"Financial sector linkages" can be an effective way to expand access to a broad range of financial services in rural as well as urban areas. Financial linkages are defined as mutually beneficial partnerships between formal and informal financial institutions that result in an expansion of financial services to new and/or existing clients. Within this context, expanding financial services does not only imply reaching more of the same clients; but also refers to providing financial services to those previously unserved segments of the population, or to broaden the variety or to improve the quality of financial services and products.
On one side, formal financial institutions have extensive infrastructures and systems, access to funds and opportunities for portfolio diversification permitting them to offer a wider range of services. However, they may be further removed from clients, particularly remote rural clients, which make obtaining adequate information and contract enforcement difficult. Informal institutions, on the other hand, usually operate close to rural clients, possess better information and enforcement mechanisms and are typically more flexible and innovative. However, they can be constrained in the type of services they offer since informal institutions lack resources and infrastructure to serve clients beyond a small geographic area.
In theory, linkages can help the different institutions overcome a weakness in what they can achieve on their own while helping to reduce costs and risks of reaching out to remote clients. In practice we are witnessing an evolution of financial linkages from the non-strategic, traditional bank-MFI relationships of wholesale finance to the more strategic nature of recent partnerships, such as commercial banks and insurers actively seeking non-formal actors (MFIs, SHGs SACCOs) to expand into new markets or MFIs strategically partnering with banks, firms, and governments offering fee-based services (money transfers, payments, salary disbursements, etc) as a way to market new clients while generating new revenue streams.