Informal Finance for Private Sector Development in Africa

Making informal finance and microfinance relevant to the development of private sector in Africa

31 pages

This paper investigates constraints to informal sector financing and microfinance for private sector development in Africa. It examines growth constraints of the private sector, the role of finance in this area and private sector use of informal finance.

Informal lending has grown considerably in Africa, but there has been little informal sector lending to private businesses. Externally driven microfinance projects have surfaced, but their performance in relation to the finance of small businesses has not been very positive. The paper introduces possible steps towards a new reform agenda that will make informal and microfinance relevant to private sector development, focusing on developing links among formal, semi-formal and informal finance. Recommendations include:

Banks should be encouraged to enter into close relationships with informal agents like savings collectors and NGOs;
Bank loanable funds could be channelled through microfinance lenders and informal lenders for on-lending to small borrowers;
Government policies should enhance linkage development;
Principles for reducing lender risk will have to involve internal management restructuring that will lead to improved risk appraisal and development of tools for containing risk.