An Assessment of the Role of Informal Finance in the Development Process

Informal finance consists of a heterogeneous set of individual and group financial arrangements. Information and transaction cost advantages are effectively used to offer a wide variety of services, especially to the rural poor who lack access to formal finance. It is difficult, however, to correctly assess the role of informal finance in the development process due to its complexity and the lack of a single framework to study its characteristics and performance. Therefore, divergent conclusions and policy recommendations have been developed, including benign neglect, regulating informal finance, and encouraging formal-informal linkages. This paper argues that the formulation of more appropriate policies requires further research to develop a consistent framework to conceptualize and empirically study informal finance