Informal Finance

a fruit and vegetable market

Informal finance is a broad concept that encompasses the wide range of financial activities and services that take place beyond the scope of a country’s formalized financial institutions and lie outside financial sector regulations. Informal finance is common in both urban and rural contexts and is usually based on personal relationships and socioeconomic proximity. 

In contrast to formal finance, most informal providers focus on one service - savings, credit, money transfers, or insurance - rather than offering a bundle of services. Informal finance arrangements in Africa range from West and Central Africa’s deposit collectors known as susu or esusu collectors and tontines, to the hawala cross-border money transfers, which are commonplace in North & East Africa, and stokvels, which have long been a feature of South African financial life.

In West Africa, susu or esusu collectors provide access to credit as well as the possibility to save and withdraw money for a small fee. In the susu arrangement, a saver agrees to deposit a specific amount determined in consultation with the collector for an agreed period of time (usually a month). At the end of the period, the susu collector renders the accumulated savings to the client, keeping one day's savings as commission.

Tontines are another prominent means to pool resources, whereby a group of individuals agree to regularly pay small amounts into a common fund - the tontine – which is then loaned for a month, without interest, to one of the members. Typically, these people share similar interests or common relationships, which strengthen social control and ensure the functioning of the scheme.

Hawala is a traditional means of transferring funds across borders and within countries, whereby funds are transferred by means of a network of hawala brokers (hawaladars) who charge a fee or an exchange rate spread in exchange for their services.  The strength of the hawala system is that it is fast, cheap, confidential and easily available.

Stokvel, a common group saving scheme in South Africa, is similar to the Tontines schemes: members meet monthly and deposit a certain amount of money into a common fund. The accumulated amount is then paid out to one of the members on a rotating basis. The First National Bank in South Africa offers special stokvel bank accounts for group savings and as of 2002, about 12 percent of the population was member of a stokvel.

Funeral insurance arrangements are a common product of community-based informal insurance associations within what is called a burial society, aimed at ensuring that sufficient funds are available to cover funeral expenses. An estimated 28 percent of the population in South Africa and 21 percent in SACU is part of a burial society based on the contributions of its voluntary subscribers.