Formal-informal Financial Linkages: Lessons from Developing Countries

This document presents the findings of a study that was conducted to examine the institutional linkages that result in expanded access for the rural poor to a broad array of financial services. The authors followed the case study method, selecting twelve cases practicing a wide range of linkages, across continents.

The authors defined financial linkage as any mutually beneficial partnership between a formal and a less formal institution that results in the expansion of rural financial services.The research was structured around the following areas of investigation:

• Linkage partners' motivations for linking;
• Mechanics of establishing the linkages, with a particular focus on contract design, risk mitigation strategies and conflict resolution measures;
• Linkage impact at the institutional and client levels;
• Regulatory environment and its impact on fostering or impeding linkages.

Analyzing the case studies, the authors found that the microfinance industry is enriched by innovative efforts to combine the comparative strengths of different types of institutions. They also found a wide range of options for linkages in the course of the study, including:

• Commercial banks using the infrastructure and local knowledge provided by MFIs to reach self help groups,
• Large international insurance companies gaining thousands of clients by linking their insurance products to every loan that an MFI makes.

Based on the study findings, the authors presented the recommendations some of which are:

• More focused attention and effort in the piloting and experimentation of establishing linkages and strategic alliances is required;
• More attention should be placed on developing facilitated linkages that help to broaden the range of financial services in rural areas beyond credit, such as insurance, deposit, payments/disbursements and remittance services;
• There is scope for additional efforts to build the capacity of institutions to enable them to actively engage in partnerships with more formal actors.