Informal Financial Market Research Articles

The Importance of the Informal Financial Market for Rural Development Financing in Developing Countries: The Example of Pakistan

The informal credit market is of crucial importance in the rural areas in Pakistan, even after decades of considerable development of formal credit organisations and of subsidised credit programmes by the government. This is due mainly to the fact that informal credit relations are embedded in the economic, political, and social interaction networks of the inhabitants in the rural areas. These interaction networks also maintain the direct credit costs and the transaction costs at a low level. However, the national development policy underestimates or even negates the significance of the informal financial market. Here, political action is required for initiating change.

Does "lottery culture" affect household financial decisions? Evidence from China.

In recent years, China's "lottery culture" has developed vigorously. Moreover, the investment participation rate of Chinese families in the formal financial market is low, whereas that in the informal financial market is high. Is there a certain relationship between "lottery culture" and family financial decision-making? If so, what is the underlying mechanism? Based on the 2017 CHFS data and lottery sales data of provinces, this study explores the impact of "lottery culture" on household participation in the formal and informal financial markets and the diversity of household financial portfolios. Results show that "lottery culture" can impede household participation in the formal financial market and the diversity of household financial portfolios while promoting household participation in the informal financial market in China. Furthermore, we analyze two channels of "lottery culture" impacts on household financial decisions: (1) risk attitude and (2) human capital. Results illustrate that "lottery culture" can influence household financial decisions by increasing risk tolerance and reducing the human capital of households.

Banking Competition and Households’ Informal Financing: Evidence from China Household Finance Survey

ABSTRACT This study explores the relationship between Chinese banking industry competition and Chinese households’ informal financing behavior. Using the China Household Finance Survey and bank branch data, this study uniquely provides insight on the so-called Chinese growth miracle, despite its underdeveloped formal financial system. Its results suggest that banking competition significantly impacts informal financing adoption, and that householders choose informal financing when they are formally financially constrained. This study has significant implications for policy makers as formal financing systems engage with the existing informal financial market, suggesting that policy makers should endeavor to balance and regulate this relationship.

The Interrelated Impacts of Credit Access, Market Access and Forest Proximity on Livelihood Strategies in Cambodia

Livelihood diversification strategies for households in developing countries are influenced by access to financial credit, to markets and to forests. Understanding their interrelated impacts has important implications for development policy, including for market access, credit provision, and forest conservation. Using a two-round panel survey of 2,417 households in 64 villages in four Provinces in Cambodia and geospatial analysis, we analyze the influence of formal and informal financial credit, market and road access, and forest access on livelihood diversification strategies. Using econometric techniques to control for interrelated effects, we find credit utilization is significant with off-farm business and wage livelihood activities, land transactions, livestock activities, and remittances. Households below the poverty line use credit primarily for consumption and agricultural investments, but above the poverty line for business investment or for buying land, houses, or vehicles. Market access is significant with total income and expenditures, as well as portfolio shifts to off-farm business and wage activities. Forest access contributes significantly to both total income and expenditures in multivariable regressions controlling for credit and market access, and we find evidence that poverty alleviation is maximized when households have both high forest and market access. We do not find that, in aggregate, households near to forests are in a “poverty trap” due to market remoteness, but we do find that they are disadvantaged in pursuing agricultural livelihoods and households with both low forest and market access are poorest. Using the technique of dominance analysis, we find that financial credit contributes more than market or forest access to total income, expenditures, and livestock income. However, market access is more important than credit for off-farm, on-farm and crop incomes. Forest access contributes more to total income than road access when controlling for access to Phnom Penh and is more important than credit for crop livelihoods.

