Informal Finance and Intermediation

This paper states that rural finance has become a key concept in development planning. It argues that one sided development strategy of top-down capitalization has been very narrow, leading to increased dualism of economy and society. It suggests four strategies by which this duality can be reduced:

• Upgrading the semi-formal financial agents and institutions to use the advantages of particular informal lenders;
• Downgrading banks;
• Linking formal banks with self-help groups to use peer monitoring to reduce risk of lending;
• Institutional innovation involving implementation of particularly member/community directed financial institutions.

The paper provides reasons for the failure of subsidized credit:

• Low fixed lending rates resulting in low saving rate;
• Financial repression impacting the quality of investment, leading to exclusion of high-risk projects as also those with very low returns;
• Low to negative profit margins resulting in only large customers obtaining bank credit.

The paper concludes that the failure of subsidized credit has supported the assumption that instead of considering lack of capital as the primary development impediment, the financial system has to be reorganized.