“The credit activities of the informal sector should be discouraged.”

“The credit activities of the informal sector should be discouraged.” Support the statement with arguments.

Answer:
The credit activities of the informal sector should be discouraged because:

  • 85% of loans taken by the poor households in the urban areas are from informal sources.
  • Informal lenders charge very high interest on their loans.
  • They try to charge more and more interest on their loans.
  • There are no boundaries and restrictions.
  • Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loan.
  • In certain cases, the high interest rate for borrowing can mean that the amount to be repaid is greater than the income of the borrower.
  • This could lead to increasing debt and debt trap, therefore the credit activities of the informal sector should be discouraged.