Governing Forest Rights Mortgage Loans Through Hybrid Governance: Institutional Innovation and Organizational Mediation in China’s Collective Forest Regions

Abstract

Forest Rights Mortgage Loans (FRMLs) have grown quickly in China’s collective forest areas, even though the basic conditions for this type of lending remain far from ideal. In many places, forest holdings are small and scattered, property rights are complex and not fully consolidated, and channels for disposing of collateral are limited. Under these circumstances, the Fulin Loan Model (FLM) in Fujian provides a useful case for understanding how forest-rights lending can still function in practice. Drawing on fieldwork, semi-structured interviews, and process tracing, this study explores both how the model was established and how it has been sustained over time. The analysis suggests that the FLM is neither a straightforward market-based lending tool nor merely a top-down policy arrangement. Rather, it relies on a more mixed form of governance in which local government support, banking procedures, and village-level social relations are brought together through specific organizational arrangements. These arrangements help lower the costs of early institutional experimentation, distribute and manage lending risks, and translate locally rooted trust into a form of credit support that formal financial institutions can recognize. As a single-case study, the FLM points to one possible way in which rural finance can be made workable under conditions of incomplete markets and strong social embeddedness.

1. Introduction

Governing forest finance under fragmented tenure conditions remains a central challenge in China’s collective forest regions. Forest Rights Mortgage Loans (FRMLs) have become an important policy instrument in China’s effort to reconcile ecological protection with rural development [1,2,3,4]. Their expansion in collective forest regions is nonetheless difficult to explain through the conventional logic of secured lending [5,6,7]. In standard credit markets, collateral supports lending because it can be clearly identified, valued, and, if necessary, disposed of at manageable cost [8,9]. Yet the institutional conditions in China’s collective forest areas are much less favorable. Forestland is often divided into small and scattered plots; relevant rights are layered, partially restricted, and not always easy to verify in practice; and markets for transferring or disposing of pledged forest rights remain thin or administratively constrained [10]. Under such conditions, lenders would normally face high information costs, uncertain collateral recovery, and elevated monitoring burdens, all of which should make the formation of stable lender–borrower relations difficult [11,12,13].

This puzzle can only be understood against the background of China’s collective forest tenure reform [1,14]. Forest resources occupy a significant share of national territory and remain closely tied to rural livelihoods and local development [15,16]. For a long time, however, these resources did not function as readily bankable assets. Ambiguous rights, weak collateral liquidity, and high transaction costs meant that regions rich in forest resources could still experience persistent shortages of formal credit [3,4,17]. The reform commonly described as the “Three Rights Separation”—distinguishing collective ownership, contract rights, and management rights—expanded the legal possibility of FRMLs by allowing management rights to be pledged [18,19]. Even so, the legal recognition of mortgageability has not automatically generated financial transactionability [20]. Forest fragmentation, restrictions on harvesting and transfer, and the absence of liquid secondary markets continue to complicate valuation, enforcement, and post-default disposal [3,4,17,21,22]. In this sense, formal reform may create a legal opening for forest-rights lending, but it does not by itself establish the institutional conditions under which such lending can scale and remain stable.

Since 2016, national authorities have sought to promote FRML development through improved rights certification, valuation systems, registration arrangements, and broader encouragement for rural lending [1,3,4,22]. By 2023, the national outstanding balance of FRMLs had reportedly surpassed RMB 130 billion [23]. Yet this growth has been highly uneven across regions. Some localities have been able to extend forest-rights lending on a substantial scale, whereas others have struggled to move beyond limited experimentation [24,25]. This variation is analytically important. If broadly similar legal reforms and policy signals produce sharply different outcomes, then formal policy support alone cannot explain why certain regions manage to stabilize FRMLs while others do not. A more convincing explanation must examine how local institutional arrangements, organizational capacities, and governance practices shape the actual operation of forest-rights lending.

The Fulin Loan Model (FLM) in Sanming City, Fujian Province, offers a particularly illuminating case. Sanming possesses abundant forest resources, but it also exhibits the structural constraints common to collective forest regions, including small average holdings and dispersed parcels. What makes the case distinctive is not the absence of these constraints but the way local actors reorganized lending around them. The FLM brings together rural credit cooperatives (RCCs), village-level forestry professional cooperatives, township forestry stations, and local government agencies in a layered arrangement through which screening, verification, monitoring, and parts of enforcement are redistributed across actors with different forms of knowledge and authority.

At the same time, this article does not present Sanming as a statistically representative case of China’s collective forest regions. Instead, it treats the FLM as a strategically chosen and relatively favorable case for theory-building. The value of the case lies in showing how forest-rights mortgage lending can be made workable when several supportive conditions are in place at once, including dense village governance networks, functioning cooperatives, prior experience with forestry reform, and sustained local administrative coordination. The purpose of examining this case is therefore not to make broad claims about all rural contexts but to identify the conditions and mechanisms that can support the operation of such a lending model.

The reported outcomes are notable. By 2018, more than 95 percent of eligible villages in Sanming had adopted the model, more than 10,000 loans had been issued, and the non-performing loan (NPL) rate was reported as zero at the time of model documentation [26] and remained zero within the villages covered by this study during the interview period (fieldwork conducted in August 2021). By 2023, the system had expanded to more than 1400 villages, provided credit lines to over 15,861 households, and sustained loan balances above RMB 17.8 billion [27]. These developments are notable because they were realized in a setting where standard collateral-based lending would ordinarily be expected to encounter severe obstacles.

This article examines how such a system becomes workable and how it is stabilized over time in a familiar-society setting where social relations, local authority, and administrative practices remain deeply intertwined. The analysis is organized around three related questions. First, how does the FLM establish an effective financial linkage between formal financial institutions and community-based organizations? Second, how do key participants—including RCCs, forestry cooperatives, village cadres, farmers, and government agencies—coordinate expectations and behavior within this arrangement? Third, what kinds of institutional innovation allow the model to lower transaction costs, contain credit risk, and transform locally embedded social relations into recognizable and enforceable credit support?

To address these questions, the study draws on fieldwork conducted in several counties of Sanming City, including interviews with RCC officers, cooperative leaders, forestry bureau representatives, and forest farmers, as well as direct observation and documentary analysis of loan files and policy materials. Analytically, the paper adopts a multi-actor and multi-level institutional perspective [28,29]. This perspective makes it possible to trace how formal rules, organizational routines, and community-based norms interact in the operation of forest-rights lending. The core argument is that the FLM should be understood not as a purely market-driven lending technology, nor as a simple extension of administrative intervention, but as a form of hybrid governance in which state coordination, financial discipline, and community-embedded authority are linked through concrete organizational practices [30]. The model does not solve the difficulties of collective forest finance through a single institutional remedy. Rather, it works by building an intermediary governance structure in which organizations situated between banks, villages, and local state agencies absorb uncertainty, redistribute responsibilities, and make socially embedded information usable within formal credit procedures.

Seen in this way, the FLM contributes to broader debates in political sociology, institutional analysis, and rural governance. Existing research has shown that market exchange under conditions of incomplete rights and high transaction costs often depends on organizational forms that can bridge formal rules and local practice [5,6,7,20]. The present case extends this insight by showing how such mediation operates in a domain where collateral is legally recognized yet economically difficult to mobilize. The effectiveness of the FLM does not derive from eliminating structural constraints but from reorganizing the institutional environment in which those constraints are managed. Through cooperative screening, village-based verification, administrative support, and bank participation, the model turns a structurally fragile lending field into one that is sufficiently governable for wider expansion across villages.

