Formal Financial Institutions Research Articles

ANALYSIS OF FACTORS INFLUENCING LOAN DEFAULT AMONG POULTRY FARMERS IN OGUN STATE NIGERIA

This study is interested in determining factors infl uencing default in loan repayment among poultry farmers in Ijebu Ode Local Government Area of Ogun State. A total of 100 poultry farmers were randomly sampled from the study area. Probit model was employed to determine and analyse the factors infl uencing default in loan repayment in the study area. Descriptive statistics were also employed to describe the socio-economic characteristics of the farmers. Finding revealed that majority of the farmers in the study area are educated. About 55.0 percent of the farmers source their credit from formal fi nancial institutions. Result from the probit model revealed that fl ock size of the farmers signifi cantly infl uence default in loan repayment at (P<0.10) level. Age of the farmers signifi cantly infl uence default in loan repayment at (P<0.01) level, while Educational level and Income of the farmers also signifi cantly infl uence default in loan repayment at (P<0.05) level.

Reducing Default Rate in Rural Credit: How Effective is Enhanced Supervision Approach for Formal Financial Institutions?

Formal financial institutions viz. commercial banks are gradually shifting their priorities from rural credit due to many practical reasons. High default rate and non-viability of rural credit, and increasing pressure on these formal financial institutions, to be more profitable, are few of the basic reasons. This paper focuses on one probable approach of default mitigation, that is, enhanced recovery effort, lack of which is one of the potential reasons for high default rate in rural sector. The paper models a specific type of interaction between the regulatory and the institution and concludes that in a regulated competitive environment the institutions will not tend to increase effort for higher recovery of delivered credit unless the regulatory intervenes and directs the institutions to do so. Even after such intervention from the regulatory, the institutions will find it optimal to invest less in additional recovery effort in rural sector if rate of return is higher or the default rate is lower in alternative sectors of investment.

Microfinance regulation influence on small firms’ financing in Tanzania

Small firms in developing countries continue to experience difficulties in accessing finance from formal financial institutions. This paper argues that regulating microfinance operations and activities is likely to strengthen microfinance institutions’ (MFIs) financial sustainability. This in turn could provide an important source of finance to small firms. Using the case of the microfinance industry in Tanzania, the paper aims at moving the microfinance regulation debate forward by generating a number of relevant inputs towards the formulation of a regulatory framework. This contribution probably comes at an opportune moment when the Tanzanian government is in the process of formulating a framework to regulate and supervise microfinance institutions.

Using remittances to build financial relationships with credit unions

Apart from fee income, remittance services offer formal financial institutions the potential of building relationships with unbanked people which often leads to them opening deposit accounts. This article describes how and why the World Council of Credit Union's (WOCCU) member credit unions in Central America began offering remittances in the 1990s. It analyses their current and potential impact on the market at both the originating and distributing side and draws lessons from its experience.

Microfinance and the Poverty of Financial Services: A Perspective from Indian Experience †

The vast network of banking and co-operative finance institutions in India has failed to provide low-income families with significant access to financial services. In this situation, the non-governmental microfinance institutions have attempted to provide an alternative to the high-cost informal financial services that most low-income clients must rely on. The extent to which such service provision is appropriate is discussed in this article using information from the financial histories of low-income families in the slums of Delhi and two villages of one of the more economically backward areas of India. The analysis in the article shows that the needs of low-income clients would be best served by highly flexible financial services that enable the conduct of frequent transactions both for small savings and for borrowing at irregular intervals. In relation to this, both microfinance and formal financial institutions do not fully meet the needs of low-income families. The article concludes with practical suggestions for the design of products and delivery systems to meet these needs.

