‍A case study of “internalization paradox” of rural micro finance

GAO Jun1 LIU Yahui1 WEN Tiejun1

(1.School of Agricultural Economics and Rural Development, Renmin University of China)

【Abstract】On the basis of reviewing the previous studies, this paper puts forward that the development dilemma of rural micro finance is due to “double paradoxes.” the first paradox is the “legalization paradox,” and the second is the “internalization paradox.” The former is mainly reflected in the system efficiency decline of informal micro finance which has high system efficiency after “normalization,” and the academia has fully discussed about this; the latter is formed against the realistic background that the “elite capture” feature of the farmers’ cooperative organizations and government welfare policy are gradually strengthened. This paper takes the capital mutual department of Z Cooperatives as an example to conduct a case study. It is concluded that the cooperative micro finance organization can only internalize transaction costs. It can only convert the risks into the institutional risks of organizational disintegration because of the inability to internalize the external risks. Finally, this paper puts forward the policy suggestion of breaking “double paradoxes” through the organizational innovation and institutional innovation based on the reconstruction of cooperative system.

【Keywords】 legalization paradox; internalization paradox; external risk; internalization transaction; organization discretization;


【Funds】 Key Project of the Beijing Municipal Social Science Foundation (15FXA003)

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    [1]. ① See Shao (2010). [^Back]

    [2]. ① Under the dual structure of urban and rural areas, the rural financial market does not have complete market competition conditions due to the high information asymmetry, which is also impossible to simply rely on the efficient allocation of resources of the market to solve the problems such as the inconvenient deposits and difficult loans of the farmers, thus the “market failure” appears. [^Back]

    [3]. ② Since the financial “new deal,” the government has adopted a number of support policies to promote the development of micro finance in rural areas, but the problems in rural finance cannot be solved fundamentally because of the lack of the inclusiveness of the policy itself and the inconsistency of the target between the decision-making body and the executive body, thus the “government failure” appears. [^Back]

    [4]. ③ Any external subject including the government, companies and public welfare organizations must have the problem of high transaction cost when accessing to local society. These external subjects often choose to work with the elites in the village to solve the problem, thus forming the stable collusive relations between the external subjects and the elites in the village. The ordinary peasant household is basically forced to be in the position of “marginalization,” and the village elites gain most of the benefits by mastering the control right of the organization and the residual claim, which is called the “elite capture.” [^Back]

    [5]. ① See Zhang et al., (2010). [^Back]

    [6]. ② The CBRC Interim Provisions on the Administration of Village and Township Banks article 25th stipulates that: the largest shareholder or sole shareholder of a village bank must be the banking financial institution; the shareholding ratio of the largest shareholder of banking financial institution shall not be less than 20% of the total share capital of the township bank; the shareholding ratio of a single natural person shareholder and affiliated party shall not exceed 10% of the total capital of the township bank; the shareholding ratio of a single non-bank financial institution or the legal person of a single non-financial institution and affiliated party shall not exceed 10% of the total capital of the township bank. [^Back]

    [7]. ③ Here the “marginalization” means the state of emerging of itself and perishing of itself without the formal approval of the local financial supervision department, and being unable to possess the national credit endorsement as well as to enjoy the rural financial policy support of the government. [^Back]

    [8]. ① The information about the mutual department of Z Cooperative used in this article comes from the field survey of our research group. [^Back]

    [9]. ① Among which, one of the information service offices in Village TB was revoked, and there are two main reasons. The first is that the lender is responsible for spending an additional cost of more than CNY 20,000 for renting the place of business and for hiring the staff; the second is that the deposit and lending enthusiasm of the lender is not high, and the deposit performance and loan performance are poor, which is not enough to cover the operating costs of the service. [^Back]

    [10]. ① One of them is both the shareholder and the lender of the information service office. [^Back]

    [11]. ① The loan interest (1.35 cents per month) of the mutual department is about 3.5 times of the interest of mutual funds (which is equivalent to deposit interest, 3.7 thousandth of a yuan per month). After a preliminary estimate, once the proportion of idle capital exceeds 2/3 of the total capital, the interest spreads income of the mutual department will tend to zero. [^Back]


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This Article


CN: 11-3586/F

Vol , No. 06, Pages 2-11+96

November 2016


Article Outline


  • 1 Introduction
  • 2 Problem analysis: the current development difficulties of micro finance resulting from “double paradoxes”
  • 3 Case introduction: the “internalization paradox” of cooperative micro finance
  • 4 Policy implications: the organization innovation and system innovation based on cooperative system to break the “double paradoxes”
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