The article therefore makes a more modest claim. In collective forest regions, the viability of FRMLs depends not only on property-rights reform or supportive policy signals but also on the organizational arrangements that link formal financial institutions to local governance structures. By examining how this linkage was put together in Sanming, the paper shows how institutional innovation can emerge under conditions of incomplete markets and strong social embeddedness. The contribution of this case lies not in offering a model that can be directly replicated everywhere but in illustrating one possible pathway through which hybrid governance can make rural finance workable when supportive institutional conditions are in place.

2. Literature Review

Understanding the emergence and consolidation of the Fulin Loan Model (FLM) requires engagement with three closely related strands of scholarship: property-rights theory, the literature on rural credit rationing, and research on financial linkage mechanisms. These bodies of work differ in vocabulary and analytical emphasis, yet they converge on a shared problem: how economic exchange becomes possible in settings where rights are incomplete, transaction costs are high, and social relations are deeply embedded in everyday economic life. In China’s collective forest regions, where tenure arrangements, financial institutions, and village governance intersect, these studies provide an essential basis for explaining why hybrid governance arrangements such as the FLM can take shape.

2.1. Property-Rights Theory and the Institutional Preconditions of FRMLs

Property-rights theory offers a first entry point for examining the institutional conditions of forest finance [31]. In the classical formulation, clearly defined and enforceable property rights lower transaction costs and facilitate exchange [32]. Empirical research has also shown that more secure rights can increase asset values and strengthen incentives for investment [33]. Applied to land and resource governance, this perspective suggests that once rights become more explicit, resources should become easier to mobilize economically. Yet the Chinese collective forest tenure system complicates such a straightforward expectation [34].

The reform commonly described as the “Three Rights Separation” did not create fully individualized and freely alienable property rights. Instead, it differentiated collective ownership, household contract rights, and transferable management rights [1]. This reform was important because it widened the legal scope for mortgaging forest-related rights and created a more formal basis for forest-rights lending [18,19]. In principle, the reform also improved the institutional environment for FRMLs by promoting rights certification, clarifying tenure relations, and supporting the development of valuation procedures [35]. From a formal legal perspective, these changes appeared to move forest resources closer to becoming bankable assets.

However, the literature consistently shows that legal formalization alone does not remove the practical barriers to forest collateralization [17,36,37,38]. Collective forestland is often divided into small and scattered plots, which weakens the value and usability of individual parcels as collateral. Logging controls and harvesting quotas further reduce the liquidity of forest assets, while secondary markets for forest-rights transfer remain thin or constrained by administrative procedures [19,39,40]. Fujian, despite being one of China’s most important forest provinces, faces the same structural constraints. Small household holdings, fragmented forest plots, and limited transferability continue to restrict the financial use of forest rights, even after formal reform [1,4,40].

For this reason, more recent scholarship has moved beyond a narrow legal conception of property rights. In settings characterized by incomplete markets and strong community embeddedness, rights do not function independently of local governance structures [41,42,43,44,45]. Their practical significance depends on organizational capacity, social recognition, and credible enforcement [46,47]. The implication is that the viability of FRMLs cannot be explained by legal reform alone. It also depends on the institutional infrastructure through which rights are identified, verified, activated, and defended in practice [48,49]. This marks an important conceptual shift. Property rights matter not only as formal legal categories but also as resources that must be made operational through organizational processes [50,51,52]. In the case of the FLM, the gap between formal mortgageability and actual financial usability becomes precisely the space in which organizational mediation matters most.

2.2. Credit Rationing and the Structural Obstacles of Rural Lending

A second body of literature focuses on the persistent problem of credit rationing in rural financial markets. Building on the foundational work of Arrow [53] and Stiglitz and Weiss [54], this tradition argues that information asymmetry, moral hazard, and adverse selection generate structural limits on credit supply that cannot be resolved simply through higher interest rates [55,56]. Under such conditions, lenders often prefer to reduce or deny lending rather than price risk more aggressively. Rural borrowers therefore face not only higher borrowing costs but also restricted access to credit as such.

These issues become particularly acute in forestry finance. Forest production is shaped by long biological cycles, uncertainty in future timber value, and regulatory constraints on harvesting and use [5,57,58,59]. Together, these characteristics increase the cost of screening and monitoring while simultaneously weakening the enforceability of collateral [9,60]. From the lender’s perspective, forestry loans therefore combine several unfavorable features: slow capital turnover, uncertain repayment timing, and difficulty in recovering value when problems arise.

Research on China’s rural financial system strongly supports this view [61,62,63]. Existing studies show that forest farmers experience both price rationing and non-price rationing [4,64]. Some are excluded because interest rates, collateral demands, or related requirements exceed what they can bear. Others are excluded even when they are willing to borrow on the terms offered, because lenders judge forest-rights loans too costly or too risky to manage. A large body of research points to high transaction costs, weak valuation systems, and the dispersed character of forest assets as central reasons why financial institutions remain cautious [65,66,67]. Studies also indicate that the benefits of FRMLs are distributed unevenly across households [68]. Better-off households are generally more able to use forest assets to obtain credit, whereas poorer households often remain constrained by greater risk sensitivity and weaker bargaining positions [69,70]. In addition, emotional attachment to forestland and a strong endowment effect can reduce farmers’ willingness to mortgage forest assets, even when formal credit channels are available [35,71,72].

This literature suggests that the main difficulty lies not in the absence of demand alone, nor in a simple shortage of financial products. Rather, the problem is that formal finance struggles to govern risk effectively in a rural setting where information is dispersed, collateral is difficult to liquidate, and monitoring is costly [65,73,74]. Banks cannot easily rely on standard mechanisms of supervision or enforcement, and this reduces their incentive to innovate in forest-rights lending [3,4]. As a result, scholars increasingly argue that overcoming rural credit rationing requires more than technical adjustments to interest rates or loan design. It requires institutional arrangements that embed financial transactions in local governance systems [75,76]. This is why community-based organizations, social networks, and locally grounded enforcement mechanisms have become increasingly important in the literature: they provide forms of information, discipline, and coordination that formal lenders often cannot generate on their own [77,78,79].

2.3. Financial Linkage Theory and Hybrid Governance

Financial linkage theory offers the most direct bridge to the FLM. Rather than treating formal and informal finance as separate or competing domains, this literature explores how they can be connected in environments where formal markets alone function poorly. Early work by Bell [80], Floro and Ray [81], and Ghate [82] showed that local intermediaries—such as village leaders, rotating savings groups, and cooperatives—often possess advantages that formal institutions lack. They have access to soft information, can monitor behavior more closely, and are able to rely on social pressure or community sanctions where legal enforcement is weak. When formal lenders are linked to these local actors, some of the core governance tasks of lending—screening, monitoring, and repayment enforcement—can be carried out more effectively [83,84,85].

This perspective is especially relevant in the Chinese familiar-society context described by Fei Xiaotong [86]. In such settings, trust, authority, and reputation are deeply tied to long-term social relationships, kinship networks, and spatial proximity. Information relevant to creditworthiness is not always written down or easily standardized, yet it remains widely known within the community. This makes village society a powerful informational environment, even if that information is difficult for outside lenders to access directly. Existing studies of Sanming’s forestry cooperatives show precisely this pattern: cooperatives know members’ reputations and past behavior, understand local household conditions, and can invoke moral pressure and community accountability when needed [87,88,89]. Because they operate inside recognized village governance structures, their authority is often stronger than that of external financial actors acting alone.

