Literature review Example | Topics and Well Written Essays - 2000 words

Literature review Example The Chinese government has legalised informal financing with the conditions that the money must not be raised from the general public and the maximum rate of interest must not exceed quadruple of the interest charged by formal institutions. Since ROSCAs typically fix the interest through bidding among the potential loan receivers, they exceed the interest limit of the government and are thus considered illegal and operate under cover (Chen, 2003; OECD Publishing,  2005; Li and Hsu, 2009). Informal lending institutions are officially allowed to charge much higher than formal lending institutions, which is why the cost of borrowing from such sources becomes very expensive. Judging by their resources and capabilities, this puts additional financial burden on private businesses. However, most of the loan applications by private businesses to banks and financial institutions get rejected primarily on grounds of absence of a previous credit history, sufficient collaterals and guarantee o f repayment. Thus, whereas formal lending institutions shy away from granting loans to private businesses, the credit crunch created due to non-availability of finance is being increasingly tended to by informal lenders. The article tries to get an insight into the financial system of China and analyses the dynamics of formal and informal financial institutions (Tanaka and Molnar, 2008). Research and Analysis The literature primarily wants to estimate the sizes of formal and informal lending markets, the criteria based on which loans are granted in each of these markets and the propensity of private businesses to borrow from the formal and informal lending institutions. To fulfil its objectives, the authors Kensuke Tanaka and Margit Molnar primarily use data from modified copy of a 2002 survey, conducted on 2500 private enterprises in China by the State Administration for Industry and Commerce, modified by Chinese University of Hong Kong in 2004 (Chinese University of Hong Kong, 200 4). Using the data, the authors have drawn a perspective of the finance industry of China as given below: Business size by sales (million ?) upto 1 1 to 3 3 to 10 10 to 20 20 to 50 more than 50 Businesses with borrowed funds 46% 57% 61% 64% 71% 58% Borrowings from formal lenders 14% 23% 28% 35% 44% 36% Borrowings from informal lenders 20% 18% 15% 12% 10% 8% Informal borrowings in products sector 23% 24% 20% 26% 9% 4% Informal borrowings in services sector 44% 35% 9% 12% 12% 9% The authors find that informal lenders are a significant source of finance for small private businesses, since formal lenders find them the riskiest due to unavailability of past credit history. Moreover, borrowing from informal lenders is more rampant in services sector than the products sector, chiefly because they have less tangible goods to keep as collateral. The authors compare the calculations with the findings of a survey conducted by Central Finance University that stated that the least developed area s of China (which coincidentally host the smallest private businesses) have the highest share of credit from informal lenders (Central Finance University of China, 2005). Next, the authors try to understand the