It is not surprising, therefore, to observe a demand for those semiformal and formal financial services that are cheaper and that are at the same time permanent and reliable. Increasing access to less costly services will also be welfare-improving. There are several reasons for this. The information costs for screening and monitoring borrowers are too high. In consequence, informal finance cannot contribute to the reallocation of purchasing power throughout the economy, critical for increases in the productivity of available resources.
Informal finance leaves too many opportunities to improve resource allocations untouched.
The development of financial systems in many countries is an illustration of how this process takes place. Since the provision of formal financial services is very costly, the process takes a long time and requires major improvements in infrastructure and institutions. To reach the poor one would require, in addition, innovations in financial technology. On the other hand, informal finance will never disappear, but it will occupy an increasingly less important niche as formal finance is developed. Valuable financial services are provided by informal arrangements.