Chinese scholarship extends this line of thinking by emphasizing that effective FRML development often depends on arrangements that combine administrative support, community authority, and formal financial discipline [30,90,91,92]. Within this literature, cooperatives are frequently described as quasi-financial intermediaries. They do more than merely facilitate communication between banks and borrowers. They can aggregate fragmented forest assets, identify and screen borrowers, organize guarantee funds, and help manage collateral disposal or internal settlement when repayment problems occur [1,93,94,95,96]. In this sense, they help construct the institutional conditions under which forest rights become usable for credit purposes [97,98,99].

Even so, the existing literature leaves several important questions unresolved. Many studies identify the presence of linkage mechanisms but say less about how those mechanisms are built, stabilized, and routinized over time [100,101]. There is often limited explanation of how informal norms are translated into formal procedures, how community authority is incorporated into credit governance, or how organizational arrangements reduce uncertainty in a lasting way [102,103,104]. For this reason, a more process-oriented and institutionally grounded analysis is needed. The FLM is valuable not simply because it links banks to village organizations but because it allows us to examine how that linkage becomes a durable governance system.

2.4. Synthesizing the Literature: Toward a Framework for Institutional Hybridity

Taken together, these three strands of scholarship provide an important but incomplete foundation for understanding the FLM. Property-rights theory explains why FRMLs become legally possible while remaining difficult to use in practice [105,106,107]. The literature on credit rationing clarifies why formal financial institutions remain hesitant to lend in rural environments marked by uncertainty, weak collateral recovery, and high transaction costs [108,109,110]. Financial linkage theory, in turn, shows how community-based organizations can help reduce information asymmetry, lower transaction costs, and strengthen repayment discipline [111,112,113].

Yet these studies do not fully explain how a stable FRML system actually emerges in a collective forest region. What remains underdeveloped is a perspective that can account for how different institutional logics are assembled and made to work together. This is where the concept of institutional hybridity becomes useful. From this perspective, financial innovation is not simply the outcome of legal reform, market adaptation, or administrative intervention taken in isolation. It is the product of layered institutional arrangements in which state authority, market-based discipline, and community norms are combined through organizational infrastructures.

The FLM is best understood in precisely these terms. It does not resolve structural constraints by eliminating them. Instead, it reorganizes the institutional environment in which those constraints are managed. Financial procedures are embedded in community-based enforcement, social capital is translated into forms recognizable to formal lenders, and village organizations take on governance functions that reduce uncertainty for banks. In this sense, the model operates at the intersection of several institutional orders rather than inside any one of them alone.

This perspective can be further developed through an Ostromian view of collective action and polycentric governance [103,104]. Beyond serving as a financial linkage mechanism, the FLM can also be seen as a governance arrangement in which different levels of authority take on complementary roles. National policy establishes the legal basis, local governments simplify procedures and coordinate support, cooperatives organize information and guarantees, and RCCs impose formal credit discipline. In this sense, the case shows how collective-action capacities can extend beyond the governance of shared resources to the governance of financial relations. The guarantee fund is especially important in this process. By embedding monitoring and enforcement in ongoing community relations, it helps sustain repayment discipline in ways that purely formal lending procedures often cannot [103,104].

At the same time, the case needs to be understood within a broader reform context in which forest rights have increasingly been turned into economically usable assets. In China’s collective forest regions, the institutional significance of forest rights has gradually expanded beyond livelihood and tenure security to include their role in credit access and resource mobilization [114,115]. The FLM should therefore be understood not as a purely market-driven solution but as a form of institutional hybridity that is both state-supported and socially embedded, in which market-oriented instruments continue to depend on administrative coordination and locally grounded authority [116,117].

From the Institutional Analysis and Development perspective, the FLM reshapes the “action arena” for forest-rights mortgage lending by (1) structuring participation through cooperative membership, (2) combining formal information requirements (RCC screening) with village-based soft information, (3) institutionalizing monitoring through cooperative and village governance routines, and (4) specifying enforcement through graduated sanctions that shift from community mediation to collective risk absorption. In this way, the model links Ostromian rule-and-enforcement logic to financial governance, explaining why forest-rights lending can be stabilized despite weak collateral liquidity and fragmented parcels [103,104].

The cultural dimension of the case lies not in an abstract notion of “Chinese culture” but in culturally inflected forms of social embeddedness [118,119]. In a familiar-society setting, credit-relevant information is often embedded in dense acquaintance networks, long-term reputations, village-based moral pressure, and socially recognized authority relations [86]. These elements do not replace formal financial procedures; rather, they make such procedures workable by supplying soft information, community monitoring, and socially credible enforcement. This helps explain why the FLM depends not only on institutional design but also on the social and cultural infrastructures through which that design is enacted.

This synthesis provides the analytical basis for the empirical sections that follow. It suggests that the key question is not simply whether forest-rights lending is legally allowed or economically desirable but how it becomes governable in practice. The next section therefore turns to the research design and the institutional setting of Fujian’s collective forest regions to trace how the FLM was assembled, operated, and stabilized over time.

3. Materials and Methods

Understanding how the Fulin Loan Model (FLM) became a workable and relatively stable institutional arrangement requires a methodological strategy capable of capturing more than formal policy design. What matters in this case is not only how the system is described in official rules but also how it is enacted through organizational routines, inter-organizational coordination, and everyday social interaction. In line with the theoretical discussion in Section 2, this study therefore adopts a process-oriented research design centered on institutional formation under conditions of incomplete property rights, high transaction costs, and community embeddedness. More specifically, the research uses a single-case, embedded case-study design to examine how state agencies, financial institutions, and village-level organizations jointly produce a hybrid governance structure in practice.

3.1. Study Area

The study focuses on Sanming City in Fujian Province, southeastern China. Sanming provides an analytically valuable setting for examining FRMLs because it combines two features that are central to the argument of this article. On the one hand, it possesses abundant forest resources; forest coverage accounts for 77.12% of the city’s total area [120]. On the other hand, it shares the structural difficulties common to China’s collective forest regions, including fragmented and dispersed plots, limited collateral liquidity, and administratively constrained markets for transferring forest rights. Historically, these conditions made it difficult for formal lenders to convert forest assets into reliable collateral.

Sanming was an early site of collective forest tenure reform and developed a relatively dense institutional infrastructure around forestry governance, including township forestry stations, forest-rights certification systems, and village-based governance organizations. This combination of structural constraint and institutional capacity makes Sanming particularly suitable for investigating how forest-rights lending is made workable in practice. At the same time, Sanming should be understood as a strategically selected and relatively favorable case rather than a statistically representative one. Its analytical value lies in showing how FRMLs can become workable when relatively strong village governance, functioning cooperatives, forestry administrative capacity, and coordinated local policy support are jointly present.

3.2. Data Collection

The empirical strategy combines three forms of data—field interviews, direct observation, and documentary materials—allowing for triangulation and layered analysis.

3.2.1. Semi-Structured Interviews

Fieldwork was conducted in August 2021 in four counties and districts of Sanming: Sanyuan, Jiangle, Jianning, and Taining (Figure 1). These sites were selected for their representativeness in FRML implementation and for the variation they provide in cooperative development, administrative coordination, and forest management arrangements. Interviews were conducted with: (1) officials from rural credit cooperatives (RCCs) involved in credit evaluation and loan supervision; (2) leaders of forestry professional cooperatives responsible for screening borrowers and managing guarantee funds; (3) village cadres engaged in local governance; (4) township forestry station staff involved in forest-rights registration and filing procedures; and (5) forestry bureau officials responsible for oversight and policy implementation. A summary of interviewee characteristics is presented in

Table 1. Summary of Interview Participants.

