Journal of Financial Risk Management
2012. Vol.1, No.2, 21-26
Published Online June 2012 in SciRes (
Copyright © 2012 SciRes. 21
The Analysis of the Participation of Private Capital in Rural
Financial Institutions
Based on the research in Wenzhou, C hin a
Jun Zhuo1, Yingrui Huang2, Riqun Ni1
1Zhejiang University, Hangzhou, China
2China Agricultural University, Beijing, China
Email: {zju-zhuojun, huangyingrui2011}
Received March 14th, 2012; revised May 10th, 2012; accepted June 5th, 2012
As one of the world’s largest country, agriculture plays a significant role in China and financial support is
of great important in modern agriculture. This paper is mainly based on the survey about the funds de-
mand and funds supply of rural financing, focusing on the existing problems and obstacles of the current
financing, the will, the tendency, the way and the path selection of private capital owners in Wenzhou to in-
vest rural financial institution, as well as investment risk evaluation and management may meet measures.
Keywords: Wenzhou; Rural Financing; Private Capital; Informal Finance; Indirect Investment
Informal finance is active in rural China and actually it occu-
pies a large proportion. In recent years, new-type rural financial
institutions such as village banks, as well as informal financial
institutions such as small loan companies, Fund Mutual Coop-
erative are in growth. The growth is accompanied with some
problems, in particular, the shortage of funds. On the other hand,
as the GDP in China is experiencing a dramatic increase, the
accumulation of private capital is lager and lager. Take Wen-
zhou City, Zhejiang Province as an example. Wenzhou has been
a center for private economy for a long time. Since China’s
Reform and Opening up, Individuals and private corporations
in Wenzhou has accumulated a large sum of social wealth. In
2010, Private capital in Wenzhou has reached to 600 billion
In 2010, the State Council in China issued the file “The
Opinions on Encouraging and Guiding the Private investment
to develop healthily”, which released various incentive policies
and measures to enable private capital entered the financial
industry more easily. With this opportunity, private capital in-
vests in financial institutions has become a trend, this will leg-
islate the informal finance, and restructure composition of pri-
vate investment, thus make a contribution to the stability of
financial market. Additionally, farmers will have an easier ac-
cess to financial support. So guiding the private capital invest-
ing into the rural financial organization is a “win-win” for pri-
vate capital owners, rural financial organizations and farmers.
The body of this paper is divided into three parts, the first
part is the introduction of investigation objects and methods;
the second part is the results and analysis of survey, from funds
demand and funds supply respectively; in the last section, sug-
gestions are given based on the analysis of the research for
investor and government. For investors, the suggestion is the
possible investment paths, as for government, the suggestions is
mainly about the policy and financial support.
Investigation Objects and Methods
We chose Wenzhou as researching place. Wenzhou has been
a center for private economy for a long time. Since China’s
Reform and Opening up, individuals and private corporations in
Wenzhou had accumulated a large sum of wealth. By the end of
2010, private capital in Wenzhou has reached to 600 billion
In this research we used simple random sampling and typical
survey. The survey was carried from two sides: borrowers such
like people in charge of professional agriculture cooperation
firms and some individual farmers and investors such like peo-
ple in charge of private capital investment service centers.
Charts 1 and 2 below are some information of the investigation
Research Findings and Analysis
Resear ch on Farmers
Following Table 1 is the illustration of the farmers’ demand
for funds. Different types of firms and farmers have different
requirement for funds according to its own needs.
One conclusion we can draw from the Table 1 is that fi-
nancing needs varied according to the categories of farming and
scales, however though difference, the major available ways for
financing are informal and further findings are presented below.
Farmers’ Financial Demands Are Hardly Met by Formal
Financial Institution
Agricultural firms and Specialized Cooperative are vulner-
able to market impacts and lagged behind in agricultural tech-
nology. The construction and maintenance of farming and ser-
vice infrastructure requires more fund supplies. 22% of the
farmers interviewed claimed to get adequate funding in their
fund-raising, most of them claim to get just a fraction of fund
they need (41%) or nothing at all (37%).
