This study was to identify challenges and contribution of informal financial services on rural households’ livelihood in selected Woredas of Gamo Gofa Zone. A multistage sampling technique was employed. Primary data on households’ motives, challenges and contribution of informal financial services were collected from household heads and focus group discussants. The collected data were analysed using descriptive statistics and inferential statistics. Users reported the transaction cost to access the service in informal financial services is low while others reported that the service is responsive for immediate problems. Users also reported that the service doesn’t need any criteria to be member while and some households are using informal financial service because of no more options available in the area. Others reported that the participation in the service has social benefit as it increases social networks, connectedness and the service doesn’t need collateral. Lack of legal support, lack of trainings, administration of members, small money size, undocumented money transfer are among challenges of informal financial services. Informal finance contributed as source of money for non-farm activities partially and fully. Legal support, training and linking informal and formal financial service institutions need future intervention.
Key words: Informal finance, challenges, contribution.
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