Informal Finance: A Theory of Moneylenders

FEEM Working Paper No. 69

IGIER Working Paper No. 347

47 Pages Posted: 24 Dec 2008 Last revised: 4 Jun 2013

See all articles by Andreas Madestam

Andreas Madestam

Stockholm University, Department of Economics

Date Written: December 6, 2012


I study the coexistence of formal and informal finance in underdeveloped credit markets. Formal banks have access to unlimited funds but are unable to control the use of credit. Informal lenders can prevent non-diligent behavior but often lack the needed capital. The model implies that formal and informal credit can be either complements or substitutes. The model also explains why weak legal institutions raise the prevalence of informal finance in some markets and reduce it in others, why financial market segmentation persists, and why informal interest rates can be highly variable within the same sub economy.

Keywords: Credit markets, Financial development, Institutions, Market structure

JEL Classification: O12, O16, O17, D40

Suggested Citation

Madestam, Andreas, Informal Finance: A Theory of Moneylenders (December 6, 2012). FEEM Working Paper No. 69 . Available at SSRN: or

Andreas Madestam (Contact Author)

Stockholm University, Department of Economics ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91


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