Chart 1.
Investigation objects-farmers.
Chart 2.
Investigation objects-o w n ers of private capital.
Table 1.
The categories of demand for funds of agricultural entities in Wenzhou.
Categories of borrower Main reaso ns of finance dema n d Available ways for financin g
Common farmer Living expe nses, loan demand for
small-scale planting Micro-credit, private loa ns, private lenders, government
anti-poverty funds
Farmer who do
traditional far ming loan demand for small-scale
farming Self-owne d money, microfinance, private lenders and some
small business co-operatio n credit institutions
Farmer and rural
cooperatives Specialized
farmer Farmers engaged in
large-scaled farming loan demand for Specialized,
large-sca l e production Self-owned money, commercial loans and private lenders
Micro company Loan demand for sta r ti ng business
and expand i ng the market Self-owne d money, microfinance, private finance, venture
capital, commercial loans, policy-oriented finance
Company with certain scale Loan demand for expanding the
market Self-owned mone y, commercial loans, venture capital
In early stage Self-owned mone y, commercial loans, venture capital, fina ncial
support from government, policy-oriented finance
company In mature stage
Loan demand for specialization
and expansion Self-owned mone y, commercial loans, venture capital
Copyright © 2012 SciRes.
In addition, the numbers of conventional financial institu-
tions (Commercial banks, credit unions) is far from enough to
satisfy the need of farmers. The amount, time-structure, borrow-
ing procedure, borrowing cost and collateral terms of the con-
ventional financial institutions fail to meet the needs of farmers
correspondingly, especially for those newly start-up farmers.
20% of the interviewees complain the biggest trouble they have
to overcomeis to get the loan from formal finance institutions,
and 44% find it difficult to get a loan. Th e proble m s are:
1) Strict criteria f o r fund i ng
The findings which presented in Chart 3 shows that farmers
need to put on collaterals (54%) or have guarantors in order to
get a loan from commercial banks or credit unions. Strict loan
requirements increase the difficulty to get access to loans and
restricted the farmers obtaining loans from banks and credit
union to an extent.
2) Complicated Procedures
36% surveyed said that procedures for getting loans from
commercial banks and credit unions are “too complex”, and
41% chose the level “complicated”. The reason is presented in
Chart 4.
3) High Financing cost
The majority of respondents thought that the lending rates of
banks and credit unions are too high (21%) or high (43%). In
addition, up to 83% of respondents pointed out that it required
additional costs to get loans from formal financial institutions
for obtaining loans. For example, sometimes farmers have to
bribe the officer with gifts or treat them dinner.
Many agricultural companies complaint that in order to have
access to formal financial institutions, they need to do to go to
the institutions several times, which takes they a lot of time and
energy, resulting in the increase of time and economic costs of
the companies.
These additional costs are, to some extent, keeping some
farmers away from the formal institutions. Some interviewees
complaint that even did they eventually got the access to loans,
the amount of loans received might be halved, this is may lay in
the reason that the financial institutio n s ’ c a u t i o n a b o u t t h e risk .
4) Loan period can’t meet the demand
68% of those surveyed said that the loan period could not
meet the needs of production and operation. Many respondents
said that considering the cost of capital, the will to get the loan
as soon as possible and the underestimation of risk and uncer-
tainties during the business process make the loans could not
fully meet the demand for a longer period. 54% of those sur-
veyed said that they could not repay loans in time. At the same
Credit guaranteeOther people's guaranteeproperty mortgage
Chart 3.
Conditions of getting loans from banks a nd c r e d i t un i o n s .
time, 57 percent of respondents said that sometimes people re-
borrow funds to pay the loan. In fact, many agricultural compa-
nies have to conduct lots of loans. Especially due to limitation
of the size of credit, they have to borrow many times for a cer-
tain amount of money, which no doubt increase financing costs
a lot.