Hawala: The Terrorist's Informal Financial Mechanism

Abstract : Since 9/11 investigations into the al-Qaeda financial network have led to several notable successes in the United Slates and Europe. Much of this achievement in the United States has resulted from strengthening the financial investigatory powers of domestic law enforcement agencies and coordinating them through the Treasury Department's new Foreign Terrorist Asset Tracking Center. In other countries, the Paris-based Financial Action Task Force, for example, is helping to coordinate the tracking of terrorist funds through the global banking system and cracking down on countries that fail to improve transparency and regulation. Financial investigators tracking al-Qaeda assets rely heavily on data and paper trails from commercial banks and financial regulators in pursuing and investigating leads. Unfortunately, these efforts have achieved little success to date in reaching the core of the al-Qaeda financial network. The problem is that many of the organization's funding mechanisms -- like its cells -- are small and inconspicuous, often using a traditional Muslim method of money exchange called In essence, hawala is a transfer or remittance from one party to another, without use of a formal financial institution such as a bank or money exchange and is, in this sense, an informal transaction. There are several other common aspects to hawala. First, in most cases, hawala transactions go across international lines, such as with worker remittances to their home countries. Second, hawala usually involves more than one currency, although, again, this is not absolutely required. Third, a hawala transaction usually entails principals and intermediaries. To accommodate requests of the principals, the intermediaries usually take financial positions. Later, much as in the case of conventional banking practices, these transactions will be cleared among the units to balance their books.

NGOs and local MFIs—how to increase poverty reduction through women’s small and micro-enterprise

Most enterprises, from the smallest to the largest, need capital. Enterprise can play a crucial role in alleviating poverty. In developing economies, women’s role in alleviating poverty through enterprise has long been recognised, and they have been received as a client group. However, poor women lack the capital required for enterprise start-ups and although lending mechanisms exist in their economy, mainstream financial institutions are not oriented towards providing them with the funding they require. Microfinance generally refers to the provision of financial services (e.g.: savings, credit, insurance) to the poor, those who normally do not have access to formal financial institutions. Non-Governmental Organisations (NGOs) in India have promoted micro-finance through women’s self-help groups. However, the different institutional forms are not value-neutral and vested interests are involved. The interests of people and those of micro-financing institutions (MFIs) sometimes compete and conflict. If NGOs change their direction and become MFIs, there could be serious repercussions on development work at the field level. When funding support underlines financial viability, then the MFIs have to be competitive; poverty reduction and empowerment will suffer unless the institutions are also owned and managed by the poor. In this case, more investment in building their capacity is required. In the present phase of evolution of an entrepreneurial culture in India, financial support for NGOs to become MFIs is cheaper than policing a market economy and the real issue of the poor being left out by the market economy is ignored. NGOs can provide the leadership for greater structural reforms and do what they are best at: be facilitators, and create people’s institutions for micro-finance. In this way, the holistic development of people that should precede their involvement in small and micro-enterprise is more likely to occur.

Micro Finance Institutions (MFIs) Practices and Povery Alleviation in Tanzania

Tanzania's Poverty Reduction Strategy (PRS) focuses among other efforts at reducing income poverty, improving human capabilities, survival and social well being and containing extreme vulnerability among the poor. In this context access of households and firms to physical and financial resources is extremely crucial. For the majority of Tanzanians who are poor, without access to formal financial institutions, access to micro finance services is a viable alternative in an attempt to reduce poverty. Micro finance institutions (MFIs) offer the poor, the possibility of managing scarce resources more efficiently and taking advantage of investment opportunities for economic returns. Access to finance services may contribute to increased income generation and thus achievement of higher standards of living at household levels while at enterprise levels it can facilitate the pursuit of income and firms growth. The operations of MFIs need therefore to have greater outreach particulars where the poor are concentrated, i.e. in the rural settings. At the same time services ought to be sustainable in order to have impact on poverty alleviation. (Af. J. of Finance and Management: 2003 11(2): 65-83)

Chinese-American Banking and Community Development in Los Angeles County

Given the rapid increase of immigrant populations and ethnic communities in the U.S., it is surprising that so little attention has been paid to the role of ethnically owned banks in community development. Analyses of banking usually focus on developments such as mergers and consolidations within the mainstream financial sector. The academic literature on financial geography and the ethnic economy has established that the discriminatory and exclusionary practices of mainstream banks and other financial institutions play a significant role in impoverishing urban, low-income ghettos. Research on minority financial services largely focuses on the dynamics of informal financial establishments in ethnic neighborhoods. With the exception of research on African-American banks, there has been remarkably little scholarship on or even acknowledgement of ethnically owned formal financial institutions in minority communities. This article examines the parallel, co-respective growth of Chinese-American residents, businesses, and bank branches in Los Angeles, with special attention to spatial and temporal correlation. In particular, we explore the role of Chinese ethnic banks in altering commercial infrastructures and residential landscapes in Los Angeles County's Chinatown and the San Gabriel Valley ethnoburb area. This article is based on extensive quantitative data and on twenty-seven multilingual interviews conducted in 1999 with officers of Chinese-American banks.

