Informal Finance Research Articles

Does industrial agglomeration curb corporate carbon emissions? A perspective of financial constraints

This paper investigates the impact of industrial agglomeration on corporate carbon emissions in China. We measure the extent of industrial agglomeration utilizing distance-based continuous spatial measurement, differentiating between the quantity and scale of agglomeration. Using a panel of 7895 firm-year observations from 2007 to 2019, our findings indicate that regional industrial agglomeration contributes to a reduction in carbon emissions for firms located within those regions. Specifically, this reduction is primarily achieved through the alleviation of corporate financial constraints. We demonstrate that industrial agglomeration facilitates firms in accessing informal finance (e.g., trade credit) more effectively than formal finance (e.g., bank loans). Additionally, we find that the effect of industrial agglomeration on reducing carbon emissions is more pronounced for firms with higher environmental responsibility, while it is diminished in regions with greater marketization. The carbon reduction effect is also more significant for heavily polluting firms and those situated in areas with stricter environmental regulations. Furthermore, our study reveals that the implementation of green credit policies may weaken the carbon reduction effect of agglomeration by limiting access to financial resources. The robustness of our main results is confirmed through the Bartik-IV test and other robustness checks. Taken together, our findings suggest that industrial agglomeration can effectively lower corporate carbon emissions by easing financial constraints, offering valuable insights into strategies for enhancing corporate environmental performance.

A Study of the Impact of Informal Finance on the Urban-Rural Income Gap - Evidence from China

ABSTRACT As a supplement to formal finance, informal finance has helped SMEs and rural areas overcome financing constraints. Utilizing China’s provincial data from 2004–2019, this study examines the influence of informal finance on the income disparity from a supply-side view. This Study revealed that informal finance is regionally heterogeneous and has the effect of narrowing the income gap between urban and rural areas, and manifests itself by accelerating the transfer of labor and the accumulation of physical capital, which is obvious in eastern China.

Dataset on Financial Literacy, Financial Inclusion, Informal Financial Business Practices, and Intentions towards Formalization of Female Small Vendors in Lima, Peru

Abstract This article presents findings from a survey conducted in Lima, Peru, aimed at understanding the relationships between education, financial literacy, financial inclusion, and informal financial business practices among small female vendors. The study, which collected 118 valid responses, focused on the impact of these factors on vendors’ intentions toward formalization. Formality was assessed based on legal registration with tax authorities, emphasizing the informal practices viewed on a continuum. These practices were evaluated using a five-point gradation scale that depicted varying levels of formality. Financial literacy, financial inclusion, and formalization intentions were measured using a five-point Likert scale, while a dichotomous question captured the formality-informality of the businesses. The demographic variables included age, gender, business tenure, employee count, and business activity. Educational level, typically treated as demographic, was considered an antecedent to financial literacy. The dataset linked to this study included raw survey data. It serves as a valuable resource for researchers, industry representatives, public authorities, and stakeholders from developing countries to deal with informality and formalization. The survey methodology and data are adaptable for use in different national contexts, facilitating comparative analysis in developing countries.

Colonial Legacy and Informal Finance

An influential line of research emphasizes that colonial legacy plays a key role in formal financial development. Can colonial legacy also shape informal finance? We investigate the impact of colonial legacy on informal financial development using a manually georeferenced data set within a credible empirical framework. In the 19th century, Europeans arbitrarily designed colonial borders that partitioned many ethnicities across multiple countries in Africa. Leveraging several spatial regression discontinuity designs across national borders and within British-French–partitioned Cameroon and a unique natural experiment where the same former British colony is compared with two otherwise similar areas with different exposures to French colonization, we discover that former British colonies today have better informal financial development than former French colonies. Exploring the channels, we find that places with a British colonial legacy maintain a style of social control that facilitates information flow, supports private enforcement and market interactions, and promotes strong legal cultures. This paper was accepted by Kay Giesecke, finance. Funding: C. Lin acknowledges the Research Grants Council of Hong Kong for financial support [Grant AoE/B-704/22-R]. J. An acknowledges the general financial support from The University of Hong Kong Start-up Fund for New Professoriate Staff. M. Tai acknowledges the Research Grants Council of Hong Kong for financial support [General Research Fund No. 17500722]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.01856 .

