Institutional voids and informal finance: Theoretical insights for regulating village banking in low-income economies

Abstract

This conceptual paper explains how institutional voids in formal financial systems shape the rise and persistence of village banking in Zambia and across Sub-Saharan Africa, and it advances a policy approach that protects members without weakening the informal features that make these groups work. Drawing on a structured desk review of peer-reviewed studies, programme reports, and policy documents, the paper applies institutional theory and institutional bricolage to show how village banking groups “piece together” locally workable rules, enforcement practices, and safeguards using trust, social norms, and simple governance arrangements. The synthesis shows a consistent pattern: village banking provides accessible savings and credit, strengthens resilience for low-income households (especially women), and fills service gaps left by rigid, costly, or distant formal providers, but it remains exposed to fraud, weak record-keeping, and limited recourse because it operates outside formal oversight. The paper’s theoretical contribution is to reframe village banking as a legitimate institutional substitute (not a stopgap) and to explain its durability through bricolage processes that blend informal norms with selectively adopted “formal-like” controls (e.g., constitutions, social funds, and basic bookkeeping). The policy innovation is an adaptive, bottom-up financial inclusion policy design: tiered recognition, co-created minimum standards, and voluntary registration with light-touch oversight, enabling consumer protection and safer linkages to wider financial infrastructure while preserving autonomy and flexibility.