Category	Number	Affiliation	Key Topics Covered
RCC Officers	4	Sanyuan, Jiangle, Jianning, Taining RCCs	Credit evaluation procedures, risk assessment, loan monitoring, cooperation with cooperatives
Village Cadres	25	Village Committees	Soft information provision, community verification, governance coordination
Township Forestry Station Staff	22	Township Forestry Stations	Forest-rights registration, simplified filing procedures, asset verification
Forestry Bureau Officials	4	County-level Forestry Bureaus	Policy implementation, oversight, coordination with financial institutions
Forest Farmers	420	Various villages in the study area	Borrowing experience, risk perception, cooperative membership, collateral attitudes

Note: Content of this table is generated by the authors.

.

Interviews were guided by a structured interview protocol (Appendix B), while allowing semi-structured probing when respondents provided information relevant to the operational mechanisms, governance arrangements, or risk-control practices of the FLM. In this sense, the fieldwork combined structured interviewing with semi-structured follow-up questions.

The field team consisted of one faculty supervisor and seven trained students from Fujian Agriculture and Forestry University. All investigators received unified training prior to fieldwork to ensure consistency in question delivery, note-taking, confidentiality protection, and research ethics. Because some respondents expressed concerns regarding privacy, audio recording was not used. Instead, detailed written notes were taken during the interviews, and near-verbatim transcripts were compiled immediately afterwards based on the interview notes. These materials were subsequently anonymized for analysis.

This data collection strategy has potential limitations. Because many interviewees were directly involved in implementing, coordinating, or benefiting from the FLM, some accounts may contain elements of retrospective rationalization, institutional self-presentation, or selective reporting. To mitigate this risk, interview records were systematically cross-checked against documentary materials, direct observation, and comparisons across villages and counties. This triangulation does not eliminate contextual bias, but it strengthens the credibility of the mechanism-based analysis presented below.

3.2.2. Direct Observation

Direct observation was carried out during credit evaluation sessions, cooperative meetings, and forest asset verification. Observations allowed us to capture tacit practices such as informal consultations among cooperative leaders, negotiation of guaranteed responsibilities, and community-mediated dispute resolution. These practices often lie outside formal rules but are integral to understanding how risk is managed and how trust is built across organizations.

3.2.3. Documentary Sources

The study incorporated internal cooperative documents, RCC loan files, borrower records, operational manuals, and government-issued regulations. These documents provided procedural detail, historical context, and a basis for cross-verification of interview accounts. They also reveal how formal institutional designs—such as simplified filing procedures or cooperative charters—are interpreted and adapted locally.

3.2.4. Ethics and Informed Consent

Prior to fieldwork, Fujian Agriculture and Forestry University issued an official research letter on 5 August 2021 to the local forestry authorities in the study area. After receiving the letter, the competent local forestry authorities provided approval and exemption for the field investigation. The study involved human participants but did not include any invasive or interventionary procedures.

Before each interview, the research team orally explained the purpose of the study, the main interview topics, and the confidentiality arrangements. Written informed consent (paper-based, in Chinese) was obtained from all participants prior to participation. Participation was voluntary, and respondents were informed that they could decline to answer any question or withdraw at any time.

3.3. Analytical Strategy

The data were analyzed through a multi-stage process, with all qualitative data analyzed using MAXQDA (version 24.6).

3.3.1. Process Tracing

A central methodological tool was process tracing, which enabled reconstruction of the sequential stages through which the FLM became institutionalized. This included mapping the emergence of forestry cooperatives, the development of guarantee fund rules, the routinization of credit evaluation procedures, and the evolution of collateral filing and enforcement practices. Process tracing is especially appropriate in contexts where institutional change is gradual, layered, and characterized by feedback effects among actors.

3.3.2. Thematic Coding

Interview records, near-verbatim transcripts, observation notes, and documentary materials were analyzed through iterative thematic coding. We first conducted open coding to identify recurring concepts such as soft information, village verification, reverse collateralization, guarantee funds, simplified filing, interest subsidies, and community sanctions. We then conducted axial coding to connect these concepts to specific actor roles and governance stages. Finally, selective coding was used to consolidate the material into the mechanism-based categories presented in Section 4.

To improve interpretive reliability, coding decisions were discussed within the research team, and discrepancies were resolved by revisiting the original field notes and transcripts. Interview evidence was also cross-checked against policy documents, administrative materials, and direct observations, thereby strengthening analytical triangulation.

3.3.3. Comparative Within-Case Analysis

Variation across villages and counties was leveraged through within-case comparison, which clarified how institutional processes adapt to different governance capacities and community structures. For instance, cooperatives with stronger leadership and denser social ties enforced repayment norms more effectively; RCCs with closer collaboration histories tended to place more reliance on cooperative screening. These comparative insights helped isolate the mechanisms through which hybrid governance becomes workable.

3.3.4. Integration with Institutional Theory

The analysis integrated empirical findings with the theoretical perspectives outlined in Section 2—property-rights formalization, credit rationing, and financial linkage. This integration guided the interpretation of how formal procedures and informal norms become mutually reinforcing, how organizational mediation reduces uncertainty, and how institutional hybridity stabilizes credit relations over time.

4. Results

The empirical reconstruction made possible through the methodological design of Section 3 reveals that the FLM does not rely on a singular institutional breakthrough. Rather, its stability emerges from a constellation of organizational practices that gradually crystallize into a coherent governance structure. These practices are enacted by RCCs, forestry cooperatives, village committees, township forestry stations, and forest farmers—actors whose interests, authority, and capacities differ substantially yet converge through coordinated institutional routines. Through process tracing, interviews, and observational materials, three dimensions of the model become salient: the operational mechanism that structures credit flows; the guaranteed mechanism that internalizes risk; and the behavioral logics that align organizational incentives. Together, these mechanisms reveal how hybrid governance takes shape in collective forest regions.

4.1. Reconstructing the Operational Mechanism

The operational mechanism unfolded in a sequence that became increasingly routinized as the FLM matured. This sequence begins with the creation of a village-level forestry cooperative, an organizational form that functions as both a credit intermediary and a community authority structure. Unlike conventional cooperatives built around economic specialization, forestry cooperatives in Sanming were deliberately anchored in existing governance hierarchies: village cadres typically serve as leaders, and cooperative membership is embedded in broader community relationships. The cooperative forms the nucleus of the institutional system because it aggregates forest plots, organizes a collective guarantee fund, and institutionalizes borrower obligations within community norms.

The second stage is credit evaluation, which proceeds through a dual-track system involving both RCC officers and village committees. The RCC initiates the formal process by collecting household-level data—income, assets, credit history—while village committees verify the accuracy of these records and provide soft information regarding the borrower’s reputation, reliability, and community standing. This integration of formal and informal information greatly reduces adverse selection. The cooperative also conditions participation on agreed counter-guarantees and a fixed contribution to the village forestry guarantee fund, which later becomes the basis for risk allocation during repayment difficulties.

Field interviews provide concrete support for this mechanism. A village cadre in Jifeng Village reported that financial institutions primarily evaluated “the farmer’s credit rating result, the value of forestland assets, and whether forest-rights counter-guarantees were available” (Village Cadre, Jifeng, Sanyuan). Similarly, an RCC manager in Jianning noted that, in his recollection, prior to the FLM, forest-rights mortgage lending had suffered from relatively high non-performing risks and difficulties in collateral disposal. Under the Fulin arrangement, however, the introduction of village-level intermediary organizations and supporting policy measures appeared to reduce risk. At the time of fieldwork (August 2021), the model reported zero NPL rates in the county sample, where 557 loans totaling RMB 64.79 million had been issued across 92 participating villages (RCC Manager, Jianning). This observation should be understood as a time-specific account rather than as definitive evidence of long-term or universal performance.

