Rethinking the Role of Informality as a Barrier to Financial Inclusion: Insights from an Indian Urban Setting

Informality has been conventionally understood as a barrier to financial inclusion. This article offers an alternative perspective that conceives informality as labour, housing and financial informality, and financial inclusion as universal access to and use of a full range of formal financial services to challenge this prevailing view. Field evidence collected in Kolkata suggests that while labour and housing informality hinder broad-based financial inclusion, financial informality, comprising heterogenous informal financial practices that act as substitutes for or supplements to formal practices, play a developmental role, or involve illegal elements in the process, has more complex implications for financial inclusion. This permits the advancement of a typology of financial informality—substitutive, supplementary, developmental and illegal—to categorise informal financial practices. Among them, developmental informality that promotes a stepping stone transition to formality undisputedly challenges the idea that informality is always a barrier to financial inclusion.