Household Financial Savings Mobilisation: Empirical Evidence from Uganda

Panel data are used to examine household savings behaviour in Uganda and the part that is played by formal financial institutions in mobilising those savings. We show that the probability a household will acquire a deposit instrument from a financial institution increases significantly for both rural and urban households with improvements in several factors. Those factors include the level of information that is made available to the household, the degree of household access to the financial institution, the level of education of the head of household and the density of financial institutions in the area where the household is located. Among those households that report holding bank savings deposits, the level of net deposits is positively influenced by increases in the availability of credit facilities, lower transaction costs (as reflected by the quality of financial services provided by the institution) and higher permanent income. Relatively higher real rates of return on physical assets and higher transaction costs (due to reduced accessibility) both have significant negative effects on the level of net deposits held by households.

Mainstreaming microfinance: how lending to the poor began, grew, and came of age in Bolivia

Drawing on participant interviews, Beth Rhyne details how Bolivia's special breed of social entrepreneurs found the keys to unlock the huge unmet demand of informal clients. She explores how the beliefs of these social activists shaped the character of the variety of institutions that now dominate Bolivia's microfinance sector, and traces how these institutions proved that lending to microenterprises could become a commercial business. Rhyne investigates the transformation of NGOs into formal financial institutions, led by the creation of BancoSol, and closely examines microfinance under the conditions of commercialization and competition that have altered the dynamics of the new industry.

The Asian crisis, private sector saving, and policy implications

The Asian financial crisis has several critical implications for the saving behavior in the crisis-hit economies as well as in other Asian economies, which are summarized as follows: increase in economic uncertainty; increase in poverty; decrease in public confidence in financial institutions; financial liberalization; and reduction in corporate leverage ratio. Putting these together, the postcrisis saving rates in the crisis economies are likely to decrease without government interventions. Although the uncertainity factor may contribute to an increase in short-term saving, an abated level in household income and corporate output and slow GDP growth will lead to a contraction in saving rates. Increased poverty, diminished public confidence in banking institutions, and the increased variability of business sales will further contribute to a reduction in saving rates of the household and corporate sectors. Keeping this in mind, the postcrisis saving policy should consider stronger macroeconomic stabilization policies to reduce the underlying economic uncertainty to encourage long-term savings/investments; improving the public confidence in financial institutions through financial restructuring and a proper deposit insurance scheme in place; channeling informal sector saving into the formal financial institutions; and promoting propoor saving policies.

Formal rural financial markets in Nigeria: An attractive or deceptive development alternative?

This paper uses the outreach paradigm to examine the role of two formal rural financial institutions (Nigerian Agricultural Cooperative Bank and People's Bank of Nigeria) in development financing in Nigeria. Findings show that the two institutions have fared relatively well in the outreach to their target clientele, except women. The paper also suggests that for wider outreach, effective linkage with rural self-help is necessary.

Community banking for development: The case of Community Bank in comparative perspective 1994–1996

The perception has existed that most formal financial institutions are incapable of breaking old habits. Traditional financial institutions are incapable, owing to the design of corporate governance, to deliver cost effective financial services to underdeveloped and marginalised poor people. The granting of microloans to the poor or the informal sector by financial intermediaries is seen as unprofitable. Despite strong demand for relatively small credit allocations, financial intermediaries are reluctant to supply credit to the poor or informal sector because of perceived high default rates, lack of collateral and high transaction costs. The latter involve two categories of cost, ie real resource costs of acquiring, screening, selecting and enforcing contracts, and gathering relevant information about the borrower, as well as the costs incurred in case of default due to imperfect information on informal sector activities. Further costs arise in providing service outlets in villages and small towns, or in the South African case, security-risk urban townships. The consequence of these considerations is that informal sector lending, or the provision of credit to the poor, has not been undertaken on any significant scale by formal sector financial intermediaries.