The third stage consists of forest-rights verification and simplified filing. Instead of relying on the lengthy and often impractical procedures associated with conventional mortgage registration, township forestry stations perform a simplified filing function. This reduces administrative complexity and enables small-value forest-rights mortgages to move more quickly from evaluation to disbursement. Forestry officials also emphasized the importance of administrative simplification. Under conventional procedures, forest-rights mortgages would normally require formal valuation. Under the FLM, however, small-value forest-rights mortgages could be processed through simplified filing and exempted from full appraisal once the cooperative provided a counter-guarantee. Officials further noted that the nominal annual interest rate of 7.8% could be reduced by a 3% forestry interest subsidy, lowering the effective borrowing cost to about 4%, and that the loan process could often be completed within five days (Forestry Official, Sanming).

The final stage involves loan disbursement, repayment monitoring, and follow-up supervision. Once the loan is approved, disbursement is carried out by the RCC, but monitoring is not left to the lender alone. Instead, the cooperative and village committee remain involved throughout the repayment period, observing borrower behavior, tracking repayment capacity, and intervening informally if signs of distress appear. The result is a continuous monitoring system that combines formal financial discipline with informal community enforcement. From the borrower’s perspective, these arrangements translated into substantially improved access to credit. A farmer in Chuwei Village, Jianning, reported that after joining the cooperative and providing a forest-rights counter-guarantee, he obtained a loan of RMB 120,000, benefited from the forestry interest subsidy, and received the funds within one week (Farmer, Chuwei, Jianning). A farmer in Huiyao Village, Sanyuan, similarly emphasized that cooperative assistance with RCC credit rating and village-level collective guarantees made borrowing feasible even when his individual asset position was limited (Farmer, Huiyao, Sanyuan). These accounts indicate that the FLM did not merely simplify procedures administratively; it transformed the practical accessibility of forest-rights finance for smallholders.

This multi-stage process is visualized in Figure 2, which was extracted directly from the original case materials. Its placement here reflects its analytical function—not merely as an illustration of administrative procedure but as a visual condensation of the layered institutional sequence through which hybrid governance becomes operational. The essence of Figure 2 is that credit does not flow directly from the bank to the farmer; it flows through a network of organizations whose collaboration transforms uncertainty into manageable risk. Each stage reinforces the others, and as the routines become embedded, they generate organizational expectations, behavioral regularities, and replicable governance patterns—all of which lend stability to an otherwise fragile institutional environment.

4.2. The Guarantee Structure: Internalizing Risk Within the Community

If the operational mechanism describes how credit flows between organizations, the guaranteed structure explains why the system remains stable despite the structural vulnerabilities of collective forest regions. The Fulin model’s guarantee system relies on what can be described as reverse collateralization: rather than mortgaging forest assets directly to RCCs, farmers pledge them to the cooperative, which in turn guarantees the loan to the bank. This inversion shifts the burden of collateral enforcement from formal legal processes to community-based governance structures.

Village-level evidence illustrates how this pooled-risk arrangement operated in practice. In Jifeng Village, cooperative members were each required to contribute RMB 20,000 to the village forestry guarantee fund, and the fund was reported to come entirely from villagers’ own risk-fund contributions; by the time of fieldwork, 14 households had been authorized for credit with a total credit line of RMB 1.31 million (Village Cadre, Jifeng, Sanyuan). In Shanxia Village, a similar guarantee-fund account had been established with the same RMB 20,000 contribution requirement, and 12 households had received authorization totaling RMB 1.44 million (Village Cadre, Shanxia, Sanyuan). In Dushui Village, the guarantee arrangement combined both a collective guarantee-risk fund and villagers’ contributions, and 24 households had been authorized for RMB 1.83 million (Village Cadre, Dushui, Sanyuan). These cases show that while the composition of the guarantee fund could vary locally, the underlying principle of pooled risk internalization remained consistent.

This arrangement has two important consequences. First, it reduces the RCCs’ dependence on formal foreclosure and disposal procedures. Because repayment risk is partially covered by the pooled guaranteed mechanism, the lender does not need to rely exclusively on judicial liquidation of forest rights in the event of repayment failure. Second, it transforms repayment from an individual contractual obligation into a quasi-collective responsibility. When borrowers encounter repayment difficulties, local governance does not move directly to formal foreclosure. Instead, established monitoring routines allow for a more graduated response: cooperative leaders and village committees typically deal with early warning signs and informal problem-solving first, and if the problem continues, the pooled guaranteed mechanism and member-level obligations begin to absorb the risk collectively. This pattern closely reflects Ostrom’s view that enforcement can operate through monitoring and graduated sanctions, thereby reducing the need for costly market-based collateral disposal where formal legal recovery is administratively difficult [103,104]. In this setting, borrowers risk more than damage to their own credit standing. They may also jeopardize the financial position of the cooperative and the interests of other members. This creates stronger incentives for repayment than conventional individualized collateral arrangements usually provide.

The intermediary role of the cooperative was clearly articulated by cooperative leaders. In Dayu Village, the cooperative chairperson was also a village cadre, and the cooperative not only maintained a risk-guarantee fund with the partner bank but also assisted in credit rating, borrower screening, monitoring, policy communication, and financial literacy promotion. As the cooperative leader explained, this arrangement greatly reduced costs, simplified procedures, and lowered risk because the cooperative accepted members’ forest-rights counter-guarantees and could supervise repayment through familiar village-based relationships (Cooperative Leader, Dayu Village).

The guaranteed structure thus illustrates a central feature of the FLM: risk is not eliminated but reallocated. It is shifted away from an exclusive dependence on collateral liquidity and toward a multi-layered arrangement involving collective funds, organizational screening, and community enforcement. This helps explain why the model could function in a context where market-based collateral disposal remained institutionally weak.

4.3. Behavioral Logics of Key Actors

The durability of the FLM depends not only on procedures and guarantee structures but also on how different actors interpret their interests and roles. The model persists because it aligns heterogeneous incentives in a way that makes participation rational for all parties involved.

4.3.1. RCCs: From Collateral Dependence to Governance Dependence

For RCCs, initial interest in forest-rights mortgage lending had been low under conventional lending logic because fragmented plots and weak collateral disposal implied high information, monitoring, and enforcement costs [65,66,67,73,74]. Under the FLM, credit uncertainty was reduced without requiring a fully developed collateral market; more importantly, local authority support reduced the pioneering/entry costs of institutional experimentation through administrative endorsement, simplified filing, and forestry interest subsidies [19,121,122].

Interviews confirm that RCCs view Fulin loans as a relatively low-risk credit product—not because forests suddenly became liquid collateral but because the governance environment became more predictable. An RCC manager in Jianning explicitly contrasted the earlier period—when non-performing risks were high and collateral disposal was difficult—with the FLM arrangement, under which no NPL had reportedly occurred during the period described by the respondent (RCC Manager, Jianning). An RCC officer in Zhongcun Township, Sanyuan, similarly emphasized that cooperative participation helped stabilize borrower credit: across 18 participating villages with a total authorized credit line of RMB 70 million, no bad loans had reportedly emerged under the cooperative-based forest-rights counter-guarantee arrangement (RCC Officer, Zhongcun, Sanyuan). What RCCs effectively purchased, therefore, was not merely collateral security but an institutional environment in which credit evaluation and enforcement became socially supported.

