A Continuum of Informality of Credit

The commonly held belief of credit market "duality" in the form of "formal" and "informal" is misleading and any attempts at aggregation have either a locational or sectoral bias (core/periphery, urban/rural, modern/traditional). The varying degrees of informality and flexibility observed in the study are complex and multi-dimensional, with characteristics ranging from freedom from regulation, flexibility in interest rates and periods to small scale of operation - covering both its organizational and operational features.

In spite of these problems, an attempt has been made to develop a continuum of credit informality. This would distinctly show the gray areas - those informal operators who exhibit characteristics of formal suppliers or formal suppliers who have adopted the working systems of the informal supplier.

The continuum was not plotted in the typical linear manner, but on a dual-axis format. This was done by distinguishing loan conditions into "monetary" and "non-monetary" components along the x and y axis. The monetary components covered loan amounts, rates of interest, loan periods and repayment schedules; while the non-monetary components covered transaction amounts, collateral requirements, proximity to borrowers and personalized services

In charting the continuum, focus has been maintained on suppliers who provide informal credit in urban squatter settlements. Unlike formal credit institutions, most functioned as single entities with few linkages between operators. But the number of operators in the market were many, contrary to popular belief, with competition keen among them.

The Continuum:

The essential constituents in the continuum were:

  1. Informal Suppliers - those who exhibit fully informal characteristics in their setup. Examples include friends, relatives and neighbours.
  2. Formal Suppliers - those who exhibit fully formal characteristics, examples include, commercial banks, finance corporations/ companies.
  3. "Informally-formal" suppliers or Transactional Credit Suppliers - those who are essentially 'formal' in their setup, but exhibit 'informal' characteristics. Examples include pawn brokers, money lenders and employer credit.
  4. "Formally-informal" suppliers or Mutual Credit Suppliers - those who are essentially 'informal' in their setup, but exhibit formal characteristics. Examples include Chit funds (ROSCAs), credit societies and people's organizations.

Numbers three and four above represent an attempt to make distinctions within the "gray areas" of ICM characterization. A number of unique features of the market are cast in perspective with such distinctions.

The data to construct the continuum was obtained from a survey of 256 households in six squatter settlements of Bangalore, India. While this covered the demand side of the market, 56 informal credit suppliers were also studied to cover supply side of the market. The study was conducted in June-July, 1991.

Click on the four quadrants of the Continuum to find out more:

| Transactional Credit Suppliers | Formal Credit Suppliers |


| Personal Credit Suppliers | Mutual Credit Suppliers |


Abstracted from:
Srinivas, Hari and Yoichiro Higuchi, "A Continuum of Informality of Credit: What can Informal Lenders Teach Us?" Savings and Development Vol. XX, No. 2, 1996.

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Hari Srinivas - hsrinivas@gdrc.org
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