Formalisation through Microfinance: An Empirical Study in Egypt

Investigating potential of credit as an incentive for clients to formalize
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This paper investigates the role of MFIs in the formalization of the economy.

Informality deprives public authorities of revenues, weakens social security systems, fragments economic and financial transactions, creates unfair competition and slows down attempts at social organization. The International Labour Organization has been trying to find ways to push back the frontiers of the informal economy, and has been looking at microfinance as a possible solution. Microfinance has the potential to combine net benefits to the individual client with a business case to the MFI and a gradual formalization effect as a result of increasing documentation requirements.

The report explores the methodology adopted by two MFIs in Egypt to link progressive loan amounts to higher documentation requirements. Study findings do not indicate that MFIs can significantly encourage the formalization of their clients. Finally, the study demonstrates that the provision of documents conditioning the loan amount is a good way for MFIs to reduce asymmetrical information and select trustworthy clients.