4.3.2. Forestry Cooperatives: Organizational Brokers and Local Guarantors

Forestry cooperatives occupy a pivotal intermediate position in the FLM. They are neither state agencies nor purely market actors. Instead, they operate as organizational brokers that connect policy directives, lender requirements, and borrower needs. Their role extends beyond guaranteed provision: they identify eligible borrowers, verify local information, organize guarantee funds, coordinate filing procedures, and supervise repayment.

This intermediary role was clearly articulated by cooperative leaders. In Dayu Village, the cooperative not only maintained a risk-guarantee fund with the partner bank but also assisted in credit rating, borrower selection, monitoring, and policy communication, thereby functioning as a quasi-financial intermediary rather than a production-only cooperative (Cooperative Leader, Dayu Village). In practice, the cooperative’s authority derived precisely from its embeddedness in local governance. Because it was linked to the village committee and familiar to borrowers, it could perform screening and enforcement tasks that would be prohibitively costly for formal financial institutions acting alone.

4.3.3. Forest Farmers: Reduced Fear, Lower Costs, Greater Willingness to Borrow

For forest farmers, the appeal of the FLM lies not only in improved loan access but also in the reconfiguration of perceived risk. In conventional mortgage lending, borrowers may fear losing land, facing burdensome procedures, or confronting high transaction costs. Under the FLM, these anxieties are mitigated by organizational support, simplified filing, interest subsidies, and the use of counter-guarantees through the cooperative structure.

Farmers’ accounts support this interpretation. A farmer in Songyang, Sanyuan, reported that after joining the village-led forestry cooperative and obtaining a loan of RMB 100,000 against 60 mu of forestland, they found the cooperative-based arrangement less intimidating; the counter-guarantee reduced borrowing costs and eased concerns about losing the land. He repaid the loan on time after three years (Farmer, Songyang, Sanyuan). This illustrates how the model lowered not only financial barriers but also psychological barriers to borrowing. In this sense, the FLM expanded effective credit demand not simply by improving supply conditions but by reshaping farmers’ subjective expectations about mortgage risk and repayment feasibility.

4.3.4. Local Governments and Forestry Authorities: Enablers of Institutional Coordination

Local governments and forestry authorities play an enabling role by coordinating policy support, streamlining procedures, and providing administrative legitimacy. Their contribution is especially important because the FLM depends on institutional adjustments that no single actor could authorize independently—such as simplified filing, policy endorsement of cooperatives, and forestry interest subsidies. By providing this legitimacy and cost sharing, local authorities also lower banks’ perceived market-expansion risks, making it more feasible for RCCs to broaden lending beyond limited local pilots.

Fiscal policy support was a particularly important enabling factor. According to forestry officials, the FLM’s nominal annual interest rate of 7.8% was effectively reduced to approximately 4% through a 3% forestry interest subsidy—lower than the 4.7% rate charged by the Agricultural Bank of China for comparable forest-rights mortgage products. This cost advantage, combined with administrative streamlining, made the FLM attractive to both borrowers and lenders (Forestry Official, Sanming). More broadly, local state actors helped stabilize expectations by publicly endorsing the model, coordinating across sectors, and embedding forest-rights lending within a broader policy framework of rural revitalization, forestry reform, and inclusive finance.

4.4. Institutional Integration and the Emergence of Hybrid Governance

These mechanisms—operational sequencing, risk internalization, and actor alignment—combine to form what can be characterized as a hybrid governance structure. Neither purely bureaucratic nor market-based, the FLM constructs an institutional space where state authority, financial discipline, and community norms become mutually constitutive. This hybrid form does not arise spontaneously. It is built gradually as organizations learn to interpret each other’s expectations, routinize coordination, and develop procedural scripts that reduce uncertainty.

The structural logic of this hybrid governance arrangement is summarized in

Table 2. Institutional Structure and Governance Components of the Fulin Loan Financing System.

Level	Core Category	Sub-Category	Description
Macro	Institutional Environment	Formal institutional environment	Legal and policy framework that makes forest management rights legally mortgageable, including the shift from prohibition to permission of forest-rights mortgages under the “Three Rights Separation” reform and related upper-level regulations.
		Informal institutional environment	Local norms, value orientations, and traditional knowledge regarding forestry and forest rights; the familiar-society structure and village-level intermediary organizations that can credibly hold and internally dispose of mortgaged forest rights within the community.
Meso	Institutional Supply	Collateral system design	Design of the forest-rights mortgage system as a pioneering institutional arrangement that requires collective action by multiple departments and proactive governmental involvement to shoulder the initial “pioneering costs” of opening a new credit market for forest rights.
		Supporting systems	Complementary arrangements such as forestland titling and certification, creation of forestry finance divisions, establishment of village-level forestry guarantee funds, autonomous valuation of reverse-collateral forest assets, and internal disposal mechanisms in which village-level organizations act as the mortgagee.
		Fiscal policy support	Interest subsidies and related fiscal incentives that stimulate credit demand and supply for FRMLs; rural credit cooperatives assist eligible borrowers in applying for annual forestry interest subsidies, effectively lowering the cost of borrowing.
	Governance Structure	Hybrid governance structure	A mixed governance arrangement combining bureaucratic coordination and market-oriented mechanisms. Village committees and forestry cooperatives act as quasi-hierarchical organizations that intermediate between dispersed smallholders and formal financial institutions in a “bureaucracy + market” financial linkage model.
Micro	Collateral Mode	Portfolio collateral guarantee	A combined guaranteed structure consisting of reverse collateral provided by forest farmers, a pledge guarantee issued by the forestry cooperative, and additional guarantees by other members through the village-level forestry guarantee fund, thereby pooling and diversifying risk.
	Loan Elements	Borrower	Ordinary forest farmers in collective forest regions holding small and fragmented forest rights, with relatively good credit standing and willingness to participate in the cooperative-based guarantee scheme.
		Collateral value	Given small and scattered plots, the model places relatively low requirements on the nominal collateral value of individual forest parcels, relying instead on collective guarantees, pooled risk, and community-based enforcement.
		Transaction costs	Substantially reduced through green channels for “Fulin Loan” applications, autonomous valuation, simplified filing at township forestry stations rather than full real-estate registration, and agency-based application for interest subsidies.
		Loan amount	Dynamically managed with an upper limit per borrower (typically not exceeding RMB 100,000), combined with a fixed member contribution (e.g., RMB 20,000) to the village-level forestry guarantee fund.
		Interest rate	Interest rates are capped relative to the benchmark rate, with “Fulin Loan” rates set below ordinary FRMLs and effectively reduced further by forestry interest subsidies, resulting in a relatively low effective cost of borrowing.
		Loan term	Follows the principle of “one-time approval, total amount control, and three-year revolving use,” allowing borrowers to draw down and repay flexibly within an approved credit line.

Note: Content of this table is generated by the authors based on fieldwork data and policy documents.

, which organizes the institutional components across macro, meso, and micro levels. Its placement here, after the analysis of operational and actor-level mechanisms, reflects its role in synthesizing the institutional architecture underlying the Fulin model. It illustrates how stability emerges from alignment across levels: national policy provides legal space and political impetus; county and township governments coordinate administrative procedures; cooperatives and village committees operationalize rules and enforce community-based norms. The model works precisely because governance tasks are distributed across organizations whose capacities complement one another.