The Role of Fintech and Its Influence on Transforming Retailers from Informal Financial Sector to Formal Financial Sector

The Role of Fintech and Its Influence on Transforming Retailers from Informal Financial Sector to Formal Financial Sector

Financing practices of labeled startups

The research investigates the formal and informal financing practices utilized by labeled startups in Algeria, emphasizing their essential role in economic development. Despite the recent dynamism observed in the Algerian startup ecosystem, these enterprises face substantial growth challenges due to limited access to financing, a critical factor for their success. To address this issue, a study was conducted involving 129 owners of labeled startups as of June 2023, employing a questionnaire for data collection. The data were analyzed using descriptive statistics and multivariate logistic regression. The findings confirm the prevalence of personal financing/love money as the dominant source of funding, with venture capital also identified as a significant financing method. Additionally, 28% of startups resorted to informal financing practices due to inadequate bank financing and difficulties in accessing other funding sources. The study also reveals that support structures have no significant impact on startup financing. This research provides valuable insights into the financing challenges faced by labeled startups and offers directions for future, more comprehensive research.

Digital Financial Development, Financial Service Participation and Residents' Entrepreneurship

Abstract This paper analyses the impact of different forms of financial participation on residents' entrepreneurial choices by defining different forms of lending based on CHFS 2019 data. The study finds that: (1) Both single and compound forms of participation can have a significant positive impact on residents' entrepreneurial choices, with the compound form of participation having a relatively higher boosting effect than the single form of participation; (2) Among the single forms of participation, internet loans have the smallest promotion effect, indicating that the role of digital finance is still to be explored, while private loans have the largest promotion effect; (3) Among the composite forms of participation, the form without bank loans has the lowest facilitation effect, indicating that bank loans are highly important for residents' choice of entrepreneurship; (4) Heterogeneity analysis reveals that financial services participation has a more significant contribution to entrepreneurial activity among low endowment households, both in single and composite forms of participation. This paper argues that the supporting role of formal finance should be strengthened, the development of informal finance should be reasonably guided, and the financial literacy of households should be further enhanced to bring into play the inclusive role of digital finance. JEL classification numbers: H20, H30, H81. Keywords: Digitization of financial institutions; Financial services participation; Digital finance; Internet lending; Entrepreneurial activity.

Customers’ blockchain adoption and suppliers’ provision of trade credit: A pre-registered report

China gravitates strongly towards a digitized economy. Given that many Chinese firms heavily rely on informal financing access, such as trade credit, we seek to investigate whether and how this increasing digitization, particularly blockchain technology, impacts suppliers' trade credit provision. We argue that if blockchains facilitate information transparency and corporate profitability, suppliers should be incentivized to grant more trade credit to customers using blockchain technology. Otherwise, suppliers should have reservations about providing trade credits to firms that have adopted blockchain technology if it increases the likelihood of illegal activities and poses information leakage risk from cyberattacks. As a further analysis, to the extent that blockchain technology may impact customers' credit quality, we explore the effects of customers' blockchain usage on suppliers' receivable financing through securitization. Overall, this study aims to investigate the potential association between blockchain technology and supply chain financing in China.

