FORMAL AND INFORMAL FINANCE SYSTEMS.

BY: Meghana.V.KumarSEM: VCOLLEGE: 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

Specialized Non bank financial institutions

Formal system of finance is licenced by the Central bank.

Commercial and development banks.

Rural banks, post bank, savings and loan companies, savings and loan companies.

Large businesses government

Large rural enterprises, salaried workers, small and medium enterprises.

INFORMAL Informal system of finance is not licenced by the Central bank.

Savings collectors, savings and credit associations and moneylenders.

The principal clients who do informal finance are 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.