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Formal Credit Constraint and Prevalence of Reciprocal Loans in Rural China

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  • Zhao Jianmei

    (Central University of Finance and Economics, Beijing, China)

Abstract

The unique feature of the rural credit market in China is the dominance of zero collateral and zero-interest reciprocal lending and its long-term coexistence with the formal loan. This paper investigates the association between formal credit constraint and prevalence of reciprocal loans in rural China. Based on the identification of rural households’ credit constraint status, we examine the effects of credit constraint on the utilization of informal reciprocal loans. We find that formal credit constraint significantly increases rural borrowers’ reliance on reciprocal loans, whereas the “debt of gratitude” imposes an uncertain obligation on rural borrowers, and discourages them from borrowing amongst relatives and friends.

Suggested Citation

  • Zhao Jianmei, 2021. "Formal Credit Constraint and Prevalence of Reciprocal Loans in Rural China," Open Economics, De Gruyter, vol. 4(1), pages 1-13, January.
    • Handle: RePEc:vrs:openec:v:4:y:2021:i:1:p:1-13:n:1
    DOI: 10.1515/openec-2020-0110
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    References listed on IDEAS

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    More about this item

    Keywords

    credit constraint; reciprocal loan; debt of gratitude; sample selection;
    All these keywords.

    JEL classification:

    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy; Animal Welfare Policy

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