Informal financial institutions and its system are important

Informal financial institutions and its system are important in serving the group at the bottom of the income pyramid. Explain the characteristics of informal financial institutions and the importance of its financial systems.

Solution

Explain the characteristics of informal financial institutions and the importance of its financial systems.

The informal sector mobilizes rural savings and small savings from low-income urban households. They operate on days that are convenient for their members. The associations among them accept any modest sum and lend themselves to management of a large number of small accounts. It is non-bureaucratic and access to credit is quite simple. Literacy is not a requisite and needs little written documents. Loan approvals are straightforward and there is no cause of delay. Rejections are rare, and disbursements are quick. While transactions are low, repayment costs are high. Informal groups are aware of the problems confronting those regarding repayments, and hence they deal with these in a much pragmatic manner. The interest paid on deposits compares reasonably well with that of formal sector which ultimately provides incentives for the rural and small urban households to save.

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