Regularize Informal Financial Market To Help Boost SMEs

This thesis first discusses the definition and the cause of informalfinance,and points that informal finance can help boost small and mediumenterprises(SMEs).Informal finance is broad and the academiahasn’tagreed on its definition.This thesis gives a summary of three popularopinions on the definition of informal finance, and agrees that it is morereasonable to give a definition from the perspective ofregulation.Informal finance in the thesis is defined as financial activitieswhich are not under the control and supervision of regulatory authoritiesincluding People’s Bank of China, CBRC, CSRC and CIRC. Regardingthe cause of informal finance,it is the product of distorted policy andfinancial repression from the view of financial repression theory while thescholars from the perspective of information economics believe that theex ante adverse selection and the ex post moral hazard caused byasymmetric information may be a more fundamental reason for the wideexistence of informal finance.We think that the formation of financialmarket is a sustained dynamic game and optimal selection processamongall participating parties. With the economic development andfinancial deepening, some informal financial activitiesmay graduallydevelop into part of formal financial system.In the following, the thesisanalyzesthe status quo of SMEs financing. It is difficult for SMEs to finance from formalfinancial system. They rely on their own capitalaccumulation greatly and quite a part of their external financing is frominformal financial market.Therefore, informal financial market helps easethe financing difficulties of SMEsto some extent and makes an importantcontribution to the development of SMEs. In addition, compared toformal financial system, informal financehas distinguished advantagesoninformation, guarantee requirement and market-oriented operationmechanismin the area of SMEs financing.Afterward, the thesis analyzes the status quo and problems ofinformal finance. Informal financial market plays an important role inChina’s financial system. It is huge in size and has various organizations.However, due to lack of regulatory and its own problems on existingforms and operation mechanism, informal finance hassome negativeeffect on our economic, financial and social system.It may be interferenceto financial system, national macro-control and social stability. Further,the thesis presents a detailed analysis about the development ofPeer-to-Peer (P2P) Lending and micro-credit companies, which we thinkmay play an important role in the regularization of informal finance. Thethesis points that the current main problems of P2P lending are its unclearnature, lack of regulatory, difficulty with controlling business risk andlack of investor benefit protection mechanism, and those of micro-creditcompanies are flaws of regulatory system and limited source of funds.In the end, the thesis analyzes America’s, Japan’s and China Taiwanarea’s experience on regularizing informal finance, and proposes somemeasures on regularizing China’s informal finance based on theirexperience and China’s actuality. Firstly, we shouldimprove thelegislation and regulation on informal finance, including revision ofexisting laws and regulations system and introducing Law of InformalFinance. Secondly, we shouldpromote the formalization and regularization of informal finance and one way to complete the task is tohelp some informal financial organizations develop into communitybanks, rural banks, micro-credit or P2P lending companies. Thirdly, weshould establish and improve a regulatory system of informal financewhich consists of CBRC, local government and industry self-disciplinesystem. Fourthly, we should establish informal financial risk managementmechanism, including market access system, withdrawal mechanism andrisk early-warning system.