4.5. Synthesis: Why the Model Works Under Supportive Local Conditions

The findings suggest that the FLM has become workable in Sanming because it reorganizes structural disadvantages into governable institutional arrangements under supportive local conditions. Fragmented forest plots become more manageable when they are aggregated through cooperatives; incomplete property rights become usable credit support when they are embedded in community governance; thin collateral markets become less decisive when disposal can be handled internally; and information asymmetry becomes more manageable when community knowledge is institutionalized into screening and monitoring. In this sense, the case indicates that organizational mediation—rather than market design or administrative command alone—plays a central role in making FRMLs governable. At the same time, this mechanism should be understood as context-dependent: its effectiveness rests on the presence of local authority structures, social embeddedness, and organizational capacities that may not exist elsewhere.

5. Discussion

The empirical reconstruction of the FLM demonstrates that its effectiveness does not derive from an exceptional economic environment or superior market conditions but from an institutional configuration that gradually became workable through organizational mediation. As Section 4 showed, the institutionalization of FRMLs in Sanming emerged from a layered process in which operational sequencing, risk internalization, and actor alignment generated a hybrid governance structure capable of functioning under severe structural constraints. This section synthesizes these findings and articulates their theoretical significance.

5.1. Financial Linkage Mechanism

The first set of insights relates to the financial linkage mechanism that underpins the Fulin model. Unlike conventional credit systems that rely primarily on collateral valuation or market liquidity [8,123], the Fulin model embeds credit relations within community governance structures [124,125]. Formal procedures—borrower screening, asset verification, collateral filing, and repayment monitoring—gain their effectiveness only because they are enacted through organizations that command social legitimacy and maintain dense information networks [102,126]. The operational sequence visualized in Figure 2 revealed how a multi-stage process was assembled such that each stage mitigates the weaknesses of the next. The cooperative substitutes for missing market institutions [127,128]; forestry stations compensate for administrative shortcomings; and RCCs provide formal credit access with reduced exposure to risk [129,130]. The system works because coordination is anchored in routine interactions, repeated communication, and shared expectations—elements that formal financial logic alone cannot create [131,132,133].

5.2. Behavioral Logics of Actors

A second insight concerns the behavioral logics of the actors involved. Forest farmers, whose aversion to mortgaging forestland has been well documented in the credit-rationing literature [3,7,134], become willing borrowers when risk is collectivized and enforcement occurs within community boundaries [135]. Their decision-making is shaped not simply by economic incentives but by a calculus embedded in social relations, reputation, and the practical assurance that collateral will remain under community jurisdiction [136,137]. For RCCs, the hybrid governance structure reshapes the informational environment, making forestry loans—once believed to be high-risk and high-cost—both manageable and predictable [138,139,140,141,142]. Cooperation with village-level institutions reduces the burden of screening and monitoring, while fiscal incentives and administrative coordination reduce pioneering costs [19,121,122]. Meanwhile, cooperatives reinforce their organizational authority by managing guarantee funds, mediating disputes, and supervising repayments—functions that consolidate their position within the village governance hierarchy [143,144,145]. In this process, the boundaries between formal and informal authority become blurred: cooperatives acquire quasi-financial responsibilities while banks adopt community-based enforcement logics [146]. This organizational alignment helps explain how the model can expand to additional villages under similar local governance arrangements, rather than implying universal scalability [147].

From a cultural perspective, the FLM draws on the relational authority embedded in China’s familiar society. Knowledge grounded in guanxi helps reduce uncertainty in borrower screening, while village-based moral pressure and socially recognized roles make repayment enforceable even in the absence of liquid collateral markets. For farmers, cooperative membership and counter-guarantee arrangements place borrowing within a setting of ongoing face-to-face observation, helping turn mortgage risk from an abstract financial concern into a socially accountable obligation [86,87,88,89,136,137].

5.3. Institutional Foundations and Hybrid Governance

The third set of insights pertains to institutional foundations and hybrid governance. As summarized in Table 2, formal and informal institutions do not coexist in parallel; they interpenetrate and reinforce one another [148,149,150]. National policy provides the legal foundation and political impetus for FRML innovation; county and township governments develop administrative pathways that reduce transaction costs; and village-level organizations translate community norms into enforceable credit governance [22,34]. This tri-level architecture constitutes the institutional scaffolding that enables the Fulin model to overcome the structural impediments of collective forest regions [14,151]. What emerges is a hybrid governance structure in which property-rights formalization, financial regulation, and community norms are braided together through organizational routines. Hybrid governance, in this context, is not a temporary accommodation but a stable equilibrium formed through repeated institutional layering [152].

At the same time, the governance strengths of the FLM also imply asymmetries. Because cooperatives are often led by village cadres and embedded in existing village hierarchies, participation is shaped not only by economic calculation but also by local authority structures. Entry into the model is selective: borrowers typically need acceptable credit standing, willingness to join cooperative arrangements, and, in some villages, the capacity to contribute to guarantee funds. These features enhance repayment discipline and coordination, but they may also disadvantage poorer, less connected, or more risk-averse households. Because cooperatives are often chaired by village cadres and embedded in existing village hierarchies, access to key governance resources—especially soft information about reputation and authority to mobilize community enforcement—may be uneven across households. This implies that participation is not purely voluntary or distributionally neutral: gatekeeping through cooperative membership and guarantee-fund contributions can shape who is likely to be approved and who bears the social costs when repayment difficulties occur. While our data indicate selective entry, further systematic work is needed to assess whether elite capture or subtle exclusion mechanisms affect distributional equity. The model’s effectiveness therefore depends in part on forms of authority and selectivity that deserve explicit analytical attention.

These asymmetries in participation and governance warrant careful analytical reflection. While the FLM’s institutional strengths—risk internalization, community enforcement, and organizational mediation—help explain why it functions effectively in Sanming, these same features rest on specific power configurations that may create distributional tensions. The model’s effectiveness does not eliminate the underlying relationship between governance capacity and access; it redistributes that relationship by anchoring credit decisions in village authority structures. Understanding this tension is essential for moving from empirical description to theoretical generalization. What emerges is not a neutral governance mechanism but one whose benefits are conditional on selective participation and local authority alignment. This observation reframes our theoretical interpretation: hybrid governance can stabilize financial relations, but it does so through arrangements that are inherently selective rather than universally inclusive.

5.4. Theoretical Implications

The theoretical implications of these findings extend beyond the immediate case of forest-rights mortgage lending in Sanming. More broadly, the study shows that institutional change in rural China often proceeds not through sweeping policy reform or market liberalization alone but through the incremental construction of organizational infrastructures that mediate between policy goals, formal financial procedures, and local social relations [153,154,155,156]. Property rights become actionable when organizations make them actionable; financial mechanisms gain traction when they are embedded in locally credible practices; and community norms become productive resources when they are translated into formal governance routines. In this sense, the case enriches institutional theory by showing how hybrid governance can emerge as a mode of institutional innovation in settings where formal institutions cannot operate autonomously and informal norms cannot independently sustain complex transactions.

A second contribution concerns the literature on financial linkage. Existing scholarship has shown that formal and informal institutions can be linked under conditions of market incompleteness but often says less about the organizational mechanisms through which such linkages are made durable over time [80,81,82,157,158]. The FLM helps clarify this point. Its effectiveness does not rest simply on connecting banks with village society in an abstract sense. Rather, it depends on the construction of intermediate organizational forms—cooperatives, guarantee funds, simplified administrative procedures, and village-based verification mechanisms—that translate between different institutional logics. This insight suggests that financial inclusion in rural settings may depend less on the expansion of formal finance alone than on the organizational arrangements that render formal finance governable in context.

