Informal lending amongst friends and relatives: Can microcredit compete in rural China?

This paper explores the relationship between informal and formal lending in China with consideration of how the strength of informal lending might affect microcredit. Lending relationships involving trust are investigated using original survey data from over 1500 farm households. Econometric results confirm a relationship between trust and informal lending, and mistrust and formal lending. With over 67% of farm households borrowing from friends and relatives the economic significance between this form of informal lending and borrowing from Rural Credit Cooperatives and Micro Finance Institutions cannot be overlooked.