Informal Finance and Microfinance in Jamaica and Trinidad & Tobago : An Institutional Study

Abstract: This study is about informal institutions in informal finance and microfinance in Jamaica and Trinidad-Tobago. Informal institutions as understood in this study are unwritten social norms that cater to specific needs in the society, and can be indirectly captured and measured in their outcome. Informal institutions are deeply embedded in the socio-cultural matrix of a society. In the context of informal finance and microfinance, the outcome of the existence of informal institutions are the indigenous financial intermediaries like Roscas, community based lending, and individual financial brokers.The institutional theoretical framework of this study helps capture the institutional dynamics and the processes in informal finance and microfinance. The theoretical framework demonstrates the following: (1) Informal institutions exist in both informal finance and formal microfinance. (2) It exposes the interface between the financial intermediaries and the informal institutions that govern informal finance and microfinance through certain mechanisms like ‘joint liability’ and ‘social collateral’, which reduce information asymmetries and transactions costs. An implication is that informal institutions address the crucial issue of ‘moral hazards’. (3) The same informal institutions governing informal finance are being adapted and innovated by microfinance. Lending methodologies of informal finance are becoming embedded in microfinance. (4) Microfinance organizations are being transformed into formal financial intermediaries, thereby exposing the process by which informal institutions are also being formalized. (5) An empirical investigation of peoples’ needs, preference and benefits provides the evidence as to why they subscribe to informal institutions via the various financial intermediaries.The findings of this study provide some interesting insights: Firstly, models of financial services based on indigenous institutions have better chances of surviving than imported models. Secondly, informal institutions compete, coexist and even complement formal institutions in providing financial services to the economically active poor. Thirdly, microfinance has not just bridged the gap between formal and the informal finance; it is also becoming a catalyst through which informal institutions are slowly being formalized. Lastly, the client base’s needs, preferences and benefits account for the pervasiveness of informal institutions in informal finance and in microfinance.