Informal Finance: Origins, Evolutionary Trends and Donor Options

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Informal financial institutions (IFIs), among them the ubiquitous rotating savings and credit associations, are of ancient origin. Owned and self-managed by local people, poor and non-poor, they are self-help organizations which mobilize their own resources, cover their costs and finance their growth from their profits. With the expansion of the money economy, they have spread into new areas and grown in numbers, size and diversity; but ultimately, most have remained restricted in size, outreach and duration. Are they best left alone, or should they be helped to upgrade their operations and integrate into the wider financial market?

Under conducive policy conditions, some IFIs have spontaneously taken the opportunity of evolving into semiformal or formal microfinance institutions (MFIs). This has usually yielded great benefits in terms of financial deepening, sustainability and outreach. Donors may be able to build on these indigenous foundations and provide support for various options of institutional development, among them, e.g. incentives-driven mainstreaming through networking; encouraging the establishment of new IFIs in areas devoid of financial services; linking IFIs/MFIs to banks; strengthening NGOs as promoters of good practices; and, in a non-repressive policy environment, promoting appropriate legal forms, prudential regulation and delegated supervision.

This paper is illustrated throughout with examples drawn from the author's experience and gives a useful introduction to the concept of Financial Services Associations (FSAs) which was pioneered by IFAD. FSAs provide a flexible model for the delivery of low cost financial services in rural areas by establishing village level financial structures that are initiated, owned and operated by villagers themselves. At the end of the paper there is a useful summary of the objectives donors may pursue in order to mainstream IFIs, together with a checklist of possible key results and outputs.

This paper was first presented at the conference on Advancing Microfinance in Rural West Africa held in Bamako, Mali in February 2000 and later published in the Journal of Developmental Entrpreneurship, Vol. 6, No. 1 (April 2001)

Document Information

Document Type Paper
Author Seibel, H.D.
Year of Publication 2000
Publisher IFAD
Number of Pages 12 pp.
Region / Country Global /
Primary Language English (en)
Keywords Member Owned Institutions, Informal Finance, Financial Service Associations
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