The commonly held belief of credit market "duality" in the form of "formal" and
"informal" is misleading and any attempts at aggregation have either a locational or
sectoral bias (core/periphery, urban/rural, modern/traditional).
The varying degrees of
informality and flexibility observed in informal credit markets (ICMs) are complex and multi-dimensional,
with characteristics ranging from freedom from regulation, flexibility in interest rates
and periods, to small scales of operation etc.- covering both its organizational and
The field study that provided background data for this document was carried out in the city of Bangalore, India, and covered more that 200 households in five urban squatter settlements, and over 50 informal credit suppliers, who operated in those settlements.
In an attempt tp characterize the complexity and variety in ICMs, a continuum of informality of credit was developed to explain the interconnectedness. Such a continuum help show the gray overlapping areas in ICMs - those informal operators
who exhibit characteristics of formal suppliers or formal suppliers who have adopted
the working systems of the informal supplier.
The continuum was not plotted in the typical linear manner, but on a dual-axis format.
This was done by distinguishing loan conditions into "monetary" and "non-monetary"
components along the x and y axis.
- Monetary components covered loan amounts, rates of interest, loan periods and repayment schedules;
- Non-monetary components covered transaction amounts, collateral requirements, proximity to borrowers and personalized services
In charting the continuum, focus was maintained on suppliers who provide
informal credit in urban squatter settlements. Unlike formal credit institutions, most
functioned as single entities with few linkages between operators. But the number of
operators in the market were many, contrary to popular belief, with competition keen