Mobilizing resources from the informal sector

The structure of formal institutions is generally inadequate to provide financial services for small farmers, small-scale entrepreneurs and the poor. A promising approach is resource mobilization by the private sector which, instead of focusing on traditional financial intermediation, focuses on removing other barriers to resource mobilization by and for the poor. These barriers include, for example, insurmountable collateral requirements, adverse selection and the low levels of literacy and numeracy among the poor that constrain their access to formal sectors.

Saving institutions are both informal and quasi-formal. Informal finance includes family and friends - who provide most of the savings facilities and loans to the poor - money-lenders and pawn-brokers and saving and loan associations. Informal financial agents, for example, know their clients better than formal banks do, which reduces information costs; but despite their popularity and potential, most informal finance arrangements have limitations. They are segmented from larger markets, which reduces competition and limits their ability to mobilize resources.