The Continued Relevance of Informal Finance in Development

The Continued Relevance of Informal Finance in Development

Informal finance is ancient. What is it, and does it still have a place in today’s economies? Throughout the first half of the 19th century and into the 1970s, informal finance was studied by anthropologists under the heading of indigenous or traditional organizations. In the 1970s, technical assistance agencies rediscovered these organizations in the context of self-help based on savings, a concept that had been central to the credit cooperative movement founded in the 19th century by the German mayor Friedrich Wilhelm Raiffeisen. In the 1980s, self-help groups (SHGs) came to be known as informal financial institutions, and their reputation was greatly enhanced by the U.N.’s Third International Symposium on the Mobilization of Personal Savings in Developing Countries, held in Yaounde, Cameroon in 1984.

Formal and Informal Finance

Formal finance is regulated and supervised by the central bank or another financial authority; informal finance is not, but may fall under a local normative framework such as “native law and custom,” with compliance enforced by social pressure. Between the two sectors lies semiformal finance: organizations and projects registered and recognized under a government authority, but not regulated. From a regulator’s perspective, nonformal finance would encompass both semiformal and informal finance; the line between them is not sharply drawn.

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