Making Money Work for the Poor in India: Inclusive Finance through Bank-Moneylender Linkages

This paper exposes the inefficacy of the formal financial system and builds a case for bank-moneylender linkages. The authors contend that despite one of the most widespread financial systems in India:

• Most poor still do not have access to formal financial services, because the formal sector (including microfinance) failed to leverage the strengths of informal lending.
• 45% of rural lending in India is by moneylenders.

The paper draws on the vast literature demonstrating the importance of the moneylenders in rural economy across the world. It says that the success of moneylenders is due to:

• Their efficiency and innovations,
• The inadequacy of the formal financial systems.

The paper:

• Challenges the popular belief that moneylenders are exploitative and unscrupulous.
• Acknowledges moneylenders as legitimate constituents of financial system due to their extensive social network and substantial credibility.
• Recommends the innovative redesign of financial system based on Bank-moneylender linkages.
• Proposes full integration of traditional and contemporary financial innovations to increase utility to the poor.

The paper concludes with a call for action research on the issue.