Research On The Legal Mechanism Of Risk Prevention Of Informal Finance

Informal finance is the essential approach for the medium-sized and smallenterprises to finance. Recently, informal finance, at a staggering rate, affords thefinancial support to the needer of the medium-sized and small enterprises as well asthe individuals, therefore, it effectively promotes the development of private economy.Since the existence of own risk and the absence of the law, the cases of informalfinancial risk are always out of control which result in the great trauma.The informal finance includes various types and the risks which are associatedwith appear distinctively because of the different types, specifically, the risk of thefailure of ROSCA,private loans easily become Ponzi scheme and legal risk, the fundsafty risk of customers in illegal private bank, the risk of pawnshop getting the stolengoods, and the subsequent risk of cash flow and business of small loan companies.And among these, non-registration informal financial risk, for example, ROSCA,private loans, illegal private bank, is destructive, which the major results are:affecting the accuracy of the people’s Bank of China when issue the currency decisionbased on the demands, dragging the local economy and influencing the social stability.The cases of uncontrol in terms of informal financial risk, especially in Xiangxi andWenzhou, exemplify that informal finance is the essential approach for themedium-sized and small enterprises to finance. The absence of informal finance law,the commercial bank law which protect the financial monopoly, and the absence ofregulatory mechanism are the substancial reasons to explain such phenomena.The development of informal finance has already become the irreversibletrend. The legislator, confronted with the informal finance, cannot take the evasiveand striking attitudes, instead, they should emphazise the crucial role informal financethey play in, should reflect and analyze the abolition of evil law in terms of the typicalcrime of illegally absorbing public deposits. In order to effectively prevent the risk,the legal system should be established: firstly, the appropriate mechanism should befound, secondly, the commercial bank law should be modified, thirdly, thescrutinization of finance should be constructed. By establishing the legal mechanisinin the aspect of prevention of informal finance, it can provide the health developmentof informal finance with the systemic warrant, and can better play the role in supportof substantially economic development.