Influencing Factors of Financing Constraints of Micro and Small Enterprises (MSEs) in China: A Risk Information Conveyance Perspective

Given the phenomenon of “financing is difficult and expensive” for MSEs, this paper empirically investigated the influencing mechanism of the credit demand side characteristics on the financing constraints of MSEs based on the information conveyance perspective. The conclusions show that MSEs in China are severely suffering from financing constraints and 57.17% and 50.00% of MSEs with credit demand have not applied for loans from formal and informal financing channels, respectively. In terms of enterprise characteristics, MSEs have low asset size, short establishment history, weak profitability, and lack of tools such as fixed assets, complete financial management system, professional technicians, and private brands to convey risk information to financing institutions, which are key factors resulting in their financing constraints. In terms of owner characteristics, young owners lack financing experience and convey higher risk information to financing institutions; therefore, owners’ age negatively influences the financing constraints of MSEs. These findings suggest that banks can use big data credit technology as a tool to obtain risk information about MSEs, and the government should implement diversified interventions to improve the information environment in financial markets. These findings provide empirical evidence for banks and governments to address the financing constraints of MSEs.

‘One System, Two Shadows’: A local public finance perspective on China's shadow banking system

Why does shadow banking persist in China despite repeated policy efforts to contain it? While studies of informal finance have traditionally emphasized the credit needs of private businesses as a demand-side explanation, this study contends that China's local public finance also constitutes an important driver for shadow banking. Based on document research and administrative data, we find that China's shadow banking system has bifurcated into two segments since the Global Financial Crisis (GFC). One is the ‘entrepreneurial shadow’ that has long provided informal credit to the private sector, especially small- and medium-sized enterprises. The other is a ‘fiscal shadow’, which serves property developers and local government financing vehicles (LGFVs), the two pillars of China's land-based local public finance regime. Property developers are major contributors to local fiscal revenues through the land economy, while LGFVs function as off-balance sheet backdoor financing intermediaries for local governments.Although localities have borrowed from unconventional sources throughout the reform era, the central government's GFC stimulus plan marked a turning point by fueling a debt-financed real estate and infrastructure construction boom. Property developers and LGFVs were launched onto a highly leveraged model of feverish expansion for over a decade. When the central government abruptly reversed its course by restricting the availability of formal credit, they became further entangled into the fiscal shadow for refinancing. Local public finance has thus become reliant on shadow banking, despite subsequent policy efforts to curb such activity. Our findings suggest the need for a more integrated analytic and regulatory framework that recognizes the mutual dependence between shadow banking and local debt – two major sources of systemic financial risks in China.

Shaping entrepreneurship in developing countries: the role of savings and credit groups

ABSTRACT In this study, we analyse savings and credit groups (SCGs) to investigate whether belonging to these groups contributes favourably to entrepreneurship. SCGs are community-based groups that represent a form of informal finance in developing countries. For the analysis, we adopt the social embeddedness theory, and test our hypotheses on a unique sample of respondents to a survey in Kenya finding a positive relationship between SCGs and the creation of new ventures. The results show that the levels of education and wealth are positively associated with the likelihood of creating a new venture, but SCG membership negatively moderates these relationships. Thus, the benefits of SCG membership are larger for less-educated and less-wealthy individuals that can offset, at least in part, the disadvantages related to these low levels. Finally, to provide insights for future research and policy, we focus on the group characteristics associated with the likelihood of creating new ventures.

