Formal and Informal Financial Services
Financial services may be provided by a variety of financial intermediaries that are part of the financial system. A distinction is made between formal and informal providers of financial services, which is based primarily on whether there is a legal infrastructure that provides recourse to lenders and protection to depositors. The following table gives an overview of this distinction by showing the segments of financial systems by degree of formality.
| Tier | Definition | Institutions | Principal clients |
|---|---|---|---|
| Formal banks | Licensed by central bank | Commercial & development banks | Large businesses Government |
| Specialized non-bank financial institutions (NBFIs) | Rural banks Post Bank Savings & loan companies Deposit-taking microfinance banks |
Large rural enterprises Salaried workers Small & medium enterprises |
|
| Semi-formal | Legally registered, but not licensed as financial institution by central bank | Credit unions Microfinance NGOs |
Microenterprises Entrepreneurial poor |
| Informal | Not legally registered at national level (though may belong to a registered association) | Savings (susu) collectors Savings & credit associations, susu groups Moneylenders |
Self-employed Poor |
A more detailed approach to distinguishing formal and informal financial services adds semi-formal services as a third segment to the above. While formal financial services are provided by financial institutions chartered by the government and subject to banking regulations and supervision, semi-formal financial services are not regulated by banking authorities but are usually licensed and supervised by other government agencies. Informal financial services are provided outside the structure of government regulation and supervision.
Read more about this topic: Financial Access
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