Informal Finance in Developing Economies

UNIMI Economics Working Paper No. 9

32 Pages Posted: 15 Feb 2005

See all articles by Arnaldo Mauri

Arnaldo Mauri

Università Degli Studi di Milano

Date Written: September 2000

Abstract

The financial systems and financial markets of developing countries have a common feature: the dualism. This means the co-existence and operation side by side of a formal or institutional financial sector and of an informal or non-institutional financial sector. The great diversity of informal financial activities makes difficult to evaluate the actual extent of informal finance in each economy, but empirical evidence in a number of less developed countries suggests that such extent is always relevant. Many examples bear witness of vitality of informal finance in filling the gaps left by operations of formal financial intermediaries: segments of the market neglected, credit rationing pursued through non-price allocation, exorbitant transaction costs shifted off to borrowers. The paper provides a comprehensive study of the role of informal finance in these economies, in rural as well as in urban areas, and of the main characters of the informal financial markets. Credit markets where heterogeneity of lenders faces heterogeneity of borrowers: different lenders may have different information about different borrowers. It investigates financial markets of developing countries highlighting crucial topics such as innovation capacity, effectiveness in personal savings mobilization, competition in funds rising and in credit supplying, personalistic relationship, interest rates charged, transaction costs inherent to financial intermediation, asymmetrical information, moral hazard, credit risk (arrears, delinquency, default), market interlinkage. Various types of operators of the informal financial sector, both individuals (moneylenders, pawnbrokers, indigenous bankers, traders, deposits collectors) and mutual associations (Roscas and Ascras), are listed and analised. Finally due attention is given to interlinks between formal and informal financial circuits: large financial flows can take place, in fact, between formal and informal sectors. Furthermore a pronounced complementarity of the two sectors emerges: in many instances informal finance should not be seen as a substitute of institutional finance, as it has been often done in the past, but rather as a complement.

Keywords: developing economy, financial dualism, informal sector, personalistic relationship, market interlinkage.

JEL Classification: G10, O16, O17

Suggested Citation

Mauri, Arnaldo, Informal Finance in Developing Economies (September 2000). UNIMI Economics Working Paper No. 9, Available at SSRN: https://ssrn.com/abstract=667262 or http://dx.doi.org/10.2139/ssrn.667262

Arnaldo Mauri (Contact Author)

Università Degli Studi di Milano ( email )

Milan, 20122
Italy

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1,255
Abstract Views
6,457
rank
17,575
PlumX Metrics