Mainstreaming Informal Financial Institutions

In this paper, the author presents the evolutionary trends of informal financial institutions (IFI), how donors can support IFIs and different methods of mainstreaming IFIs, with examples from Africa. Some of the evolutionary trends mentioned by the author are:

• From labor, kind or premonitory currency, to cash;
• From non-financial to financial groups;
• From rotating to non rotating patterns;
• From short-lived to permanent groups;
• From savings only to savings-driven credit;
• From traditional organization to microfinance (MF).

Some of the donor options that the paper mentions are:

• Enhancing management skills and operational practices;
• Transforming rotating and non rotating savings and credit associations into financial intermediaries with permanent loan funds;
• Availing opportunities for upgrading to regulated financial institutions and mainstreaming into formal financial sector;
• Entering into linkages with commercial banks.

The author concludes that the IFIs should stay informal if the policy environment is repressive. However, with non repressive policy environment, promoting appropriate legal reforms, prudential regulation and delegated supervision can enhance the outreach of IFIs.