A changing financial landscape: the evolution of financial policy in Indonesia. (1994)

Both these views suffered from tunnel vision. Those who criticized informal finance either were not aware of, or simply chose to ignore, the wide variety of financing arrangements which characterized it -preferring instead to think in terms of the harsh moneylender stereotype. They complained about exorbitant interest rates, but failed to consider the actual costs of lending—the high transactions costs inherent in small-scale loans, the costs of additional services sometimes provided by lenders (including risk-sharing, in some cases), and the often high probability of default. Most important of all, they paid little attention to the fact that the ubiquity of informal finance was strong evidence of its value to those who used it. The inappropriateness of this stereotype has since clearly been demonstrated by numerous studies of informal finance (see, for example, Adams and Fitchett 1992). At the same time, those calling for the expansion of resources allocated to formal finance either did so with the intention of having it displace informal finance (in line with this antipathetic attitude), or else virtually ignored the existence of the latter. The second approach may be seen as having been influenced by empirical and theoretical work which had been done on the relationship between financial development and economic growth1, which focused largely if not entirely on the expansion of formal financial institutions and transactions without looking at informal finance at all -as though financial institutions were being set up where previously there had been a vacuum. On the contrary, however, informal finance presumably has been a feature of economic transactions ever since production began to evolve from pure subsistence, and it remains an important aspect of even the most advanced economies. The historical growth of the well developed formal financial sector observed in the now more advanced countries was a response to the progressive emergence of opportunities for doing things which informal finance could not do as well, most frequently as a result of the steadily increasing scale of business enterprise in general. Often it was a by-product of the supply of services other than financial intermediation. For example, formal commercial banking can trace its origins to informal systems within which well-reputed individuals (usually traders or merchants) would accept cash deposits from others for safekeeping, and could issue handwritten notes allowing their own suppliers and acquaintances to obtain cash or goods on credit from third parties. When the demand for such services became large enough, it became profitable to establish distinct enterprises -namely banks -specifically for these purposes. Likewise, modern day stock exchanges evolved from very modest beginnings, in the form of informal meetings between the owners of shares in various enterprises who from time to time were desirous of changing the composition of their portfolios. Insurance companies and pension funds emerged to provide forms of cover against certain risks faced by enterprises and individuals, which were an improvement on protection available