Financial Dualism

Financial System

Financial system plays a vital role in the economic

growth of a country.

Its is a complex, well-integrated set of sub systems

of financial institution, market, instrument and
services facilitates the transfer and allocation of
funds, efficiency and effectively.
 Financial Dualism

 The financial systems and financial markets of developing

countries have a common feature: the dualism.

 This means the co-existence and operation side by side of a

formal or institutional financial sector and of an informal
or non-institutional financial sector.

 The two Sector are such that they characterized by different

levels of development, technology, patterns of patronages,
and more importantly by the interest rate (price setting).
 Component of Financial Dualism

 Formal Financial Sector - is characterized by the presence

of an organized, institutional and regulated system which caters
to the financial needs of the modern spheres of economy.
 regulated by financial authorities (ex. rural bank, cooperatives,
commercial banks and development bank, credit unions).

 Informal Financial Sector – is an unorganized, non

institutional, and non regulated system dealing with the
traditional and rural spheres of the economy.
 controlled by customary law (ex. Saving, Credit groups, money
lender, shop keepers, ASCRA, ROSCA, SHG, SFGA etc.)
 Informal and formal financial institutions in
developing countries

Source: Microfinancegateway (2006)

 The Outreach and Impact of Informal and Formal
sector

 Informal financial markets serve multiple sectors, financing households and

enterprises in a wide range of income levels and geographic areas.
 Characterized in general by personal relationships, individual operators, ease of access,
simple procedures, rapid transactions, and flexible loan terms and amounts.

 Formal Financial sector is more active on financial market, and thus more dependent
on external financial sources than previous category. There is a higher risk by financial
services providing to clients (interest rate fluctuation by external sources).

Source: Microfinancegateway (2006)

 Impact of Financial Dualism

There are five elements which may be considered

impact of financial dualism in integration of
financial sector:
 The mobilizations of savings
 The Efficient use of external funds
 The allocations of resources
 The effectiveness of macroeconomic and macro
financial policies
 The distributional effect of unequal access to
financial services (Equity concerns).
 Result

the integrations/coexistence of formal and

informal sectors creates a:
 higher efficiency and financial performance,
 improve financial funds (access to additional
sources of funds ),
 Wider range of financial services,
 Profitability and sustainability
 and most of all improve outreach to the poor.
 Conclusion

 The integration/coexistence of formal/informal sector is

very beneficiary for poor people.
 Financial dualism offers more effective and efficient
financial systems/services for the poor.
 (ex. wider range of financial services, accessible funds,
better pay back system, low interest rate and lastly easier
access to loan).
 Financial dualism provides more sustainable and profitable
financial system for the Financial institutions so it is a win-
win situation for both formal/informal and specially the
poor people.
 References
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