Informal Finance

People who live in remote areas far from formal financial institutions or who require more flexible and varied products than those offered by financial service providers often rely on informal finance through moneylenders, family members, or friends. Informal associations also provide services and include rotating savings and credit associations, village community banks, village savings and loans associations, and other community-based savings groups. These latter organizations typically comprise up to 30 members who pool their savings to create a fund from which they can make small loans to individual members. Transactions are simple and transparent, and often take place in front of all the other members.

Informal finance has a long history in poor communities as these tools help low-income people manage their complex financial needs. However, without formal structures or rules, informal finance can be unreliable, expensive, and risky. Financial service providers are working to better understand the financial needs of low-income clients to provide them with the products and services they require, but in a more cost effective, predictable, and secure manner.

A man making pottery. Photo by Sandipan Majumdar, 2008 CGAP Photo Contest.