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Formal versus Informal Finance - Essay Example

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Formal versus Informal Finance
Over the past two years, experts in matters of finance as well as economists have always identified China as a counterexample to the results found in research in the growth and finance literature…
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Download file to see previous pages 18). This discourse delves into the firm financing patterns and growth in China. In the end, the paper finds that very few firms as well as companies rely on formal banks to finance their business, leaving most of them to depend on informal sources to drive up capital for their businesses. Furthermore, the author of this paper discovers that although, few businesses rely on formal sources of finance, such sources are responsible for faster growth of a business company compared to informal sources of finance. Some of the vices identified are corruption. However, there was no evidence to prove that such a vice affected the allocation of credit to firms from the financing institutions. It also did not affect the performance of the business both in the market and in terms of profit making. This paper presents a counter argument on the positive relationship between finance and growth using China’s economy as a case study. Analysis of the Relationship between Finance and growth Economists concur on the fact that China has the fastest growing economy in the world. The Chinese economy has gained significance that no other economy can ignore its rate of growth. Pundits believe that the Chinese economy will surpass the size of the US economy by the time we get to the third decade of the current century (Yao & Yueh, 2009, p. 40). Professionally though, its per capita income level will remain very low compared to that of the United States. In some other quarters experts dismiss this predictions as misleading citing various facts. The strength of the China’s economy for instance, appears in its manufacturing sector that is so far challenging manufacturing sectors in advanced economies around the world. This is profound especially in economies that are labor intensive (Angelina, 2008, P. 76). China is also undertaking a top-down approach while entering the high technology industry. This means that the rate at which such an economy accelerates is high and will hit its peak very soon. The growth of technology receives maximum support form high-level research by a large of scientists as well as engineers finishing their undergraduate and postgraduate courses. China is an essential counterexample to findings in various fields among them institutions, law, growth of literature, and finance (Pagano, 1993, p. 619). This is despite the fact that it has very poor financial systems and legal structures. Its economy defies all these to become the fastest growing economy in the world (Patnaik, 2011, p. 33). A lot of information from scholarly articles in the field of law and finance demonstrates that the growth of formal financial institutions relates closely to a faster growth of business organizations in addition to enhancing better allocation of resources (Yu, 1998, p. 79). Literature from these articles also considers the value and input by informal financial systems in the development of economies from developing economies. Informal financing as defined in the scholarly literature entails small, shorter, and unsecured loans. These sources of finance are restricted to the rural areas, households, agricultural financing and contracts, small entrepreneurial engagements, and individuals. The loans target the lower cadre of the market within the developing economies (Hsieh & Klenow, 2009, p. 21). The same appears in the developed economies but takes a different approach. In the US for instance, ...Download file to see next pagesRead More
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