Does a Bigger Commercial Banking Sector Benefit the Poor_ A Minor Field Study in Kenya

Abstract: Recent evidence suggests that there are serious information asymmetries in the Kenyan financial market. Between 2006 and 2009, the formal and semi-formal financial sectors in Kenya increased a lot. In contrast to what classic economic theories would predict, the informal financial sector experienced a minor increase. This thesis, through interviews in a minor field study, suggests that the informal financial institutions in Kenya have some important advantages compared to the formal ones. Informal lending seems to be operating within informal institutions that serve as enforcement mechanisms of informal agreements. Third party enforcement represented by the police or auctioneers is available to informal lending, which, it may be argued, partly explains the seemingly high repayment ratios in the informal financial sector. Many of the interviewed preferred the informal financial sector because it offers more flexibility in the repayment period of a loan and because the costs of financial services provided by banks were more unpredictable than the informal alternatives.