People run their financial lives with a variety of tools. The first tools that come to mind are likely to be formal, like checking accounts and credit cards. But households often use informal tools that are harder to see from outside, like short-term loans from friends or relatives. It’s tempting to think that these informal tools are last resorts, or second-best solutions, but informal financial mechanisms are often combined with formal tools, and sometimes are preferred. Among the families in the U.S. Financial Diaries (USFD), for instance, the use of informal loans was as common as the use of alternative financial services (e.g., payday loans, pawn shop loans), though the volumes transacted informally tended to be smaller. Understanding how these informal finance tools work, and why households use them, can offer new perspectives for financial services innovators and policy makers.
Publications
Viewing all posts with tag: Informal Providers
Lending Sources by Country GDP
In wealthy and poor countries alike, people rely on a variety of lending sources to meet their financial needs.
Emergency (Hand) Loan
Emergencies can derail families and prevent them from getting ahead. This study describes the design, implementation, and results of a pilot emergency (“hand”) loan product in India. The product achieved its original intent, but the pilot encountered considerable institutional and execution challenges. The experience generated lessons for future product innovation.
Borrowing to Save: Perspectives from Portfolios of the Poor
It’s not surprising that saving is hard for many of us. We’re impatient, temptations are at hand, and savings devices are seldom ideal. By the same token, it would not be surprising to find that we have a hard time keeping money in the bank. But, puzzlingly, new studies give examples of people withdrawing funds less often than neoclassical economic theory suggests they should (e.g., relative to the simulations of optimal savings in Deaton 1991). And, paradoxically, it is often the same people who had trouble saving who also have trouble drawing down their savings. Some are so reluctant to dis-save that they willingly borrow at expensive interest rates to avoid touching their savings.
Take-up: Why Microfinance Take-up Rates Are Low & Why It Matters
If you listen to the strongest pitches for microfinance, you would imagine that everyone offered microfinance would leap at the chance to be a customer. Yet this is not so. Evidence shows that it’s usual that under half of eligible households participate in microfinance. Moneylenders are still in business, and many individuals in develop- ing countries still rely primarily on family and friends to meet their needs for money. This is not necessarily a bad thing: informal sources of credit provide a useful way to finance profitable investments or respond to life events. But it shows that the demand for existing microfinance institutions and products can’t be taken for granted.