Financial Literacy and Formal Credit Accessibility: Evidence from Informal Businesses in China

There is a sizable informal business sector in emerging markets. This paper investigates informal businesses’ accessibility to formal credit in China and their owners’ financial literacy as a potential determinant. By examining informal businesses in urban areas from the 2015 China Household Finance Survey, we find that business owners’ financial literacy is positively associated with the likelihood of their businesses holding bank loans. This positive relationship only exists among businesses whose owners have rural hukou, and it is more pronounced in areas where formal-credit accessibility is lower.