Informal Finance and Formal Microfinance

The Rationale of their Coexistence in the Context of Urban African Financial Markets
First Edition

This dissertation endeavours to shed light on the paradox of the persistence of informal finance in urban African markets despite the emergence of a vibrant microfinance sector. To do so, it analyses the rationale of the financial choices of the micro-entrepreneurs operating in the markets of Ouagadougou (Burkina Faso). In particular, a careful examination of the motives driving the combinative use of informal and formal microfinance is carried.

In order to lay deep theoretical foundations to this analysis, this thesis develops a model describing the financial behaviour of the micro-entrepreneurs in the presence of hyperbolic preferences and social influences. The solution of this model shows, inter alia, that the financial choices are not solely driven by economic motivations but also by social motivations. This result is confirmed by empirical observations which show, among other things, that social relations play an important role in explaining the persistence of informal finance.

Besides, it appeared also that the combinative use of informal finance and microfinance can be explained, on the one side, by the fact that the motives driving the demand for informal and for formal finance are not always the same and, on the other side, by the fact that these two types of financial mechanisms are more likely to be used as complements than as substitutes.

Ultimately, this thesis unfolds a new perspective for apprehending the coexistence of informal and formal microfinance. Informal finance is no longer considered as a makeshift, but as an integral part of the financial landscape of the Sub-Saharan urban financial markets. Therefore, microfinance institutions and policy makers ought to adopt a more positive and pro-active attitude vis-à-vis informal finance.


Paperback - In English 24.00 €

Specifications


Publisher
Presses universitaires de Louvain
Title Part
Numéro 695
Author
Pierre-Germain Umuhire,
Collection
Thèses de la Faculté des sciences économiques, sociales, politiques et de communication
Language
English
BISAC Subject Heading
BUS000000 BUSINESS & ECONOMICS
Onix Audience Codes
06 Professional and scholarly
CLIL (Version 2013-2019)
3283 SCIENCES POLITIQUES
Title First Published
22 May 2013
Type of Work
Thesis
Includes
Index, Bibliography

Paperback


Publication Date
22 May 2013
ISBN-13
9782875581983
Extent
Main content page count : 240
Legal Copyright Date
D/2013/9964/13 Louvain-la-Neuve, Belgium
Code
88091
Dimensions
16 x 24 x 1.3 cm
Weight
397 grams
List Price
24.00 €
ONIX XML
Version 2.1, Version 3

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Contents


ACKNOWLEDGMENT I
ABSTRACT III
TABLE OF CONTENTS IV
GENERAL INTRODUCTION . 1
i. The research question and objectives 3
ii. Research assumptions 4
iii. Empirical methodology and the scope of the research . 6
iv. Thesis outline 7
CHAPTER I. THE DEMAND FOR INFORMAL AND ITS COEXISTENCE WITH
FORMAL MICROFINANCE: CONCEPTUAL FRAMEWORK . 11
1.1 Financial informality: an elusive concept . 12
i. The ILO approach 12
ii. The specific law criterion 13
1.2 The economics of financial informality 15
i. Financial dualism: informal finance as a solution of last resort . 16
ii. Informal finance as a deliberate choice . 20
iii. Important remarks with respect to the above theoretical arguments 26
1.3 Informal finance and social influences . 28
i. The social influence a` la Granovetter or "the bandwagon effect" 29
ii. The social effect a` la Polanyi or the reciprocity effect . 31
iii. A global analytical framework: putting things together 33
1.4 Analysing the coexistence of informal and formal microfinance:
substitutability or complementarity . 36
i. Substitutability 36
ii. Complementarity 38
TABLE OF CONTENTS
v
iii. Summing up 41
1.5 Conclusion 43
CHAPTER II. MICRO-ENTREPRENEURS' FINANCIAL LANDSCAPE. 47
2.1 Empirical methodology 48
i. Combining qualitative and quantitative approaches . 48
ii. Method for data collection . 49
iii. Questionnaire design 52
iv. Sample design . 52
2.2 The micro-entrepreneurs' socio-economic characteristics 58
i. Gender, Age and Education 59
ii. The micro-entrepreneurs’ income . 60
iii. The business activities of micro-entrepreneurs . 64
2.3 The micro-entrepreneurs’ financial landscape . 65
i. The Pari (Roscas) . 66
ii. The Cauri d’or . 70
iii. Interest-free loans between relatives & friends 73
iv. The supplier’s credit . 73
v. Formal microfinance . 74
2.4 The magnitude of the micro-entrepreneurs’ financial activity 82
i. Financial enrolment rates . 82
ii. Volume of financial cash flows . 87
2.5 Comparative analytics: informal finance vs. formal finance 90
i. The strengths of the informal financial mechanisms . 90
ii. The weaknesses of the informal financial mechanisms . 92
iii. The price of money . 93
2.6 Conclusion 96
CHAPTER III. UNDERSTANDING THE MOTIVES DRIVING THE FINANCIAL
CHOICES OF THE MICRO-ENTREPRENEURS IN THE PRESENCE OF HYPERBOLIC
PREFERENCES AND SOCIAL INFLUENCES 99
3.1 Conceptual framework: the micro-entrepreneur financial choice rule under
hyperbolic preferences and social influences 100
TABLE OF CONTENTS
vi
i. Hyperbolic preferences 100
ii. The micro-entrepreneur decision problem 102
iii. Social influences and the perceived return/cost 103
iv. Model solution using the Bellman principle of optimality . 106
v. A focus on the effects of quasi-hyperbolic preferences 110
3.2 Empirical Framework. 113
i. Empirical specification 113
ii. The Direct Revelation Method . 114
iii. Empirical techniques 120
3.3 Empirical results 122
i. Correspondence Analysis statistics 122
ii. Results discussion . 126
iii. Summing up: overview of the motives driving the micro-entrepreneurs’ choices
134
3.4 Conclusion 137
CHAPTER IV. COMBINATIVE USE OF INFORMAL AND FORMAL MICROFINANCE:
COMPLEMENTARITY OR SUBSTITUTABILITY? . 141
4.1 The magnitude of the combinative use of informal and formal (micro) finance
among micro-entrepreneurs . 141
4.2 How do the micro-entrepreneurs combine financial mechanisms? . 143
i. A brief note about cluster analysis . 143
ii. Clusters of micro-entrepreneurs 144
4.3 Who is combining informal and formal (micro) finance? 148
i. Empirical specification 148
ii. Results and discussion 149
iii. Robustness check & a note on the use of formal credit 154
4.4 Complementarity or substitutability 158
i. Complementarity 158
ii. Substitutability 161
4.5 Conclusion 163
GENERAL CONCLUSION . 167
TABLE OF CONTENTS
vii
i. The diversity of the micro-entrepreneurs financial landscape 167
ii. The combinative use of informal and formal microfinance . 168
iii. The resilience of informal finance: diversity of motives 168
iv. Informal and formal finance: poor substitutes, weak complements . 170
v. Limited access to formal credit 171
vi. Lessons for microfinance institutions and policymakers . 172
vii. Limits and venues for future research . 177
REFERENCES 179
APPENDICES 193
Appendix 1. A brief review of economic approaches to informality 194
Appendix 2. Information asymmetries a` la Stiglitz & Weiss . 200
Appendix 3. Questionnaire (in French) . 203
Appendix 4. Microfinance institutions in Burkina Faso 218
Appendix 5. Solving for the micro-entrepreneur decision rule 219
Appendix 6. Cross tab clusters vs. Micro-entrepreneurs financial choices 227