Research On The Credit Enhancement Of Farmer Cooperatives Based On Members’ Formal Financing

A hot theme of rural finance research has been the difficulties of farmers’formal financing. Since the implementation of industrialization of agriculture, a many innovations of organizations to solve farmers’financial constraints have emerged in China’s rural areas, especially the ability of farmer cooperatives to promote the farmers to obtain loans, which is most important reason for this study. Farmer cooperatives are one of the most important organizations in the form of agricultural industrialization, which have the main function of providing service for its members. This paper extend financial functions of farmer cooperatives organizations, from organization functions of agricultural industrialization to intermediary function of rural financial market and from providing economical services to financial services for its members. Therefore, this study has great significance for easing farmers’formal financing constraints, improving the utilization efficiency of farmer cooperatives, and enhancing the comprehensive ability of farmer cooperatives.This paper discussed the credit enhancement for members during their formal financing activities by farmer cooperatives based on the field survey of 123 farmer cooperatives and 574 members in five provinces (Anhui, Shandong, Zhejiang, black, Sichuan). The research is divided into three issues:(1) why farmer cooperatives can enhance credit? (2) How do farmer cooperatives enhance credit for their members? (3) How to increase the degree of credit enhancement of farmer cooperatives?This paper explained the mechanism of credit enhancement of farmer cooperatives theoretically. Before receiving loans, farmer cooperatives are financing information transmitters, which will reduce asymmetric information between financial institutions and members and reduce transaction costs. On the other hand, they are supervisors to ensure compliance with contracts after receiving loans, which use reputation mechanism and its connected transaction to establish effective constraints, thus reduce transaction uncertainty expects of financial institutions.By inductive analysis of credit enhancement patterns in practice, the paper discussed how farmer cooperatives enhance credit for their members. According to whether assume joint obligation of members’loan repayment, the patterns of credit enhancement can be divided into three categories: sub-loan pattern, assuming joint obligation pattern, as well as not assuming joint obligation pattern. It found that there are differences in the degree of credit enhancement of farmer cooperatives, which mainly due to the design of interest joint mechanism. The degree of credit enhancement is different with differences in interest joint mechanism. Interest joint between cooperatives and the members closely is more conducive for members to obtain formal financing.Based on the quantifying valuation of degree of credit enhancement of farmer cooperatives and empirical research on the results of credit enhancement, the paper discussed how to increase the degree of credit enhancement of farmer cooperatives.In empirical research part, the paper built "credit enhancement ability" index system of farmer cooperatives and estimated the values of influence on credit enhancement of sample cooperatives using second-order factor analysis of structural equation model. It then built members’formal financing model with path analysis of structural equation model, which incorporated the influence of credit enhancement. Based on this model, the paper examined the effects of credit enhancement. The results indicated that credit enhancement of cooperatives played a positive role in the availability of members’formal financing. However because of the members’ heterogeneity, the positive role is more obvious for board chairman and core members. Therefore, this paper proposed suggestion for strengthening credit enhancement through building close interest joint mechanism.