They are more accessible. Informal lenders are often located in rural areas and in communities that formal financial institutions underserve. This makes them more accessible to people who need loans but who cannot get them from banks or other formal lenders.
They have lower default rates. Informal lenders often lend to one specific vertical, say market vendors, they go deep, understand the moving parts of this sector and create relationships with their often 50-500 monthly borrowers(With a ). The Trust created by being close(Physically seeing the borrowers frequently) gives them an 80% repeat business from a borrower which translates to as low as 5% NPL as compared to the 60% NPL that other lenders face.
They are faster. Informal lenders can often process loan applications and disburse funds more quickly than formal lenders. This is important for people who need money urgently, such as to cover unexpected expenses or to start a business.
They are more flexible. Informal lenders are often more flexible than formal lenders when it comes to the terms of loans. For example, they may be willing to lend to people with poor credit histories or who do not have collateral. They may also be willing to lend smaller amounts of money, which can be helpful for people who are starting or who have limited financial resources.