-
Formal versus Informal Finance:Evidence
from China
Meghana
Ayyagari
，
Asli Demirguc-
kunt
，
V
ojislav
Maksimovic
The World Bank Development
Research Group
Finance and Private
Sector Team
Policy Research Working
Paper
，
2008
China
is often mentioned as a counterexample
to the findings in the finance and growth
literature since,
despite the
weaknesses in its banking system, it is one of the
fastest growing economies in the world. The fast
growth
of
Chinese
private
sector firms
is
taken
as
evidence
that
it
is
alternative
financing
and
governance
mechanisms that
support China's growth. This paper takes a closer
look at firm financing patterns and growth
using
a
database
of
2,400
Chinese
firms. The
authors
find
that
a
relatively
small
percentage
of
firms
in
the
sample
utilize
formal
bank
finance
with
a
much
greater
reliance
on
informal
sources.
However,
the
results
suggest that despite
its weaknesses, financing from the formal
financial system is associated with faster firm
growth, whereas
fund
raising
from
alternative
channels
is
not.
Using
a selection
model,
the
authors
find
no
evidence
that
these
results
arise
because
of
the
selection
of
firms
that
have
access
to
the
formal
financial
system.
Although firms report bank corruption, there is no
evidence that it significantly affects the
allocation of
credit or the performance
of firms that receive the credit. The findings
suggest that the role of reputation and
relationship
based
financing
and
governance mechanisms
in
financing
the
fastest
growing
firms
in
China
is
likely to be
overestimated.
Financial
development
has
been
shown
to
be
associated
with
faster
growth
and
improved
allocative
the research focus has been on formal
financial institutions, the literature has
recognized the
existence
and
role
played
by
informal
financial
systems,
especially
in
developing
dominant
view
is
that
informal
financial
institutions
play
a
complementary
role
to
the
formal
financial
system
by
servicing
the
lower
end
of
the
market
，
informal
financing
typically
consists
of small,unsecured,
short
term
loans restricted
to rural areas, agricultural contracts,
households,individuals or small entrepreneurial
ventures.
Informal
financial
institutions
rely
on
relationships
and
reputation
and
can
more
efficiently
monitor
and
enforce
repayment
from
a
class
of
firms
than
commercial
banks
and
similar
formal
financial
institutions
ing
to this view however, informal financial systems
cannot substitute for formal financial systems
because their monitoring and
enforcement mechanisms are ill-equipped to scale
up and meet the needs of the
higher end
of the market.
Recently,
studies
have
emphasized
the critical
role
played
by
informal
networks
and
financial
channels
even in developed
markets. Guiso, Sapienza and Zingales (2004) show
that social capital affects the level of
financial development acrossdifferent
regions of Italy and is particularly important
when legal enforcement is
weaker and
among less educated people who have limited
understanding of contracting mechanisms. Gomes
(2000)
investigates
why
minority shareholders
invest
in
IPOs
in
environments with
poor
investor
protection