Imperfect Substitutes: The Local Political Economy of Informal Finance and Microfinance in Rural China and India

Abstract

Banking authorities in both China and India have attempted to limit most forms of informal finance by regulating them, banning them, and allowing certain types of microfinance institutions. The latter policy aims to increase the availability of credit to low-income entrepreneurs and eliminate their reliance on usurious financing. Nonetheless, the intended clients of microfinance continue to draw on informal finance in both rural China and India. This article argues that the persistence of informal finance may be traced to four complementary reasons––the limited supply of formal credit, limits in state capacity to implement its policies, the political and economic segmentation of local markets, and the institutional weaknesses of many microfinance programs.