Friday, June 11, 2010

Informality: a major obstacle for microfinance’s success

Though access to finance has improved the standards of living throughout the world, access to capital alone has not broken the glass ceiling of informality. Informal workers generally do not have access to legal benefits, are highly exposed to market fluctuations and lack physical and financial security. Micro Finance Institutions (MFIs) have tried to fill the gap of low income worker need for capital by creatively catering to high risk borrowers who are in their majority informal. But without the support of sound national legal systems, informal workers continue working in the margin of societies.

GFI led a public opinion survey in 2009 in Nicaragua and Guatemala under the program PILAR. The survey showed a cross section of informality in Guatemala and Nicaragua, increasing the understanding of barriers to formality in both countries. In both countries it was clear that informal workers surveyed did not have access to diverse formal services such as social security, public health and financial services. Only one out of three informal workers polled in Guatemala City was able to obtain credit when they needed it.

And in Nicaragua, the investment of personal funds to create a new business is disproportionately large, with 52% of interviewees relying on their savings to start a new enterprise.

Without registration of the self employed and informal enterprises, financial services will only have minimal impact. As recommended by the Central Bank of Sudan for the developemnt of commercially sustainable microfinance “informality must be addressed for microfinance programs to thrive”