inaccessible to them. A centralized registry for collateral interests would avoid improper information on collateral use and would therefore help lenders make better decisions on lending volumes and allocation.47 Furthermore, the government could support the training of professionals in financial information (accountants, auditors, market-survey specialist, IT experts, economists). Finally, the government could compile and disseminate statistical information necessary for the more advanced risk-management technologies.

Intemational discussions are currently debating the idea to promote incentives for sound finance through an international rating of financial systems. Governments could ask to have their financial systems and regulatory/supervisory regimes rated by one or more specialized bodies - peer groups, private rating agencies, official bodies, and so on. The rating, which would be made public, would evaluate domestic policies and quality of domestic regulation aind supervision, and make qualitative assessments. This would almost certainly alter the incentives of governments which do not abide by international standards of sound financial practice to take corrective action, especially to the extent that ratings affected a country's borrowing costs.

Sound information provision may significantly improve the incentive structure of the circuit process. Information providers, however, should not replace supervisors, but complement them. Even with good information, the circuit remains vulnerable to bouts of over-enthusiasm and over-pessimism, when agents tend to alter the value of information and overreact to it depending on what they expect others to do. Thus, close monitoring of markets and institutions by well-trained supervisors is necessary, as well as clear and timely policy responses from them to abnormal conditions.

# **Strengthening informal finance**

_Governments should exploit the informational comparative advantage of informalfinancial institutions and strengthen the complementarity between the formal and the informal sectors._ The poorest people of rural and urban societies live beyond the frontier of formal finance, or outside the formal financial circuit. Here, credit is scarce, costly, and related to social ties. Financial transactions are personalized and often conducted directly, or through informally established groups or institutions. Savings are held in cash or secure real commodities, and often lent to relatives or friends on terms of reciprocal assistance. If an economy is to develop, it needs to progressively allow for the transition of its informal actors to the formal circuit. Incentives can help.

Informal financial service providers have an incentive to deal with small amounts of mnoney and to interact with people spread widely across the country. They do not carry the cost of documentation and bookkeeping, and act upon information exchanged through face-to-face relationships and on rules enforced through social control. This makes honest informal intermediaries much better placed than formal institutions and government agencies to reach out effectively to people beyond the frontier, and to implant the principles of a market credit culture. Experience shows that informal low-cost remittance networks can provide efficient money transfer services to immigrant workers; that rotating savings and credit associations and, in general, self-policing arrangements based on strong social ties, can effect stable term transformation of liquid funds and fund long-term investment projects; that the social mechanisms of information provision and rule enforcement allow informal lenders to tailor their loan terms and conditions upon the specific characteristics and the needs of individual borrowers, overcoming the rigidities typically embedded in the standards conditions of official finance.

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