Study And Exploration Of Relationship Financing In Rural Areas

China is the largest developing country in the world with 1.3 billion people, of which more than 700 million live in rural areas. This absolute number is sufficient to note that only boosting the rural economy and maintaining its development, can we narrow the widening urban-rural gap. Undoubtedly financial activities is the lubricant to promote economic development. After years of reform and development, China has formed multi-level, wide coverage, and sustainable rural financial system. However, China's rural economic development is still relatively backward, and current situation of financial services in rural areas largely falls behind cities. Rural finance in China's financial system is still the weak link. This is caused by many reasons. But we should recognize that rural area has its own characteristic, largely different from urban area, and just this determines the need in rural areas of financial services is not the same as that of cities.The information asymmetry is a common phenomenon in the credit market, especially in rural areas. The enterprises in urban areas usually have adequate assets, transparent financial statements and high credit rating scores, called "hard information", by which they can easily get loans form banks. While the large proportion of information of peasants and small and medium-sized enterprises (SMEs) exists in the form of "soft information", which is private and proprietary and difficult to be coded and standardised, and can only be obtained through long-term and close contact between the lender and the borrower. But usually banks make loans based on "hard information" to keep away credit risk, causing the financing difficulty facing peasants and the SMEs.So, this paper puts forward a brand-new financing method from the perspective of relationship financing, which is suitable for rural areas. Relationship financing is a financing institution based on "soft information", and it puts emphasis on the long-term and close relationship between borrowers and lenders. By this means borrowers do not need to provide standard and qualified information to get loans, and it aslo brings value to lenders. By relationship financing, lenders can obtain a variety of rents. Relationship financing exists owing to the fact that the relationship bank has unique advantages in reducing the information cost and removing the information asymmetry. Medium and small-sized banks in rural areas can easily access to home and community of the borrower, and through long-term contact to get "soft information", and aslo they have lower agent costs due to their simpler structure, so they tend to make more relationship loans to peasants and SMEs than large banks. And peasants and SMEs are the most important customers to them. It proves to be a win-win choice for the both two parties. Since 1990s, relationship financing has gradually become a research of governments and economists, and has become one of the important measures in the United States, Japan and other developed countries to resolve the plight of SME financing. But it is just a financing arrangement, not only can be used in developed countries, but also in developing countries.In this thesis, first, I will do the theoretical analysis, introducing micro-foundation for relationship financing, that is borrower's demand and lender's supply. Second, take the Grameen Bank of Bangladesh as an example, because the Grameen Bank's financing model is relationship financing.Then, combine the actual situation of borrowers and lenders in China's rural areas, and find that relationship financing is more suitable for them. On the basis of these, the rural social and cultural background, that is the network of social relationship, which is widespread in China's rural areas is fit to such financing arrangements. In relatively closed economy in rural areas, people attach great importance to relationships among the families. Network of relationships among personnel are based on mutual trust and cooperation, which has formed a kind of consensus and atmosphere, regulating the behavior of members of society. Social network provides all market participants with access to information, by which relationship financing can alleviate the asymmetric information in rural areas. Information asymmetry is also relative.This thesis concludes that relationship financing is very suitable in rural areas, and social network has provided a very good social and cultural background. It is helpful to resolve the plight of peasants'and SMEs'financing, and aslo to the reform and development of small and medium banks.