The Informal Financial Sector In Developing Countries

In this comparative study of programmes against poverty in developing countries, the authors argue that building sustainable, target group-oriented financial institutions is important and feasible, and that it is likely to have greater development impact than the channelling of external funds to poor target groups (small and micro-scale business, small farmers, and women). The analysis has far-reaching implications for development policy and will interest development specialists, policymakers, and scholars of development finance and international banking.

Seminar paper from the year 2005 in the subject Economics - Monetary theory and policy, grade: A= 1,0, Johns Hopkins University (School of Advanced International Studies (SAIS)), course: Theories and Models of Economic Development, language: English, abstract: Credit markets in developing countries differ substantially from their counterparts in OECD countries. Apart from the obvious differences in institutional development, technology and productivity which are both measures for and causes of underdevelopment, typ ical LDC credit markets have two main characteristics. Firstly, their financial systems are very small compared those in industrial economies. Secondly, developing countries are characterized by very big informal financial sectors that coexist with formal credit institutions. Interestingly, credit contracts differ highly between these two sectors and there seems to be only very limited inter-sector competition. The following paper ventures to explain the persistence of these peculiarities in rural credit markets1 using the model of asymmetric information in credit markets developed by Stiglitz and Weiss. By applying the model specifically to LDC credit markets I show that asymmetric information is among the major reasons for the underdevelopment of rural credit markets. Building on these findings I then explain how Microfinance Institutions (MFI) have lately been able to overcome some of the problems of imperfect information and strive in markets formerly dominated by informal money lenders. The first part of this paper provides an overview of the typical characteristics of credit markets in developing countries, concentrating on the limited size of LDC credit markets and on the apparent dichotomy between formal and informal finance sectors. Then, the importance of financial systems for economic development is briefly outlined in order to explain the relevance of the topic of this essay. The main part of the paper then presents the model of asymmetric information in credit markets pioneered by Stiglitz/Weiss as a possible explanation for the causal origins of these characteristics. The last part shows how successful microfinance institutions may succeed in operating in rural credit markets by their ability to overcome problems of imperfect information.

Seminar paper from the year 2005 in the subject Economics - Monetary theory and policy, grade: A= 1,0, Johns Hopkins University (School of Advanced International Studies (SAIS)), course: Theories and Models of Economic Development, 29 entries in the bibliography, language: English, abstract: Credit markets in developing countries differ substantially from their counterparts in OECD countries. Apart from the obvious differences in institutional development, technology and productivity which are both measures for and causes of underdevelopment, typ ical LDC credit markets have two main characteristics. Firstly, their financial systems are very small compared those in industrial economies. Secondly, developing countries are characterized by very big informal financial sectors that coexist with formal credit institutions. Interestingly, credit contracts differ highly between these two sectors and there seems to be only very limited inter-sector competition. The following paper ventures to explain the persistence of these peculiarities in rural credit markets1 using the model of asymmetric information in credit markets developed by Stiglitz and Weiss. By applying the model specifically to LDC credit markets I show that asymmetric information is among the major reasons for the underdevelopment of rural credit markets. Building on these findings I then explain how Microfinance Institutions (MFI) have lately been able to overcome some of the problems of imperfect information and strive in markets formerly dominated by informal money lenders. The first part of this paper provides an overview of the typical characteristics of credit markets in developing countries, concentrating on the limited size of LDC credit markets and on the apparent dichotomy between formal and informal finance sectors. Then, the importance of financial systems for economic development is briefly outlined in order to explain the relevance of the topic of this essay. The main part of the paper then pre

Developing countries now use monetary policy as part of their adjustment programmes but its targets, the tools, and the theory were developed for advanced countries. Low income countries do not have the sophisticated financial sectors that rich ones can assume, and the shocks and size of adjustment which they face may be much greater. Using six country studies, with special analysis of the roles of the external sector and the informal financial sector, this book analyses the interaction among monetary policy, the financial sector, and development.

Invisible to official statistics and operating outside the reach of governmental regulation, informal finance markets often prove more efficient and more fair than their formal counterparts. The authors of these studies emphasize the diversity and richness of informal credit markets.

In 2011 the World Bank—with funding from the Bill and Melinda Gates Foundation—launched the Global Findex database, the world's most comprehensive data set on how adults save, borrow, make payments, and manage risk. Drawing on survey data collected in collaboration with Gallup, Inc., the Global Findex database covers more than 140 economies around the world. The initial survey round was followed by a second one in 2014 and by a third in 2017. Compiled using nationally representative surveys of more than 150,000 adults age 15 and above in over 140 economies, The Global Findex Database 2017: Measuring Financial Inclusion and the Fintech Revolution includes updated indicators on access to and use of formal and informal financial services. It has additional data on the use of financial technology (or fintech), including the use of mobile phones and the Internet to conduct financial transactions. The data reveal opportunities to expand access to financial services among people who do not have an account—the unbanked—as well as to promote greater use of digital financial services among those who do have an account. The Global Findex database has become a mainstay of global efforts to promote financial inclusion. In addition to being widely cited by scholars and development practitioners, Global Findex data are used to track progress toward the World Bank goal of Universal Financial Access by 2020 and the United Nations Sustainable Development Goals. The database, the full text of the report, and the underlying country-level data for all figures—along with the questionnaire, the survey methodology, and other relevant materials—are available at www.worldbank.org/globalfindex.