Reflections and perspectives on accessing informal finance and social capital

Learning outcomes After completion of the case study, students will be able to identify and discuss ways in which informal financing of the kind discussed in the case study can provide new or different opportunities for access to alternative financing schemes; assess the role of“social capital” in micro and small business development and to understand and apply the role of social capital for female entrepreneurs in the Global South; critically analyse and reflect on the new role of digital technologies in challenging traditional patriarchal social norms and exclusion and ultimately be able to evaluate the role of digital technologies in terms of its practical implications for female entrepreneurs; and understand the role played by socio-cultural and historical contexts in female-owned/managed businesses within informal sectors of the economy. Furthermore, the students should be able to discuss how these contexts provide opportunities or challenges for actionable/robust/relevant business plans for female entrepreneurs. Case overview/synopsis This case study aims to create a platform for classroom conversations around: context of entrepreneurship in informal economies, challenges of accessing finance, women entrepreneurship, opportunities of digital entrepreneurship and resource acquisition and social capital. Overall, this case study intends to inspire and cultivate additional voices to advance authentic understanding of informal business practices in the financial sector that go beyond traditional formal western settings. This case study is based on a true story relating to the “sou-sou” financing system – an informal financing scheme – originating from West Africa which has been transported to other parts of the world including Latin America and the Caribbean (LAC) and other parts of Africa. The characters involve Maria, the main protagonist; Eunice, from LAC; and Fidelia from West Africa. With first-hand information from Eunice and Fidelia, Maria learnt about the ideological principles and the offerings of flexibility, trust, mutual benefits and kinship of the sou-sou system and was inspired to integrate digital technologies as a sustainable game changer for accessing microfinance. This case study draws on the contextual understanding of the economy in the Global South as well as the gender-based aspects of entrepreneurship as key aspects of women entrepreneurship and digital entrepreneurship. The sou-sou system is presented as a practical solution to the challenges faced by women entrepreneurs in the Global South to access finances, and the integration of digital technologies is considered instrumental not only in reinforcing the traditional system but also in transforming the entrepreneurial prospects for these women. Complexity academic level This teaching activity is aimed at postgraduate students in Master of Management and Master of Business Administration programmes. It can also be used for short executive courses, specialised PhD seminars and advanced bachelor programmes. This case study could be taught in the field of entrepreneurship in areas related to technology, gender, women entrepreneurship and financing in the context of the Global South. Supplementary materials Teaching notes are available for educators only. Subject code CSS 3: Entrepreneurship.

Repercussions of Reliance on Informal Sources of Finance: A Study of Tribal Communities in Kerala

The economic and social consequences of reliance on informal finance are enormous in the case of socially and economically disadvantaged people like the tribal communities. These communities have become more financially vulnerable due to the severe barriers in accessing institutionalised formal finance. Drawing on data collected from 246 randomly chosen households from four tribal communities (Kurichya, Kuruma, Adiya and Paniya) in the Wayanad district of Kerala, and using mixed-method approach, the study seeks to examine the repercussions of reliance on informal source of finance by the tribal communities. The study reveals that the agents of informal financiers also resort to social demoralising and mental harassment towards the tribal households. The study shows that tribal households may not be aware of compounding effect of interest rates when they avail credit from any source of finance, especially informal finance. This in turn increases the indebtedness among the tribal communities. All these call for the need of tailoring institutional (formal) credit solutions suitable to the credit needs and socio-economic conditions of the weaker segments of the society like the tribal communities. The study suggests adopting supply-side cum demand-side strategies.

Impact of microfinance on income generation: Evidence from a rural community‐driven development programme in Myanmar

AbstractThis paper evaluates the impact of a rural community‐driven development programme in Myanmar, which promoted village‐level microfinance for income generation. Utilizing a three‐round household survey consisting of 100 treatment and 50 comparison villages with approximately 8500 households per round, we employ difference‐in‐differences and two‐stage least squares estimations. Our analysis shows three key findings. First, the programme significantly increased access to microfinance, primarily for production. Second, formal and informal finance were substituted in part with village‐level microfinance. As a result, treated households were less likely to borrow money from formal banks or informal lenders such as their relatives, friends or neighbours. Third, the village‐level microfinance nudged rural households to harvest, yield and sell their products more, which led to increase in seasonal income. Our study suggests that microfinance targeted for productive investment can significantly improve income of rural households in developing economies.

The clan and informal financing in China: An analysis of the trickle-down effect

This study investigates the impact of clans on a household's informal financing. Using data from the China Family Panel Studies (CFPS), we find that clans significantly promote informal financing; a series of robustness checks verify this result. We further demonstrate that clans motivate affluent households with a collectivist ethos to lend, thus aiding households facing liquidity constraints in entrepreneurship, mortgage repayments, and medical expenses. However, our findings indicate that poor households do not benefit from clans, reflecting the proverb “help the starving but not the poor.” We confirm the indispensable role of clans in informal financing through analyzing the development of formal finance and population outflows. Our results clarify the relationship between clan culture and informal financing in contemporary China.

