Informal Finance in Transition

The perceptions of informal finance have undergone significant changes. Historically, informal finance was characterised as highly exploitative. This paradigm has changed owing to a better understanding of informal finance, the changes that have occurred in rural financial markets, economic developments and changes in financial systems. The paper discusses the evolution of rural financial markets as a transitional continuum and challenges the traditional paradigm of informal finance. Informal sources of finance continue to be fairly significant in spite of the increased penetration of financial institutions into rural areas and co-exist with institutional finance. Those borrowing from institutional sources simultaneously source funds from informal sources. Informal sources provide finance for a variety of purposes and persist due to their advantageous characteristics of flexibility, convenience and negligible transaction costs. Informal interest rates still range from zero to as much as 25 per cent per month. While the importance of professional moneylenders has declined, trade credit has grown in importance and cheetus (ROSCAS) continue to be an important financial service. While collateral is not the basis of most informal lending, new forms of security such as post-dated cheques and blank notes signed by the borrower have emerged. Despite over five decades of institutional agricultural credit, most credit for small-scale agriculture is from informal sources. Although country-wide data disclosed a significant decline in informal finance in rural areas, micro studies indicate the predominance of informal sources