ABSTRACT
The
study examined linkages between formal and informal financial institutions in
South Eastern Nigeria. The area was purposively chosen because of the intense
economic activities including borrowing and savings of both the formal and
informal financial institutions in this area. The objectives of the study were:
to identify the financial institutions in the area and describe the operations
of the formal and informal financial institutions; identify areas that formal
and informal institutions were linked and the institutional factors that
facilitated such linkages; determine major constraints to linkages; determine
strategies that would enhance linkages between formal and informal financial
institutions and on the basis of the findings, make recommendations for policy
and further research. Multistage random sampling procedure was used to get 36
formal and 38 informal financial institutions for the study. Two sets of
structured questionnaire for formal and informal financial institutions were
employed to collect primary data. Also secondary data were collected on the
2007 financial records from both sectors. The study was guided by two null
hypotheses. Data generated were analyzed using descriptive statistics, probit
regression and exploratory factor analysis. Thirty eight (38) informal and
thirty six (36) formal financial institutions were identified. Of the twelve
possible areas considered for linkages, the institutions were linked in 6
areas. Summary statistics on institutional factors that facilitated linkages
found years of business experience, interest rate on loan, rate of loan
recovery, and number of years of business operations, significant
factors for linkages between financial institution. Financial institutions
grouped 5 major constraints in linking with each other as poor legal and
regulatory systems,
lack of confidence, problem of communication, poor capacity building and
institutional rigidities. The institutions grouped three (3) major strategies
that would enhance linkages to be the provision of conducive legal and policy
environment to ensure confidence and human/organizational upgrading of the
informal sector. In the same way the informal institutions and institutional
adjustment. Based on the constraints to linkages, the following recommendations
were made; providing effective judicial system for protecting property rights
with official recognition of informal financial institutions and their
inclusion in regulated reforms; effective use of micro finance banks as
second-tier regulatory body; provision of tax relief on profits granted to
banks that allocate credit through informal sector; improving the ability of
banks to reduce loan losses through the use of local sanction to enforce
repayment; effective networking of all informal financial institutions; human
upgrading though periodic staff training and adapting existing banks to the
rural environment of informal financial institutions.
CHAPTER ONE
1.1 BACKGROUND
OF THE STUDY
Most business
opportunities are not exploited in developing nations. Some, when started are
abandoned as a result of lack of funds. The above scenario has had negative
consequences on the growth of the economy. One of the major economic goals of
Nigeria is a satisfactory and sustainable economic growth (NEEDS, 2004).
Economic growth depends in part on efficient financial market. A financial
market is efficient to the extent it brings about efficient allocation of
resources including credit (Yaron, 1994).
Credit, based on
sources and extent of government supervision, has been broadly classified into
formal and informal (Aryeetey, 1997). The formal financial sources are those
under the direct supervision of the Central Bank of Nigeria (CBN). They include
commercial banks, rural banks, investment houses, insurance companies, and
financing companies. These institutions have loan-able funds at their disposal.
The volume of credit they give may likely meet the credit needs of borrowers
who meet their lending conditions (Poyi, 2000; Mkpado and Arene, 2007). The
formal institutions however have such problems as high transaction costs, low
level services to customers, long and tedious bureaucratic procedures, poor
information about borrowers among other weaknesses (Atieno, 1994). On the other
hand, informal financial institutions have acceptable credit programmes, cheap
outreach, enforcement mechanism and good information about borrowers but they
do not provide enough credit to borrowers.
Information is a
major factor in resource allocation in financial market. For instance, a
lender’s willingness to lend may hinge on the information about the borrower.
The absence of information may explain why lenders choose not to serve some
individuals (Yaron, 1994).
Information imperfections are
important in explaining the segmentation of credit markets into formal and
informal. Information flows are typically efficient over relatively close
distances and within social groups, as found in the informal setting. This is
one of the advantages the informal financial sector has over the formal
financial sector (Bell, 1990).
The failure
of formal financial institutions such as banks to serve poor borrowers is due
to a combination of high risks, high costs and consequently low returns
associated with such businesses. To lower these risks, banks screen potential
borrowers to establish the risk of default; they create incentive for borrowers
to fulfill their promises to repay; and they develop various enforcement
strategies to encourage repayment, to the extent of available information.
Scarcity of information results in information asymmetries between borrowers
and lenders (Varghese, 2005). In order to address this problem, banks often
attach collateral requirements to loans. Unfortunately, conventional collateral
requirements usually exclude poor borrowers, who seldom have sufficient forms
of conventional title.
Informal lenders
have often, innovatively succeeded in limiting loan default. For instance, by
lending to Self Help Groups (SHGs), the joint liability and social collateral
thus created ensure strict screening and monitoring of members (Mosley 1996;
Nathan, 2004). From the foregoing, each financial institution has several
strengths and weaknesses. There is no unique financial institution that can
provide adequate financial services to borrowers.
To attain financial
viability and sustainability in the face of these weaknesses, the new
institutional economics and development theory suggests that formal and
informal financial sectors be linked. The vision is of models, or principles
that integrate both sectors; where different sectors exploit each other’s
comparative advantage in cost-effectively delivering financial services to
borrowers. Such integrated and partnership efforts will bring about purposeful
and effective solution....
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Item Type: Ph.D Material | Attribute: 173 pages | Chapters: 1-5
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