Theoretical Perspectives on Social Relationships in Informal Financing

Theoretical Perspectives on Social Relationships in Informal Financing

Inclusive Finance for SMEs in Pakistan: A Supply-Side Perspective

Objective: Inclusive finance aims to escalate the access and usage of financial services among SMEs and individuals as well. Therefore, it is mainly concerned with efforts towards financial inclusion, which means easy access and usage of a wide range of affordable financial products and services by everyone, provided by a variety of sound, responsible, and sustainable financial institutes. In Pakistan, SMEs face severe issues towards access to formal finance and bound to meet their financial needs by using informal finance. This study aims to highlight the supply-side factors impacting SME's access to finance in Pakistan. Methodology: This quantitative research has been conducted in the five big cities of Punjab province. By using a stratified sampling technique SMEs from three main sectors have been included in this study manufacturing, services and trading. Findings: In line with prior research study concluded that for inclusive growth and development, provision of resources, favourable policies and regulatory reforms, financial and other national institutions, international bodies support can bring significant change in the status of SMEs in Pakistan. Implications: Current study will be helpful for policy makers and financial institutions to formalize their structure and strategies to facilitate SMEs in Pakistan.

Financial Funding for Small and Medium-sized Enterprises (SMEs)

The purpose of this paper is to provide a comprehensive understanding of SME funding issues and promote more inclusive and sustainable funding approaches for SMEs. The method used in this paper is qualitative by looking for papers derived from existing journal literature within ten years, looking for findings or results related to variables in this paper. Discuss results and findings from the literature found. The results of this paper after being presented in the form of a conclusion that makes contributions related to the field of finance. SMEs have an important role to play in African economies, but they often struggle to access formal financial services. Informal finance is becoming the preferred choice in some situations. Recommendations include building a regulatory framework, increasing linkages between the formal and informal financial sectors, and leveraging financial technology (FinTech) for financial access. Financial inclusion and risk management of SMEs are also important. This conclusion highlights the role of SMEs and the financial challenges that must be overcome to support economic growth.

Exploring the impact of formal and informal finance on green innovation under the lens of carbon neutrality.

In order to reduce environmental deterioration and promote sustainable growth, green innovation-which includes ecologically friendly technology and practices-has become a top priority of policymakers worldwide. This research investigates how formal and informal finance affects green innovation in highly polluted high, middle-, and low-income economies, using data spanning from 2007 to 2021. For analyzing the empirical link between formal finance, informal finance, and green innovation, we have employed the 2SLS and GMM estimation techniques. The primary estimates of the analysis suggest that formal and informal funding methods significantly impact environment-related technologies in high-income and middle- and low-income nations. Moreover, the GDP, carbon emissions, trade openness, human capital, research and development, financial stability, and digital finance are essential factors in promoting environment-related technologies in high-, middle-, and low-income nations, respectively. The policymakers in both groups of countries should foster collaboration between the formal and informal sectors to promote green innovations, which is essential for achieving sustainable development goals.

Does household welfare change with finance access? The case of women and the youth in The Gambia

AbstractPoor access to finance remains one of the key challenges faced by households and businesses in The Gambia in the face of an underdeveloped financial market. Yet, women and the youth are further disadvantaged as they are reported to face peculiar challenges in finance access, in spite of efforts taken by different stakeholders, including the government. Therefore, this study examines the impacts of various forms of finance on welfare for these marginalized groups by supporting quantitative analyses of the Integrated Household Survey data with some qualitative information. Adopting Lokshin and Sajaia's (2004) endogenous regime switching estimator, due to the nonrandomness of access to finance, the study finds that women households significantly benefit from informal finance through improved food consumption expenditure, and from formal finance through improved income amidst a growing business culture. For the youth, estimates of treatment effects show that informal finance is significantly welfare‐degrading, but formal finance improves almost all measures of welfare. The results reveal, among other things, variations in efficiency and risk attitudes in the use of various forms of finance by the different subpopulations, calling for interventions that increase the level of knowledge and consumer protection.