Financial sector development - Sida

formal and informal markets is not fully relevant as, among other things, differences in
borrowers’ transactions costs are not accounted for.
Borrowers’ as well as lenders’ transaction costs are very low on the informal financial
markets. The costs of the borrowers are low primarily because information costs are low
or nil, costs for loan collection as well as service delivery are low. Informal market actors
successfully manage risk primarily by dealing with clients they know.
Recent case studies from Africa show that the linkages between the formal and the
informal sectors are weak and notably limited to deposits of temporary income surpluses
with formal institutions. Except the theoretical arguments forwarded by structuralists
explaining fragmentation with asymmetric information and differences in transaction
costs, the reasons for the lack of integration are poorly documented based on empirical
research. Some observations suggest that the financial products are poorly adjusted by
formal institutions. Observations in Ghana suggest that prejudiced attitudes towards
informal actors constrain integration.
Most interventions through semi-formal actors seem to originate from a perception of
unsatisfied needs for credit. Such interventions tend to ignore savings and to be ad hoc in
nature without ambitions to establish lasting services. Often, no thought has been given
to what will happen at the end of a project period. Institution building has played a minor
role in such interventions. Many interventions have emphasised social objectives at the
expense of financial viability and sustainability.
A review of recent literature on rural finance suggests that the success stories, in the
sense that viable, self-sustained institutions of a scale of significance have been
established are relatively few. Similarities between the success stories include a strong
emphasis on institution building, deliberate attempts to ”copy” informal market actor
operations in order to reduce transaction costs and risk and provision of both deposit
and borrowing facilities.
The promotion of financial services to the informal sector should draw upon lessons from
the past which include the following:
• Macro-economic and sector policies are of profound significance for the evolution of
financial markets.
• The promotion of financial services means the promotion of a system of interrelated
service providers.
• The informal financial sector is of significant importance in Africa, often accounting for
more than half of the transactions. Contrary to the expectations of many, this sector
has increased in importance following economic liberalisation.
• Financial services should be provided by viable and permanent institutions. Projects
which are not geared at building permanent and financially self-reliant institutions are
seldom successful.
• Financial intermediation has to be seen as a matter of providing services rather than
as the provision of a production input (credit) and should, at least, include both savings
and credit.
The strategic options for promoting rural finance service provision, which in Eastern and
Southern Africa primarily means services to small scale farmers, might be the following:
1. Promotion of the informal finance sector, involving:
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