Informal Financial Institutions Is Welcome
Chart 5 are existing financing channels for farmers and the
ratio, from which we can see that as formal financing institu-
tions cannot well meet farmers’ demands, informal ones en-
joyed more popularity. Some reasons are presented in the
Chart 6. In addition, 78% of interviewees expressed that, they
are looking forward eagerly to more new financing channels
which can better fit their needs.
Research on the Owners of Private Capital
These interviewees are owners of private capital who were
interested in investing in rural finance. What we find in the
interview are as follow s :
Intentions of Investment in Rural Finance
According to Chart 7, most of those surveyed are interested
in investing in rural financial institution especially the new-type
rural financial institutions such like micro-credit companies,
venture capital and private equity funds as they think those
new-type institutions are suppose to be more operational flexi-
bility and have the ability to address the problem of asymmetric
information and f i n a n c i a l management efficiency.
Withdraw and Transfer Mechanisms
The majority of respondents believe that the withdrawal and
transfer mechanisms are very important for private capital to
enter the agricultural sector. 72% of those surveyed were wor-
ried about the liquidity of financial investment in rural areas is
too slow, which result in a high investment risk and restrain
enthusiasm to invest. A considerable part of investors want to
improve the conversion flexibility, in particular, to establish a
good platform for equity distribution and a trading market of
property rights.
Risk in Policy Environment
At present there are still some problems in rural financial
development such as the bottleneck of land resource. Agricul-
tural policy may affect the confidence of private capital inves-
tors. In addition, policy for investment in rural financial institu-
tions nowadays was not catering for the investors.
In the survey, 24% said that currently the investment project
provided by government is not clear, 47% said that the invest-
ment information is far from enough. Previously the access to
investment information mainly rely on personal relationships,
but this result is limited. Therefore, a higher credit investment
platform in badly needed to play the role of linking investors
and investment projects.
Investment Paths for Private Capital Owners
New-type rural financial institutions including rural banks,
Copyright © 2012 SciRes. 23
Chart 4.
Reasons of the difficulty for getting loans form formal institutions.
Chart 5.
Financing channels for fa r mers.
safeconvinenceflexible interest
rates and period
credit loan
propo ration
Chart 6.
Reasons of why farmers prefer lending from informal financial institutions.
small loan companies and other non-formal financial institu-
tions etc. are easy to get access and have relatively flexible in-
terest rate, term and fewer restrictions that meet the demand of
farmers. On the other hand, we can see that the owners of pri-
vate capital have an optimistic view on the outlook of the de-
velopment of rural finance. Private capital entering the new
financial institutions is conducive to the effective funds flow
and optimized allocation of resources. What we can draw to an
conclusion is that private capital’s entering rural financial or-
ganization is a “win-win” for private capital owners, rural fi-
nancial organizations and farmers. Below we gave some sug-
gestion of several ways for private capital entering the rural
Copyright © 2012 SciRes.
Chart 7.
Intentions of investme nt in rural finance.
financial system.
Participate in Creating or Shareholding in the New Type of
Rural Financial Institutions
For owners of private capital, investing from the set-up state
of in the new type of rural financial institutions such as town
bank, microfinance companies, the credit guarantee companies
and agricultural insurance companies means the investor can, as
co-founders, engage in the decision of regular management,
Private capital’s entering into this area means a lot. Firstly, it is
a great complement to capital; Secondly, social influence, espe-
cially the influence of some large private capital owners can
bring in many other potential investors; Thirdly, the rich man-
aging experience of these investors can effectively improve and
enhance the operational efficiency of the new type of rural fi-
nancial institutions. Hengsheng Village Bankin Wenzhou Yong-
jia County is a successful example. Founded by Ouhai rural
cooperative banks, Yongjia County rural credit union and 21
rural credit cooperative enterprises, Hengsheng Village Bank
has a great performance since its establishment.
