Informal Financial Arrangements: Types, Recent Shift and Arguments

Abstract

Most developing countries across the world exhibit a duality of formal and informal economies. The current scenario is evidence that policymakers in India have made efforts to restrict various forms of informal finance by categorizing them as usurious and replacing them with newer banking concepts and practices. However, it is clear that the formal financial system is not exempt from theoretical and implementation flaws, leading to a significant demand and relevance for informal financial arrangements. This paper provides a concise overview of informal finance, its categorization, the shift of focus from credit supply to collective arrangements, and its enduring prevalence. The paper aims to emphasize the contributions of informal finance in promoting savings, facilitating credit provision, and sharing economic risks in the Indian market. Additionally, it critically examines the strengths, weaknesses, and the role of informal financial arrangements in the Indian economy