Informal Rural Finance: An Aladdin's Lamp of Information

This paper breaks down the notion of superiority of the formal financial sector and misunderstandings about the nature and role of informal finance. Conventional development wisdom sees the informal market dominated by a stereotypical selfish village moneylender interested in preserving a stagnant rural economy. It examines:

• Prejudices and stereotyped characterisations of lenders in the informal sector and how these have helped sustain beliefs in the moral and technical superiority of formal finance;
• Belief in the ability of the formal financial sector to eradicate poverty through liberal supply of credit and expansion of the institutional network to rural areas;
• Characteristic crucial to the environment of the poor that conditions financial intermediation, namely its small scale;
• Notion that the informal finance market is inaccessible to researchers because both lenders and borrowers in this market would have a vested interest in remaining silent about its operations.

The paper explains how village communities have traditionally taken care of their own financial needs before development interventions; have woven for themselves a network of protective mutual assistance; and that such networks have numerous components of financial intermediation. It ends with an appeal for unbiased and novel research into this subject.