The case also contributes to debates on collective action and common-pool resource governance. Building on the Ostromian tradition [103,104], the FLM illustrates how collective-action principles can be extended from resource governance to financial governance. The guarantee-fund structure is especially significant in this regard. By embedding accountability, monitoring, and repayment discipline within community relations, it creates incentives for mutual oversight that reduce default risk without relying exclusively on formal legal enforcement. The case therefore suggests that the analytical value of Ostromian perspectives extends beyond the management of shared natural resources and can also illuminate how communities help stabilize financial relations under conditions of uncertainty.

At the same time, the significance of the FLM may extend beyond the direct domain of credit provision. First, by making cooperative participation a functional condition for accessing finance, the model may reinforce village-level collective organization and cooperative governance. Second, by transforming forest tenure into economically actionable assets, it may encourage more coordinated, investment-oriented, and economically oriented modes of forest management. These broader effects, however, are not unambiguously positive. The same features that improve coordination and repayment discipline may also generate tensions between economic efficiency and social inclusion, between investment-oriented resource use and long-term ecological sustainability, and between organizational effectiveness and dependence on local authority structures. For this reason, the broader implications of the FLM should be understood as analytically suggestive rather than automatically beneficial in all respects.

Finally, the case should be situated within a broader reform context in which market-oriented instruments remain embedded in a state-guided governance framework. In this sense, the FLM is better understood not as a purely market-driven solution but as a form of state-mediated institutional hybridity. Its emergence reflects a specific Chinese developmental context in which forest rights were increasingly activated as economically usable assets, while administrative support, fiscal incentives, and local state coordination remained crucial to implementation. This temporal and political context matters. As fiscal conditions tighten, development priorities shift, or ecological constraints become more salient, the institutional package that supports the FLM may become more difficult to sustain. The FLM should therefore be understood as a historically contextual and contingent arrangement rather than as a permanent or universally applicable solution.

5.5. Policy Implications

The policy implications follow naturally from these theoretical insights. Efforts to promote FRMLs in other regions should not focus solely on improving collateral valuation methods, adjusting interest rates, or expanding credit quotas [4,22]. These measures may address surface-level symptoms but leave underlying institutional constraints intact. Instead, policymakers must attend to organizational infrastructures—cooperatives, forestry stations, and credit institutions—that enable hybrid governance [159,160,161].

Specifically, the study suggests several policy priorities:

First, supporting cooperative development is essential. The Fulin model’s success depends critically on the presence of village-level forestry cooperatives that possess both organizational capacity and community legitimacy. Policies should provide resources for cooperative formation, leadership training, and operational support, particularly in regions where existing cooperative structures are weak.

Second, simplifying administrative procedures can significantly reduce transaction costs. The Fulin model’s streamlined filing process at township forestry stations demonstrates how administrative innovation can facilitate financial innovation. Policymakers should identify opportunities to reduce bureaucratic barriers while maintaining necessary oversight.

Third, providing fiscal incentives remains important for reducing pioneering costs. Interest subsidies and other financial supports help align the interests of RCCs with policy goals, making forestry lending economically viable. However, such incentives should be designed to complement rather than substitute for organizational development [162].

Fourth, policy transfer must acknowledge contextual dependencies. The Fulin model’s effectiveness depends on specific features of Sanming’s institutional environment, including strong village governance, relatively cohesive communities, and supportive local government. Regions with weaker governance capacity may require different institutional configurations [104,163]. Policy transfer should therefore be accompanied by careful assessment of local conditions and adaptive implementation strategies.

5.6. Limitations and Future Research

As with any case study, this study faces important limitations. Most critically, it is based on a single, strategically selected case that combines relatively favorable institutional conditions—strong village governance, functioning cooperatives, and coordinated local authority support. The findings should therefore not be understood as evidence that the FLM is broadly replicable across all collective forest regions. Rather, the case identifies a set of enabling conditions and operative mechanisms under which hybrid governance in forest-rights lending is more likely to function effectively.

The evidentiary basis also warrants acknowledgment. Because the analysis relies heavily on interviews, field notes, and local documentary materials, it remains vulnerable to selective reporting, retrospective rationalization, and contextual bias. To mitigate these risks, interview accounts were systematically cross-checked against policy documents, administrative materials, and direct observation. However, because audio recording was not used during fieldwork for privacy reasons, quoted statements should be understood as careful reconstructions based on expanded field notes compiled immediately after interviews, rather than verbatim transcripts. Interview evidence drawn from actors directly involved in implementing, coordinating, or benefiting from the FLM may also contain elements of institutional self-presentation. Our triangulation approach strengthens credibility but does not eliminate such bias.

The reported zero NPL outcomes, based on fieldwork conducted in August 2021, should be interpreted cautiously. Given the single-period nature of the fieldwork and reliance on interview and documentary sources, such outcomes may partly reflect favorable borrower selection, strong community screening, and the fact that repayment difficulties are often managed informally before becoming formal defaults. A conservative interpretation of these results strengthens rather than weakens analytical credibility.

Finally, the fieldwork was conducted in 2021, and subsequent policy developments—including updates to national forestry finance guidelines—may have introduced modifications not captured in this study. Additionally, the model’s long-term sustainability under demographic change, particularly rural outmigration, remains understudied. Future research should examine how institutional arrangements adapt as younger generations migrate to urban areas and the social foundations of community governance weaken.

6. Conclusions

This study has examined the FLM in Sanming City, Fujian Province, as a case of institutional innovation in China’s collective forest regions. Through extensive fieldwork—including semi-structured interviews with 475 participants, direct observation, and documentary analysis—combined with process tracing, the analysis has reconstructed the operational mechanisms, guarantee structures, and actor logics through which the model was incrementally assembled and stabilized.

The analysis suggests that the FLM becomes workable because it reorganizes fragmented property rights, weak collateral markets, and dispersed local knowledge into a governable institutional arrangement. Rather than solving these structural constraints through market development alone or administrative command alone, the model links state coordination, financial discipline, and community-based authority through intermediary organizations. In this sense, the case shows how hybrid governance can make forest-rights lending workable under supportive local conditions.

At the same time, the article does not claim that the FLM constitutes a universally transferable model. Sanming appears to be a relatively favorable case, and the model’s effectiveness depends on conditions that may not be present elsewhere, including stronger village governance, functioning cooperatives, and relatively dense social relations. The contribution of the study therefore lies less in presenting a ready-made template than in identifying one possible pathway through which rural finance may become governable under conditions of incomplete markets and community embeddedness.

More broadly, the case also suggests that financial innovation may have effects beyond credit provision alone. By reinforcing cooperative organization and potentially reshaping forest management practices, the FLM illustrates how financial governance can transform wider institutional relations in rural society. These developments, however, may also generate tensions between efficiency, inclusion, and sustainability. Future comparative research is therefore needed to assess how far similar arrangements can travel, what conditions they require, and how their trade-offs unfold in other contexts.

Despite limitations related to generalizability and long-term sustainability, the FLM stands as a significant empirical case for understanding institutional innovation under conditions of market incompleteness. While the findings are relevant for broader debates on rural finance and institutional hybridity, they should be read as conditional insights derived from a relatively favorable case rather than as evidence of a universally transferable model. As China continues to deepen collective forest tenure reform and expand rural financial inclusion, the organizational principles embedded in the Fulin model may provide useful reference points for policy design and institutional development, provided that their contextual conditions and limitations are kept in view.