
Contents
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China's Financial Market Segmentation China's Financial Market Segmentation
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Transactions, Financial, and Physical Cost Model Transactions, Financial, and Physical Cost Model
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Survey Methodology Survey Methodology
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The Average Firm The Average Firm
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Number of Informal and Formal Loans Number of Informal and Formal Loans
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Transactions, Financial, and Physical Costs Transactions, Financial, and Physical Costs
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Number of Loans Number of Loans
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Interest Rates Interest Rates
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Time to Obtain Loan Time to Obtain Loan
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Physical Costs—Threat to Life and Livelihood Physical Costs—Threat to Life and Livelihood
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Presence of Collateral Presence of Collateral
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Possibility of Assets Being Seized Possibility of Assets Being Seized
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The Power to Seize Assets The Power to Seize Assets
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Implications of Study Implications of Study
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Policy Recommendations Policy Recommendations
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Conclusion Conclusion
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Notes Notes
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References References
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7 Chapter 7 Is Informal Finance Faster, Cheaper, and Better than Formal Finance? A Study of Small and Medium Enterprises in Shanghai and Nanjing
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Published:August 2009
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Abstract
This chapter compares informal and formal finance in terms of the costliness of obtaining and keeping loans, finding that formal finance should be preferred by firms that are better credit risks. Informal, or non-bank, finance, is used frequently by most small- and medium-sized enterprises (SMEs). This is not necessarily because it is better than formal, or bank, finance, but often because it is the only means of financing available, since the formal sector remains plagued by lending constraints. The chapter compares informal and formal finance in terms of transaction, financial, and physical costs, based upon a study performed in the cities of Shanghai and Nanjing. It is found that informal finance is not necessarily faster, cheaper, and better than formal finance. In fact, for firms that are good credit risks, it is less attractive than formal finance due to its higher interest rates.
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