The role of informal microfinance institutions in saving

eturn in tightly regulated financial markets or to the higher, riskier rates of return in the
unregulated markets. On the other hand borrowers are restricted to the high rates of interest
charges by banks or are constrained by the amount of credit available on the high-risk
unregulated markets.
In stock markets there are no stipulated ceilings on returns. As a consequence they offer an
alternative to safe but low, sometimes negative real rates of return. They provide investors
with a greater range of risk and return opportunities than a bank-based financial market.
They also allow for a better matching of the risk and return characteristics of lenders and
borrowers. In addition, investors have the choice of switching to less risky assets with stable
returns or to relatively safe bank instruments where stock returns fail to compensate for risk.
Stock markets allow risk sharing, without the need for government guarantees. Expected
returns are driven by the performance and prospects of the company itself, and not by
government guarantees.
From both a practical and theoretical perspectives an issue of importance for stock markets is
the demand for domestic securities. The demand for securities of emerging markets in a
globalized world market is partly due to the potential reduction in risk and increase in return
as a result of international diversification. According to the modern portfolio theory analysis
of a portfolio should be based on the expected returns from each asset, the variance of returns
and the covariance between securities. The variance is important in any given market, because
by increasing the number of assets in a portfolio, the unsystematic (diversifiable) risk can be
diversified, but the contribution of each asset to the total risk caused by the covariance terms
are systematic (non-diversifiable) risk.
International diversification depends crucially on the correlation of securities between
countries which is often less than the correlations between securities of a single country. The
correlation is computed as the covariance of securities within one country with securities of
another divided by the product of the standard deviation between each country’s securities.
Thus including foreign securities may also have the effect of reducing the covariance terms,
thereby reducing the covariance terms, thereby reducing the level of non-diversifiable
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