New Interest in Informal Credit

The negative experience with formal credit programmes has sparked an interest in the operations of the informal financial market and its role in the mobilization and allocation of resources. Favourable comments on the workings of indigenous savings and credit groups as autonomous self help institutions have brought home the fact that the informal sector consists of many other actors and modalities of financial intermediation than those of money lenders, traders and landlords. There is a glimmer of recognition that even and other "powerholders", if the name befits them, can and do perform services that, far from being extortionate, may be beneficial to the rural economy and its participants.

Before the eighties, papers on informal lending were conspicuously absent from credit conferences - somehow it did not seem proper to provoke a discussion of such a controversial topic. Was this worthwhile when, indeed, the future belonged to institutional finance and the informal sector would soon be outdated? Today, the same conferences and workshops routinely devote part of their proceedings to a discussion of the merits and demerits of the informal sector. Representatives of developing nations now seldom express the view that to adopt support of rotating savings associations is tantamount to efforts to keep their country from entering the era of modern finance.

While there can be little doubt of the formal sector's superiority over the informal one when it comes to financing large scale economic development and projects of nationl and regional importance, the role and strength of informal finance agents in small-scale economies and their subsequent importance to low-income households should not be under-estimated. In these penny economies the informal sector has a number of advantages over the formal one. It responds remarkably well to rural, particularly short term financing opportunities and allows low-income people acess to services not available to them elsewhere and at a relatively low cost. It can do so because the informal sector is the natural environment for rural people and antedates the introduction of formal institutions. People are, as it were, born into this sector, and this brings with it frequent face to face contacts, cultural affinity, and a great ability to adapt to the consitions of lower income life. Unlike formal institutions, informal intermediaries do not need government subsidies to operate in a rural penny economy. They survive on the basis of competitiveness, financial viability and low cost operations.

Adapted from - Bouman, F.A.J. (1989)

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