Informal Sector Finance Systems: What The Microfinance Industry Can Learn From Them

This paper details lessons from the informal sector that may help the microfinance industry respond better to clients needs and reduce costs.

The paper states that the poor need financial services to respond to:

• Lifecycle events;
• Emergencies;
• Investment opportunities;
• Consumption needs.

The informal sector financial strategies employed by the poor include savings, loans, leasing, insurance, investments and domestic and cross-border money transfers.

Informal financial systems are popular because they:

• Are fast and accessible, leading to low transaction costs for clients;
• Provide small daily deposits, short-term loans and small loans;
• Allow reciprocity, which is a strong basis for financial transactions;
• Offer financial innovations that engender flexibility and speed;
• Are disciplined - non-performance is quickly punished and borrowers have to earn their loans;
• Use savings as the basis of transactions and not subsidized outside cash.

The paper concludes by recommending that MFIs should:

• Find ways of responding to the poor's wide range of financial service needs;
• Conduct systematic market research, paying attention to the competition from the informal sector;
• Design products and services around the customers' cash flow capacity and patterns;
• Devise micro-financial delivery systems that are convenient to allow for local, frequent and quick transactions;
• Invent ways of working more effectively with the informal sector, particularly in the area of devising safety nets through which clients can access lump sums of money to smooth household income flows or to meet emergencies.