This latest report, from UK think tank the IDS looks at the risks of informal loans in developing countries.
This Emerging Evidence Report acknowledges that high-interest informal moneylending can serve a useful purpose in developing countries, helping those without the means to access credit from formal financial institutions. However, the high charges for these informal loans can lead to people being caught in a debt trap and losing their assets. Promoting access to credit for the poor through microfinance institutions (MFIs) has advantages and disadvantages. Microcredit can bypass the ultra-poor or, alternatively, it may be given to those unable to repay the loans, trapping them deeper in poverty or even lead to people using high-interest informal moneylenders to pay back the MFI loans. Community-based financial organisations generally rely on people forming savings groups and recycling the funds as loans. They may promote a savings culture, but there is little evidence of their impact specifically on people’s use of high-interest informal moneylending. This Emerging Evidence Report concludes that more research is needed on how high-interest informal moneylending operates in different contexts, and what interventions could be effective in combating it.Read Full Report