For the Motion |
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Authors: | Wing Thye Woo |
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Institution: | 1. Brookings Institution, Washington DC , USA and University of California , Central University of Finance and Economics, China, Davis , Beijing , USA wtwoo@ucdavis.edu |
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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. |
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Keywords: | informal finance interest rate credit constraint income disparity rural China |
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