Abstract
This paper argues that weak legal institutions explain the coexistence of formal and informal financial sectors in developing credit markets. Informal finance emerges as a response to the formal sector's inability to perfectly enforce its claims in an environment with poor creditor protection. Given this setting, the theory incorporates the possibility of a credit-rationed informal sector to show that entrepreneurial and informal sector assets can be either complements or substitutes. The theory rationalizes the observation that entrepreneurs employ multiple lenders and suggests that an unequal wealth distribution promotes investment in poor societies.