Informal Finance Literature Review

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CPM: 9680


In any country the financial system consist of two components, which is formal and informal sector. Formal sector is well organized and institutionalized compared to informal sector. These are subjected to the investigation of the major regulatory bodies of the country. Even though these regulatory bodies implement policies regarding the informal sector, it is still not adequately addressed the activities conduct by these institutions. ?The financial systems of most developing countries are characterized by the co-existence and operation side by side of a formal financial sector and an informal financial sector - a situation
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It plays a vital role in a developing country, but it may result negative impacts on the economy. Most of the times Informal finance sector is focusing on Rural sector rather than the urban sector. Informal financing typically consists of small, unsecured, short term loans restricted to rural areas, agricultural contracts, households, individuals or small entrepreneurial ventures and helps in servicing the lower end of the market. While Formal financial system is associated with faster growth and higher profit reinvestment rates for those firms that receive it.? (Ayyagari, Meghana, and Vojislav Maksimovic,…show more content…
The security level of the informal financial sector is highly questionable in today?s context with the incidents occurred in the recent past. the formal sector, where physical investment faces no risk of destruction, and the informal sector, where investment in each period is subjected to an exogenous risk of destruction. (Prof. Mudit Kapoor, 2004)
There is also increasing evidence that poor people are facing an extremely risky environment when they save in the informal sector. Thus it is clear that when discussing the risk to poor people?s savings, this has to been evaluated on a relative basis. Very often all the alternative savings systems available to poor people are risky. The research revealed that 99% of clients saving in the informal sector report that they have lost some of their savings. 15% of those saving in the formal sector report that they had lost some savings and 26% reported lost savings in the semi-formal sector. (Graham A.N.,

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