FORMAL AND

INFORMAL
FINANCE
SYSTEMS.
BY: Meghana.V.Kumar
SEM: V
COLLEGE: TOSA
INTRODUCTION
 Access to finance is the ability of individuals or enterprises to obtain
financial services, including credit, deposit, payment, insurance, and
other risk management services.
 Accumulated evidence has shown that financial access promotes
growth for enterprises through the provision of credit to both new and
existing businesses.
 It benefits the economy in general by accelerating economic growth,
intensifying competition, as well as boosting demand for labour.
 Financial services may be provided by a variety of financial
intermediaries that are part of the financial system. A distinction is
made between formal and informal providers of financial services,
which is based primarily on whether there is a legal infrastructure that
provides recourse to lenders and protection to depositors.
 TIER DEFINITION INSTITUTIONS PRINCIPAL
CLIENTS
FORMAL Commercial and development Large businesses
banks. government
Formal system of
finance is licenced by
Specialized Non the Central bank. Rural banks, post bank, savings Large rural enterprises,
bank financial and loan companies, savings and salaried workers, small
institutions loan companies. and medium enterprises.

Informal system of Savings collectors, savings and The principal clients who
INFORMAL finance is not licenced credit associations and do informal finance are
by the Central bank. moneylenders. either self-employed or
poor people.
FORMAL FINANCIAL SECTOR.
 Formal financial institutions often ignore small farmers, lower income
households, and small-scale enterprises in favour of large scale, well-off,
literate clientele who can satisfy their stringent loan conditions.
 Complex administrative services procedures are beyond the knowledge
and understanding of the rural masses and small savers.
 Formal financial institutions do not mobilize rural savings or small scale
deposits.
 Formal sector of institutions are selective regarding their clients, so as to
avoid clients who make only small deposits.
 Loan application procedures are very complex and needs reading and
writing skills so that a file on the borrower maybe established.
 The transaction costs are high and the repayment costs are low.
 The formal sector regularly has loanable funds available.
 The formal sector keeps written records on the activities of the clients.
INFORMAL FINANCIAL SECTORS
 The informal financial sector provides savings and credit facilities for
small scale farmers in rural areas, and the lower-income households and
small-scale enterprises in urban areas.
 The procedures of the informal schemes are usually simple and straight
forward as they emanate from local cultures and customs they are easily
understood by the population.
 The informal sector mobilises rural savings and small savings from low
income urban households.
 Informal groups operate on the days which are convenient for their
members.
 Informal sector associations accept any amount of regular savings,
even the most modest sums which a saver can afford to set it aside. The
financial techniques on which such informal groups are based lend
themselves to the management of a large number of small savings.
 Transaction costs are low and repayment costs are high.
 The interest paid on the deposits in informal sector compares favourably
with that paid in the formal sector, thus providing an incentive for rural
and small urban house holds to save.
INFORMAL FINANCIAL SECTORS
 The informal financial sector provides savings and credit facilities for
small scale farmers in rural areas, and the lower-income households and
small-scale enterprises in urban areas.
 The procedures of the informal schemes are usually simple and straight
forward as they emanate from local cultures and customs they are easily
understood by the population.
 The informal sector mobilises rural savings and small savings from low
income urban households.
 Informal groups operate on the days which are convenient for their
members.
 Informal sector associations accept any amount of regular savings,
even the most modest sums which a saver can afford to set it aside. The
financial techniques on which such informal groups are based lend
themselves to the management of a large number of small savings.
 Transaction costs are low and repayment costs are high.
 The interest paid on the deposits in informal sector compares favourably
with that paid in the formal sector, thus providing an incentive for rural
and small urban house holds to save.