The persistence of informal finance

Regardless of regime type, most developing countries face the challenge of providing credit to lower-income portions of their rural populations (Bouman and Hospes 1994; Hoff, Braverman, and Stiglitz 1993). China and India are no exceptions. Due to perceived deficiencies in the formal financial system, in both countries the state has attempted to alleviate rural poverty by establishing government microfinance programs. Even with such programs, however, small business owners and farmers in both China and India rely primarily on curb market finance. Indeed, in some cases, the scale of informal finance actually increases in communities targeted with more official credit. One of the reasons that even an expanded supply of formal finance is insufficient to meet demand is because state policies are seldom implemented properly. Furthermore, the reality of segmented credit markets at the local level means that government microfinance programs often fail to reach their intended clientele. Developmental outcomes often deviate from state intentions due to complex political and economic dynamics at the local level.