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Implications of informal credit for policy development in India for building inclusive financial sectors

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  • Shaheel Rafique

    (Rural Development Consultant, North-Eastern Development Finance Corporation Limited, Assam, India)

Abstract

This paper examines the characteristics of the informal credit market in India by giving a historical overview of that market. It also provides a microlevel analysis of the role of informal credit, with the help of a case study of a migrant professional moneylender in an Indian village. India has a long history of professional moneylending. This paper is part of an ethnographic study which fills a research gap in the study of the informal credit market in India. This paper addresses two main issues. The first is the place of a Kabuliwallah, (professional moneylender in the village financial system) and the complementarities with other intermediaries in a village, as well as other dimensions of that business in a district. The second is the implications of the research for formal financial institutions in India. Data from the account books of a Kabuliwallah show that he was complementing the financial services provided by the formal credit institutions operating in the same geographical area. It is a unique business approach, with flexible contractual terms and conditions. The study concludes that, although the informal sector is acknowledged in policy, it is not clear as to how the formal sector should operate in the presence of the informal sector, where the activities of a professional moneylender is a good example. Keeping in view the findings presented, the paper concludes that the adoption of a decentralized process for the formulation of a financial intermediation strategy is required for building an inclusive formal financial sector.

Suggested Citation

  • Shaheel Rafique, 2006. "Implications of informal credit for policy development in India for building inclusive financial sectors," Asia-Pacific Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 13(1), pages 101-127, June.
    • Handle: RePEc:unt:jnapdj:v:13:y:2006:i:1:p:101-127
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    References listed on IDEAS

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    1. Christensen, Garry, 1993. "The limits to informal financial intermediation," World Development, Elsevier, vol. 21(5), pages 721-731, May.
    2. Bolnick, Bruce R., 1992. "Moneylenders and informal financial markets in Malawi," World Development, Elsevier, vol. 20(1), pages 57-68, January.
    3. Vijay Mahajan & Bharti Gupta Ramola, 1996. "Financial services for the rural poor and women in India: Access and sustainability," Journal of International Development, John Wiley & Sons, Ltd., vol. 8(2), pages 211-224.
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