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• W2056284920 abstract "Abstract The interest rate is one of the most important factors in farmers’ decision-making of borrowing and lending in the informal financial market in China. This paper explores the determinants of the interest rate with microfinance data. Results show that the income disparity, the relationship between borrowers and lenders, the usage of borrowing, and formal credit constraints are important factors affecting interest rates. More importantly, to borrow from those in the higher income hierarchy, farmers have to bear higher interest rates. We attribute this to different social capitals across income groups and higher default risks for the poor. This paper contributes to a better understanding of the informal financial market in rural China and sheds light on the mechanism of higher informal interest rate formation. Keywords: informal financeinterest ratecredit constraintincome disparityrural ChinaJEL Classifications: O16O12E26 Acknowledgement We would like to thank Qiang Gong, Weili Ding, Steven Lehrer, Zhao Rong, Lu Zheng, and Nico Heerink for their helpful comments. Special thanks to Dr. Yangru Wu for his valuable suggestions. Financial supports from ‘the Fundamental Research Funds for the Central Universities (No. JBK1207064)’ and ‘Project 211 (Phase III) Southwestern University of Finance and Economics (No.211QN2011052)’ are gratefully appreciated. All potential errors are our own. Notes 1. The formal financial system in rural China includes the Agricultural Bank of China, Rural Credit Cooperatives (RCCs), the China Agricultural Development Bank and the Postal Savings Bank of China. We use banks in the later text to refer to banks and RCCs in the system. 2. The informal sector includes private financial organizations, rural fund cooperatives and individuals or families. 3. The survey covers over 20,000 farmers in 31 provinces. 4. Although the data used in this paper have information on those lending out, however because of the randomly selected sample, we cannot observe the borrowers’ characteristics and match with the lender which will also have an effect on the interest rate. In addition, the borrower’s situation also has an effect on the judgment of lenders. The borrowing and lending rate are equal in equilibrium. Hence, we do not do an analysis based on the lending interest rate. 5. Gift spending is another major feature of social capital in rural China. 6. We divide the farmers in accordance with per capita net income into two groups in our data set. For the lower-income group, 36% of the households borrow for investment while for the higher-income group, 34% of rural households borrow for investment. A t-test shows that there is no significant difference between the two income groups (p-value = 0.54, t stat = 0.62). 7. Dufhues et al. (Citation2011) think that individual social capital cannot be ignored and it is problematic to treat group social capital as a whole. 8. We control demographics of the head of the household because the head of the household is usually the person who makes decisions in the household. 9. Other purposes, including buying a car, expenditures for weddings and funerals, daily consumptions are not reported in the Table due to very small proportions. 10. Since we cannot observe the type of the car, we cannot distinguish the specific purpose of the financing. We treat the purchase as consumption here. Less than 3% of borrowings are for this purpose, therefore, it has little effect on our estimation results. 11. A robustness check is performed to validate the combination, shown in Subsection 3 of Section 4. 12. The average income of borrowers is not significant in affecting the borrowing interest rate. One possible explanation is that lower-income farmers do not have many choices on from whom they might borrow. 13. For space considerations, the full set of estimation results are not reported. It may be provided upon request to the authors. 14. A t-test is performed for different income groups on the ratio of the borrowed amount over desired borrowing amount; p-value equal to 0.02 and t-statistic to 2.40." @default.
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• W2056284920 date "2013-07-29" @default.
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• W2056284920 title "What determine the interest rates in China’s informal market?" @default.
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• W2056284920 doi "https://doi.org/10.1080/14765284.2013.814459" @default.
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