Formal vs Informal Financial Sectors

5 Questions

The formal financial sector is characterised by the presence of an organised, institutional, and regulated system.

The informal financial sector is an unorganised, non-institutional, and non-regulated system.

Examples of the informal financial sector include moneylenders, local bankers, traders, and landlords.

A financial system is a complex, well-integrated set of sub-systems of financial institutions, markets, instruments, and services.

The formal financial system mobilises and usefully allocates the scarce resources of a country.

Study Notes

A financial system is a network of institutions, markets, and instruments that facilitate the flow of money between savers and borrowers.
It enables the allocation of resources, management of risk, and facilitates economic growth.

Also known as the organized financial sector, it consists of institutions that are regulated and supervised by government agencies.
Characteristics include:
- Legally recognized and registered institutions
- Operate under government regulations and laws
- Provide standardized financial services
- Maintain transparent accounting and reporting systems
Examples include commercial banks, central banks, and insurance companies

Also known as the unorganized financial sector, it consists of institutions that operate outside the formal banking system.
Characteristics include:
- Often unregistered and unregulated
- Operating outside government regulations and laws
- Services vary and may not be standardized
- Limited transparency in accounting and reporting
Examples include:
- Money lenders
- Savings clubs and rotating credit associations
- Informal money transmitters
- Pawnbrokers and loan sharks