FinDev Blog

Does Informal Finance Still Matter?

Evidence from Kenya, Ghana, Tanzania and Zambia
Savings group meeting, Senegal. Photo by Natalie Brown, 2018 CGAP Photo Contest.

Informal Savings Mechanisms (ISMs) have long been important to many people’s day-to-day money management across Africa. These mechanisms, which include Savings Groups, Rotating Savings and Credit Associations or even leaving savings with a person outside the immediate family, are a set of different ways in which individuals or groups of people save money and access other financial services. ISMs build on key principles of small-balance saving in that they a) help users build up larger lump sums of money; and b) provide encouragement and nudges from peers that strengthen the discipline to save. But as formal financial services become much more prevalent in the region, what will happen to these ISMs? Will they fall by the wayside as the digital revolution takes over? Or will they remain relevant somehow?

Formal finance is expanding rapidly… but informal finance also continues to grow

In Kenya, a country at the forefront of financial innovation in Africa which can signal early trends, FinAccess data shows us that formal financial inclusion expanded from 27 to 83 percent of the population between 2006 and 2019. During the same period, the percentage of customers using only the informal sector shrank from 32 to 6 percent. However, the data also shows us that users did not abandon the informal sector; they simply added formal financial services to their money management mix while they continued to use ISMs as well. The percentage of adult Kenyans using two or more types of financial services expanded greatly over this time period, from 19 to 74 percent. It is not surprising that with increasing choice, Kenyans choose not to put all their financial eggs in one basket. And one of those baskets is still the ISMs. Between 2013 and 2019, the total percentage of the population using ISMs (exclusively or not) actually increased from 28 to 30 percent. Clearly, informal finance has remained relevant to millions of people in Kenya, even while formal finance has also bloomed.

The percentage of customers who use mobile money but do not have an account at an FSP (they may receive digital remittances or welfare payments, for example) doubled from 32 to 64 percent between 2011 and 2017. In Ghana, Tanzania and Zambia, Findex Microdata allows us to see similar information and trends for the time period of 2011 to 2017. Our analysis shows that in these three countries:

  • The percentage of the population using ISMs also expanded rapidly, from 8 to 19 percent during this time period. In total, 7.3 million additional savers started using ISMs between 2011 and 2017.
  • Most of this rapid expansion came from those using both ISMs and FSP accounts, who grew from 5 to 16 percent of the population.
  • The percentage of the population using only ISMs remained constant at 3 percent.
  • Interestingly, the percentage of the population using only FSPs slightly decreased from 7 to 6 percent.

Usage of formal and informal financial services in Ghana, Tanzania and Zambia and comparison with Kenya.
Source: Analysis of Microdata by SatF team; primary data from The Global Findex Database 2017, The World Bank.

Even though the Findex and FinAccess datasets use different methodologies and collected data in different years, the broad trends across formal and informal finance are validated for these four countries. In both datasets you can clearly see a diminishing role for informal finance by itself, but growing usage of ISMs alongside the rapid expansion in formal financial inclusion.

Why do people still use informal finance?

As we can see from the data, ISMs continue to be relevant for people in Kenya, Ghana, Tanzania and Zambia. Why is that? ISMs offer a useful service that fits into people’s lives, and they often provide added value beyond financial services. These community-based savings groups help their users to accumulate savings, starting with amounts as low as $0.50 every week in local currency. They operate on simple rules, which are agreed upon and enforced by members. They can be flexibly adapted across groups and over time, and respond to local demand for savings and loans. While the financial transactions are the primary incentive for the groups to meet on a regular basis, they also serve many other social and development purposes. Many ISMs offer value to customers through non-group mechanisms as well, such as Susu collection, where a deposit collector regularly visits homes or businesses to collect savings.  

With their flexibility and non-financial benefits, it is a real challenge for FSPs to replicate what ISMs can do on their own. However, FSPs can also provide many financial services which ISMs can’t, such as security of surplus cash, saving anonymously, saving larger lump sums and/or over longer periods of time, bigger and longer-term business loans at competitive interest rates, and micro-insurance.

In the end, access to both formal and informal services improves customers’ awareness and choice and challenges FSPs to do better.

Strengthening linkages between FSPs and informal savers

SatF’s qualitative research and analysis, along with the work with our FSP partners, have confirmed what the data show - that many ISM users are already convinced of the case for mixing formal with informal and that they see the two as complementary. We therefore work to strengthen the commercial linkages between FSPs and informal savers, supporting partner FSPs to articulate what value formal institutions bring to ISMs and their users.  For example, FSPs may provide payments system access via a mobile wallet for ISM users. They may allow ISM users to shift their savings through time to when they most need it, as opposed to the pre-established ISM pay-out time. Or FSPs can introduce credit as a genuine add-on to the ISM’s existing lending.

What is clear is that stand-alone bank or MFI accounts with no digital offer, as well as the purely informal, cash-based collective savings outside the home, are being left behind. This is something to celebrate, as digital finance and ISMs together are finally drawing money out from under the mattress!


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Graham Seel
04 October 2019

It is good to see data-driven confirmation of what intuitively one would expect - even going back to Diaries days, it was apparent that poor households use many savings and credit mechanisms. The question is: does it really matter? I would argue it is critically important in vulnerable regions and communities that informal savings mechanisms continue, not just for the flexibility they add, but also for the non-financial community benefits. Savings Groups of all kinds bring community cohesion, female empowerment, peace-building, and a forum for learning and exploring such diverse activities as HIV management, sustainable agriculture, marketing, and literacy training.
I am a volunteer consultant with World Renew, which is particularly conscious of the need for holistic capacity-building in all of these areas - savings (they use the VSLA model) forms the core of many other related activities that lead to community resilience.

Steve Peachey (co-author)
23 October 2019

Thank you Graham for such a good exposition of why this agenda is not just about the money. We really value what informal savings mechanisms can do for their members and have always said to our partner FSPs that what we are really after is a triple-win. Something in linkage for them (otherwise their interest will not sustain) but just importantly something in it for the ISM-user (linkage adds to the mix not just substitutes) and something in the whole package that helps strengthen the ISM itself. What really spoke to me when I saw the growing overlap between formal and informal, is that the customer (the ISM user) is clearly in the same place on this, if not ahead of us. The poor very quickly stop using things that do not work for them - dormancy is their ultimate signalling mechanism when it comes to badly designed financial products - but when things do work, growth can be spectacular. It is a really powerful signal that the fastest growing, active part of the market is people who mix formal (especially digitised formal) with informal. Now let's try and make what they are already doing easier and more rewarding for them.

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