the article.