Links between Institutional and Non-institutional Financial Sectors
The general bias of policy in developing countries ranges from studied neglect to active hostility towards the non-institutional sector. This seems misconceived considering that the size and persistence of this sector testifies to its inherent strength and economic rationale. Attempts to formalize the informal sector are liable to fail because its very rationale derives from its informality. Excessive regulation of the informal sector is more likely to result in its disappearence without providing for adequate institutional substitutes. The appropriate strategy should therefore be for the institutional sector to take on more of the desirable features of the informal sector, particularly in relation to the small saver and small borrower. Some of the elements of such a programme would be as follows:
- Creation of a panel of guarantee brokers (eg. like the compradores of the foreign banks in South East Asia) attached to each commercial bank. These brokers, who would be drawn from the ranks of non-institutional lenders, could work on a salary-cum-commissiion basis to guarantee loans to small and risky customers.
- Creation of credit risks insurance system in the institutional sector to insure loans to small or risky customers (on the lines of the systems in India and Malaysia).
- Provision of centraal bank rediscount or refinance facilities for credit instruments of the informal sector subject to a guarantee by authoried brokers that it is not accommodation paper and represents genuine credit.
- Institutional lenders, particularly rural cooperatives, should earmark a certain proportion of their credit for essential consumption purposes.
- Lending procedures, including hours of work of institutional lenders should become more flexible and informal and the social, cultural, and psycologial attitudes of bank staff should be more in tune with the local environment and the needs of the local community.
Return to the Documents Section
Hari Srinivas - hsrinivas@gdrc.org
Return to the ICM Homepage
