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Formal and Informal Credit Markets and Rural Credit Demand in China

Author

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  • Tang, Sai
  • Guan, Zhengfei
  • Jin, Songqing
Abstract
Credit markets are an essential economic institution. In developing countries, particularly in countries undergoing rapid social and economic transition, it is important to identify emerging credit demand and institute credit supply in a timely manner to facilitate economic transformation. This research focuses on the evolving rural credit market in China, where borrowing from the social network has been common but the recent economic transition has made this informal credit market inadequate in addressing rural credit needs. This research is aimed at identifying the social and economic factors that explain the farmers’ credit constraint and influence farmers’ decisions to switch from informal to formal credit markets. Using data from a household survey, we estimated both binary choice probit models and a multinomial probit model to explore the determinants of credit market choice and credit constraints. We found that the credit demand is significantly affected by household’s production capacity as supported by the fact that household size, land size, head’s education all significantly increase household’s probability to borrow, but the impact of these factors varies considerably by credit market. Transaction costs have a significant, negative effect on formal credit demand. The credit constraints analysis suggest that off-farm employment, land size and the cost of the credit are the three most important factors that increase the probability of being constrained.

Suggested Citation

  • Tang, Sai & Guan, Zhengfei & Jin, Songqing, 2010. "Formal and Informal Credit Markets and Rural Credit Demand in China," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61339, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea10:61339
    DOI: 10.22004/ag.econ.61339
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    References listed on IDEAS

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    2. Hoff, Karla & Stiglitz, Joseph E, 1990. "Imperfect Information and Rural Credit Markets--Puzzles and Policy Perspectives," The World Bank Economic Review, World Bank, vol. 4(3), pages 235-250, September.
    3. Anjini Kochar, 1997. "Does Lack of Access to Formal Credit Constrain Agricultural Production? Evidence from the Land Tenancy Market in Rural India," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(3), pages 754-763.
    4. Kochar, Anjini, 1997. "An empirical investigation of rationing constraints in rural credit markets in India," Journal of Development Economics, Elsevier, vol. 53(2), pages 339-371, August.
    5. Lin, Justin Yifu, 1997. "Agricultural Development and Reform in China," 1997 Conference (41st), January 22-24, 1997, Gold Coast, Australia 135409, Australian Agricultural and Resource Economics Society.
    6. Feder, Gershon & Lau, Lawrence J. & Lin, Justin Y. & Xiaopeng Luo, 1991. "Credit's effect on productivity in Chinese agriculture : a microeconomic model of disequilibrium," Policy Research Working Paper Series 571, The World Bank.
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    Cited by:

    1. Liqiong Lin & Weizhuo Wang & Christopher Gan & David A. Cohen & Quang T.T Nguyen, 2019. "Rural Credit Constraint and Informal Rural Credit Accessibility in China," Sustainability, MDPI, vol. 11(7), pages 1-20, April.
    2. Zibei Chen & Minchao Jin, 2017. "Financial Inclusion in China: Use of Credit," Journal of Family and Economic Issues, Springer, vol. 38(4), pages 528-540, December.
    3. Campero Alejandra & Kaiser Karen, 2013. "Access to Credit: Awareness and Use of Formal and Informal Credit Institutions," Working Papers 2013-07, Banco de México.
    4. D’Agostino, Anthony L. & Sovacool, Benjamin K. & Bambawale, Malavika Jain, 2011. "And then what happened? A retrospective appraisal of China’s Renewable Energy Development Project (REDP)," Renewable Energy, Elsevier, vol. 36(11), pages 3154-3165.
    5. Yusuf Ibrahim Kofarmata & Shri Dewi Applanaidu & Sallahuddin Hassan, 2016. "Determinants of Demand for Credit: A Conceptual Review," Asian Journal of Economics and Empirical Research, Asian Online Journal Publishing Group, vol. 3(1), pages 6-10.
    6. Louis Atamja & Sungjoon Yoo, 2021. "Credit Constraint and Rural Household Welfare in the Mezam Division of the North-West Region of Cameroon," Sustainability, MDPI, vol. 13(11), pages 1-19, May.
    7. Wittawat Hemtanon & Christopher Gan, 2020. "Microfinance Participation in Thailand," JRFM, MDPI, vol. 13(6), pages 1-27, June.
    8. Liqiong Lin & Weizhuo Wang & Christopher Gan & Quang T. T. Nguyen, 2019. "Credit Constraints on Farm Household Welfare in Rural China: Evidence from Fujian Province," Sustainability, MDPI, vol. 11(11), pages 1-19, June.
    9. Odu, O.O. & Okoruwa, V.O., 2013. "Effect of Credit Constraint on Profit of Small Scale Rice-Based Farmers in Niger State, Northwestern Nigeria," 2013 Fourth International Conference, September 22-25, 2013, Hammamet, Tunisia 161649, African Association of Agricultural Economists (AAAE).
    10. Odu, O. O. & Okoruwa, Victor O. & Adenegan, Kemisola O. & Olajide, A. O., 2011. "Determinants of Rice Farmer’s Access to Credit in Niger State, Nigeria," Journal of Rural Economics and Development, University of Ibadan, Department of Agricultural Economics, vol. 20, pages 1-13, June.
    11. Moumita Basu & Ranjanendra Narayan Nag, 2018. "Dualism, exchange rate, and employment: a structuralist model," Indian Economic Review, Springer, vol. 53(1), pages 287-310, December.
    12. Yusuf Ibrahim Kofarmata & Abubakar Hamid Danlami, 2021. "A micro-level analysis of the intensity of agricultural finance supply in Nigeria: empirical evidence," SN Business & Economics, Springer, vol. 1(1), pages 1-17, January.

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    Keywords

    Agricultural Finance; Farm Management;

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