Smallholder Food Marketing Behaviour

Many farmers in Africa sell their produce at low prices immediately after harvest because they need cash. They could solve temporary liquidity constraints by use of credit and store their produce to sell when prices are high. However, due to various reasons such many poor farmers have been excluded from formal financial services. In response, the informal financial market has expanded, but the question why informal credit has not facilitated storage to enable farmers benefit from intertemporal arbitrage opportunities remains largely unanswered. To answer this question, we investigate the role of informal credit markets and traders in stabilizing seasonal food crop prices. Our analysis is based on a household survey data, and in-depth interviews with key players in the informal credit market and grain traders in rural southwestern Uganda. We find that community-based self-help savings and credit associations provide credit for the majority (62%) of farmers. Informal credit still excludes the very poor and is not sufficient to enable farmers benefit from intertemporal arbitrage opportunities. Thus, poor farmers continue to ‘sell low and buy high’. The study also addresses a related fundamental aspect of food marketing: why is there no competition between traders bidding up prices after harvest and eliminating seasonal price fluctuations? We analyse traders’ costs and profit structure in the study area, and shed some light on imperfections in the grain market and the barriers that limit competition between traders. We find that grain trade is not highly competitive. High transaction costs and limited access to credit are the main barriers limiting competition. Supporting community-based self-help savings and credit associations to raise their portfolio can enable more farmers to borrow at the same time. Investing in infrastructure, organising and supporting small scale farmers to bulk their produce might lower transaction costs, promote competition and dampen price fluctuations.
 JEL Classification: D53, O13, O16, Q12, Q13

Social networks and informal financial inclusion in China

Using the 2011 China Household Finance Survey (CHFS) database, we explore the heterogeneous impacts of social networks on informal financial inclusion for Chinese urban and rural households. We find that social networks significantly increase the probability of households’ participation in the informal financial market, augment the size of informal financial transaction, and raise the ratio of informal lending over the total household assets. We also identify the mechanisms through which the social networks affect households’ participation in the informal financial market. By reducing information cost, perceived risk and precautionary saving, social networks play a larger role for urban households than rural households. Notably, the effects of social networks on informal finance are strengthened with the development of formal financial market.

Social Networks and Informal Financial Inclusion in the People's Republic of China

Using the 2011 China Household Finance Survey (CHFS) database, we explore the heterogeneous impacts of social networks on informal financial inclusion for urban and rural households in the People’s Republic of China. We find that social networks significantly increase the probability of households’ participation in the informal financial market, augment the size of informal financial transactions, and raise the ratio of informal lending to total household assets. We also identify the mechanisms through which social networks affect households’ participation in the informal financial market. By reducing the information cost, perceived risk, and precautionary saving, social networks play a larger role for urban households than for rural households. Notably, the effects of social networks on informal finance are strengthened by the development of the formal financial market.

Family structure and home ownership: Evidence from China

This paper studies how individuals, particularly low-income individuals, have financed housing purchases since the housing market was privatized in urban China in the 1990s. To the surprise of many policy makers and economists, more than 80% of the households in urban China owned private housing by the end of 2010. In contrast to most developed countries, we find that male siblings are important borrowing resources to purchase housing. Conditional on the number of siblings, having more brothers instead of sisters increases the probability of owning housing among male individuals born during the baby boom (1949–1978) in urban China. However, there is no such brother effect for females. The brother effect is stronger for males with low income or low levels of education and is also stronger when brothers are wealthier. Our results are robust to different model specifications. Our results suggest that females are likely to be excluded from family-based informal financial market for housing purchase among baby boom generations in China.

Access and use of financial markets for basic education expenses

As a result of the financial crisis of 2008, the macroeconomic adjustment has affected Mexican homes through greater unemployment and a drop in purchasing power. Moreover, families had to keep financing education costs, sometimes going into debt in the formal or informal financial market. The hypothesis of this article proposes that the access and use of formal and informal financial products makes it possible to reduce financial problems associated to education expenses at the basic education levels. The probit model is estimated with a sample comprised of four hundred homes in the municipality of San Pedro Cholula (state of Puebla). The results indicate that a worsening in the work conditions and the loss of employment are associated to a greater probability of facing financial difficulties. Likewise, the access to the formal financial market allows reducing the probability of facing these difficulties, whereas for the informal market the results are a function of the characteristics of each financial intermediary.

