22 substantial body of survey-based evidence on informal credit markets in Sri Lanka<sup>23</sup> which permits us to draw some inferences.

In Sri Lanka, as in many other developing countries (Ghate, 1988). the informal money market has continued to play a more important role than th, formal market in the provision of credit.<sup>24</sup> In 1981-82, for instance, almost 60 percent of the household borrowing in Sri Lanka rwhich includes borrowing by informal businesses and cottage inoustries) was provided by the UMM (Table 17). According to a mid-1970s survey of the informal sector in Colombo, over 75 percent of the credit granted to informal businesses came from informal sources (Marga Institute, 1978 and 1981). Informal sources of credit are by no means confined to households and small businesses. The Pettah Money Market (the informal money market in Colombo) is believed to handle vcry large volumes of fun.s (Sanderatne, 1989; Datta, 1983). However, the mere existence of a sizable UMM does not necessarily imply significant crowding-out following reforms in the OMM. This will occur only if the UMM is "competitive and agile" (Taylor, 1983), and if it is closely linked with the OMM so that bank deposits are a better substitute for UMM claims than cash or other assets. As argued in Section 2.3, such a characterization may be incorrect in the typical developing country. In fact, the competition and agility is restricted to limited areas and groups. The evidence from Sri Lanka further illustrates this point.

One of the important facts shown by this evidence is that "informal lending consists of a wide range of sources and arrangements, in contrast to the general tendency to think of informal credit as synonymous with pure money lending" (Sanderatne, 1989:22). The share of pure morney lenders in the total informal borrowing of households seems to be only about 24 percent (Table 17). A larger share (31 percer') comes from friends and relatives in the form of reciprocal transactions. The rest (55 percent) is mostly a part of land tenure relations and the systems of produce marketing and consumer credit. Under these credit arrangements, the lender usually has a vested interest in the borrower's economic activity which extends beyond interest income.

The view that the informal financial market is segmented, noncompetitive, and not well integrated with the formal market, is further supported by data on the interest rate structure of informal credit (Table 19). According to the data, nearly 50 percent of such credit is granted either free of interest or at interest rates which are much lower than those of institutional credit. Given the absence of directly observable interest rates in kinship and patron-client relationships, it is difficult to compare the terms of credit in the inthrmal market with those of institutional credit. Howevet . the l-ull 'v-i ?5 percent) of the credit supplied by moneylenders is -xtendIed at -i v Iiight interest rates. It therefore se~Pms utl ikPl: that even a dAraQt iK iLange in institutional 23. Fernando (1988S and S3ntldeLatn.o (198P and IO9R) provide useful svntheses of this literature.

- . The relative importance ot U1UI _haC 'f_ derlined ]'m! as institutional l-nding increased (Table 17!.