Participate in the Reform of Rural Credit Cooperative
Banks, Shareholding Agricultural Cooperative or Rural
Commercial Bank
Private capital shareholding the agricultural cooperative or
rural commercial bank on one hand can be the supplement of
the lack of capital, on the other hand, through the clearing-up of
the original shareholders and the entry of new blood, capital
constraint can be strengthen. Many new capital owners have
high quality which can help the banks optimize the structure of
property rights and the management of banks.
Participate in Creating Agricultural Venture Investment
Funds and Agricultural Industry Investment Funds
The previous investigation and analysis have shown that up
to 31% of respondents will invest in private capital of private
equity venture fund. The advantages are flexible investment op-
tions (44%), Management (42%), more controllable risk (36%).
Private capital can cooperate with government, banking and
financial institutions, enterprises, institutions and individuals to
create professional private equity investment fund. Multi-joint
strength will help to integrate the advantages of the different
Policy Sugges t i ons
Through government have released various incentive policies
and measures to enable private capital entered the financial
industry, there are still something need to be improve. In the
research, the private capital owners call for some policy reform,
details are shown in the Chart 8. According to the appeals, we
gave some of our suggestions on policy.
More Preferential Taxation and Support Subsidies
Due to the underdeveloped investing environment in rural
areas, government should give more incentives for private
capital entering the rural financial institutions. More encour-
agements, whether material or non-material, should be given to
some of the pioneers thus more investors would be willing to
invest in this area which most of them are not familiar at all. As
for farmers, more preferential taxation and support subsidies
will in the end benefit them as the cost of the investors cut
down so does the financing cost of farmers.
Risk Guarantees Should Be Given
As mentioned before, investing in the rural financial systems
can be risky, which hider many private capital owners from
entering this area. Government, to some extent, should shoulder
part of the responsibility through establishing government-
based loan guarantee institutions or funds, providing insurance
subsidy for loan default and so on.
Less Restrictions
The government should regulate, ease the circulation of rural
land use and new financial institutions regulatory restrictions
such as the shareholding ratio and establish a good circulation
platform and property right trading equity market, guide and
regulate industrial and commercial capital to invest in modern
In all, to ensure the sound development of the market, on one
hand government should encourage competition and innovation,
speed up the reformation and attract more private capital into
the rural financial market to support modern agricultural de-
velopment, on the other hand government should guide and
standardize the market order, introduce more support policies to
ensure that participants are able to obtain a reasonable return on
investment. In addition, the survey expressed the hope that local
Copyright © 2012 SciRes. 25
more Tax
policy support
expand the
range of
speed up the
reform of
Credit Unions
Chart 8.
Appeals for reform of rural financial institutions.
government should reduce administrative intervention of finan-
cial organizations and strict control seizing resources from the
rural financial market.
Han, J. (2009). Research on rural finance in China. Shanghai: Shang-
hai Yuandong Press.
Joseph, E. S., & Andrew, W. (1981). Credit rationing in markets with
imperfect information. The American Economic Review, 71, 393-
Li, J. H., Hu, X. L., & Yang, J. C. (2009). Views on forum for rural
finance in China. Rural Finance Ressarch, 66-69.
Liu, L. L., Yang, S. Q., & Jiang, P. (2010). Report on rural finance
development in China. Beijing: Tsinghua U n i ve rsity Press.
Ouattara, K., & Claudio, G.-V. (1998). Microfinance apex organiza-
tions in West Africa: The case of Benin. Case Study for the
CGAP-OSU Project on Microfinance Apex Mechanisms, Columbus,
OH: The Ohio State University.
Tang, M. (2007). Modern agricultural are in need of rural finance.
China Industry News.
Townsend, R. (1994). Risk and insurance in village India. Economet-
rica, 62, 539-591. doi:10.2307/2951659
Yang, J. C., Jiang, C. L., Han, J., & Zhang, Y. Y. (2009). Views on
forum for rural finance in China. Rural Finance Ressarch, 66-69
Copyright © 2012 SciRes.