The unregulated informal financial sector has an important economic function in Taiwan. There is a distinct market segmentation between formal financial institutions and the informal financial sector. Statistics show that during the period of 1964-92, the share of informal financing of private enterprises fluctuated over time. This paper develops a model which describes the interaction between financial institutions and the informal informal financial sector. The model is applied to conditions where the loanable fund market of financial institutions has excess demand, excess supply, or is in equilibrium. The estimated structural equations based on the data of 1965-92 support the theoretical model. Based on this model, this paper uses a comparative-static analysis to show that the impacts of an exogenous variable or policy variable on the informal market interest rate or the relative share of informal financing of private enterprises have different signs when the loanable fund market of infancial institutions is in excess demand, in excess supply and in equilibrium. Some explanations for the fluctuation of the share of informal financing of private enterprises in 1965-92 are then provided, based on the results of comparative static analysis and the actual changes of exogenous and policy variables in Taiwan over this period.