Acceso y uso de los mercados financieros para el pago de los gastos de la educación básica

The aftermath of the 2008 financial crisis and the macroeconomic adjustment that followed provided higher unemployment and eroded the Mexican households’ purchasing power. Though, families had to continue financing education expenditures, sometimes borrowing in the formal or informal financial market. The hypothesis of this paper posits that access and use of formal and informal financial products can reduce the financial problems associated with basic school private expenditures. The probit model is estimated through a sample of four hundred households drawn from the municipality of San Pedro Cholula (state of Puebla). The results indicate that a worsening of working conditions and sudden unemployment are associated with an increased likelihood of difficulties in making ends meet. Moreover, accessing the formal financial market lessens the likelihood of such problems, but for the informal counterpart results depend on the characteristics of each financial intermediary.

Banks versus Informal Financial Institutions: An Investigation into Financial Services by Households in Ghana

Banks have continued to close their rural branches whiles setting up new urban branches in Ghana. Some studies have concluded this trend is due to reorientation towards serving big businesses in urban areas. Numerous informal financial institutions have also emerged at the same time in rural areas. These changes in the financial market are likely to affect the financial services available to households, their preference and demand for these services. Using the Ghana Living Standard Survey data, estimations from Tobit model show that the sources of financial services significantly affect the financial services obtain by households. Conditional logit model results suggest when alternatives are available, rural households are more likely to obtain their financial services from the informal financial market. Pooled cross-section estimations indicate the demand for financial services by households is changing overtime. These results suggest banks are being competed out of business in the rural areas by informal financial institutions leading to their continued closure of rural branches.

What determine the interest rates in China’s informal market?

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.

The anatomy of an informal financial market: Rosca participation in Taiwan

Little is known about informal financial markets in developing countries. This paper analyzes participation in rotating savings and credit associations using a national household survey from Taiwan. We find that participation is highest among high-income households. There is some evidence that income stability may play a role as well. Life cycle differences suggest a role in funding durables purchases. Our evidence indicates that roscas may be an alternative savings device to the formal financial sector.

INFORMAL RURAL FINANCE An Aladdin's lamp of information

Sociologia RuralisVolume 30, Issue 2 p. 155-173 INFORMAL RURAL FINANCE An Aladdin's lamp of information FRITS J. A. BOUMAN, FRITS J. A. BOUMAN *Department of Agrarian Law, Wageningen Agricultural University, The NetherlandsSearch for more papers by this author FRITS J. A. BOUMAN, FRITS J. A. BOUMAN *Department of Agrarian Law, Wageningen Agricultural University, The NetherlandsSearch for more papers by this author First published: August 1990 https://doi.org/10.1111/j.1467-9523.1990.tb00407.xCitations: 8 AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Citing Literature Volume30, Issue2August 1990Pages 155-173 RelatedInformation

Research on rural savings in India

Rural savings are determined by both “ability” and “incentives” to save. All except two studies reviewed emphasize “ability,” though some qualitatively analyse “incentives.” This relative neglect is justified when the positive substitution effect of the “incentives” is off-set by its negative income effect. Such “total” effect does not necessarily arise. “Incentives” variable can be incorporated in both cross-sectional and time-series models, as shown in the two exceptions. Past time-series estimates of rural savings are characterized by reporting, measurement, and analytical weaknesses. Some of these lead to underestimation of these savings. This, however, does not mean that all of the additional savings are mobilizable by the financial institutions. This is because rural households hold their savings in monetized as well as non-monetized forms. Moreover, some of the monetized savings are held in the form of physical assets. Thus, only those monetized savings which are invested in financial assets of the informal rural financial market (RFM) can be considered as potentially mobilizable by the financial agencies. Institutionalization of such savings would improve their efficiency by promoting better allocation among different areas, sectors, economic activities, and also to entrepreneurs. To identify appropriate policies, further literature may be developed by promoting and researching programmes with better rates of return on financial savings, besides those with opportunities to transact other businesses.