Use of the Formal and Informal Financial Sectors: Does Gender Matter?

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Section I. Introduction

Access to transfers and credit, whether cash or in kind, is a major source of poverty alleviation in many developing countries around the world. For many poor households, these public and private gifts and loans make up a substantial portion of their yearly incomes and provide an important means to generate additional income.¹ Women may especially benefit from transfers and credit in countries such as Bangladesh where they often have few work alternatives.

As such, the formal financial sector is currently one of the principal areas of intervention intended to provide social protection and poverty alleviation for the poor. The intervention has taken the form of formal transfers and improved access to credit and/or subsidization of credit. In addition, the development community is increasingly interested in ways to create an enabling environment for the private sector, including banks, to provide the poor with improved access to financial services.

The informal financial sector is also a key source of social protection, especially in areas with limited access to the formal financial sector. In fact, in many countries, the informal sector is much larger than the formal sector. The informal sector, which includes transactions such as gifts and loans from relatives, friends, and neighbors, may overcome barriers to the formal sector. If this is so, formal programs designed to increase access to formal financial services may actually prompt reductions in the informal sector.

In this report, we descriptively examine the formal and informal financial sectors of rural Bangladesh, placing a special emphasis on differences between men and women. Our analysis uses unique panel data on the credit and transfer behaviors of 1,800 households in rural Bangladesh. Throughout the analysis, we focus on five important questions: (1) How important are the formal and informal financial sectors? (2) What are the primary sources of gifts and loans within those sectors? (3) Do men and women rely on different sources for finances (e.g., formal vs. informal) or different types of finances (e.g., gifts vs. loans)? (4) How have the financial sectors evolved during the 1990s? (5) What is the relationship between the formal and informal sectors? The report is primarily descriptive. However, we use causal regression analysis to further investigate the relationship between the formal and informal sectors and begin to answer the question: does the formal sector crowd out the informal sector and is this different for men and women?

Throughout the report, we pay particular attention to the gender of the recipients of both formal and informal finances. Formal credit and transfers may alter the allocation of resources within the household. Formal sector programs, such as microfinance, often target women with the intent, explicit or implicit, of altering allocations within the household. It is not clear without recourse to the data that providing additional financial resources to women will have different effects on intra-household (and inter-household allocations) than providing those same resources to men. Conceivably, male dominance in the household may permit them to capture all of the benefits of resources provided to any other household member.

Formal credit and transfers may not only alter the allocation of resources within the household, they may also alter the allocation of resources between altruistically linked households. Households that are recipients of formal transfers and credit may transfer some of the benefits by increasing (decreasing) gifts and loans to (from) altruistically linked households, generating possible third-party effects. In the most extreme case, formal sector programs could have no income effect on their targeted population if the formal sector fully replaces the informal sector. Even in this extreme case of no income effect, programs may still have important impacts on broader measures of welfare such as women's empowerment. The sign of the relationship between the formal and informal sectors is indeterminate because assets acquired through formal sector programs may increase the credit-worthiness of households and thus lead to improved access to financial services from other sources. As part of a larger project, the final section of this report begins to explore the relationship between the formal and informal sectors.

The remainder of this report is organized as follows. Section II discusses the relevant literature on transfers and credit. Section III describes the dataset and provides important variable definitions. Section IV presents descriptive results, and Section V presents regression results. The final section summarizes important findings.

Notes from this section

1. For instance, in their analysis of the Philippines, Cox and Jimenez (1995) find that transfers accounted for nearly one-fifth of total household income for urban recipients in their sample.

Note: This report is available in its entirety in the Portable Document Format (PDF).

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