Problems of Working Women in the Rural Informal Sector of Punjab (Pakistan)

The informal sector plays a significant role in Pakistan’s economy as well as in other developing countries. The role of the informal sector in solving the unemployment problem of Third World countries has become the focus of a conceptual and empirical debate in recent years. Most of the research takes a favourable view of this sector and suggests that it should be used as a policy instrument for the solution of the most pressing problems of developing countries, such as unemployment, poverty, income inequalities, etc. Before proceeding further, we will define the informal sector and differentiate it from the formal sector. There are various definitions, but the one given in an ILO report (1972) is generally considered the best. According to this report, informal sector activities are ways of doing things characterised by a heterogeneous array of economic activities with relative ease of entry, reliance on indigenous resources; temporary or variable structure and family ownership of enterprises, small scale of operation, labour intensive and adapted technology, skills acquired outside the formal school system, not depending on formal financial institutions for its credit needs; unregulated and unregistered units, and not observing fixed hours/days of operation.

Credit and Banking Structure: Asian and African-American Experience in Los Angeles

This paper considers whether the paucity of bank branches in heavily African-American communities and the lack of a robust AfricanAmerican banking sector may be among the factors impeding these communities' economic development. While activists often claim that these factors reduce credit flows in African-American communities, there are reasons to think that such claims may lack merit. For one thing, technological advances have permitted banks to make loans geographically distant from their branch offices and also have allowed many nonbanks to enter credit markets. Further, many immigrants, especially from East Asia, have succeeded on the basis of informal financial arrangements nurtured in ethnic enclaves. Therefore, informal intraethnic resources, not banks per se, may be the key to ethnic groups' access to credit and capital. Ethnic enclaves are of undoubted historical importance for many ethnic groups, but they may no longer be an important forn of social organization (Roger Waldinger, 1993). Timothy Bates ( 1997), in turn, has shown that successful Asian-American small businesses rely more on equity capital and formal financial institutions' credit than on family or lending-circle funds. Are formnal banking structures important in minorities' access to credit? This question is answered here by examining recent experience in multi-ethnic Los Angeles. Los Angeles has seen a sizable inflow of Asian immigrants, who no longer cluster in the inner city but have been expanding into suburban communities. Several Asian ethnoburbs (Wei Li, 1997) have arisen, in part due to the formal economic institutions spawned by ethnic business networks, including many Asian-American banks (Yu Zhou, 1996). Dymski et al. (1998) suggest the termn ethnobank to denote banks that are owned or controlled by members of ethnic minority groups and which primarily provide financial services to ethnic businesses and residents. Why might ethnobanks play a special role in ethnic communities' economic activities? Until the Civil Rights era, etimic banks fell into two categories: African-American banks focused on customers left unserved because of segregation and racial discrimination (Lisa Ammons, 1996) while Asian-American banks supported exportimport activities (Peter Kwong, 1987). Civilb rights laws and desegregation made mainstrea banks more accessible to minority customers. Before deregulation and the informationprocessing revolution, banks delivered credit and other financial services through multipurpose branches; these solved the principal-agent problems inherent in credit contracts by building up localized knowledge rooted in sustained bank-customer relationships. But banks have increasingly established centralized loandecision processes emphasizing standardized public information, not informal private information. For many banks, bank branches are now primarily venues for selling financial products, not hubs for gathering information and making loan decisions. Consequently, banks now open and maintain branches in what Angela Chang et al. ( 1997) ternm rational herding' pattems; t Discussants: Robert Avery, Federal Reserve Board; Elijah Brewster, Federal Reserve Bank of Chicago; Darryl Getter, U.S. Naval Academy; Sonya Williams Stanton, Ohio State University.

Micro-Credit Programme Evaluation: A Critical Review

summary Micro‐credit programmes have emerged as an antipoverty instrument in many low‐income countries. They target the poor, especially women, with financial services to help them become self‐employed in rural non‐farm activities of their choice. In contrast, micro‐credit programmes of the village banks supported by Accion International or Women's World Banking provide financial services in response to market failures in which formal financial institutions failed to cater financial services to small‐ and medium‐scale enterprises. No matter whether they are instruments for poverty reduction or market failure, micro‐credit programmes practice financial intermediation for their targeted clienteles. The article reviews the methodologies practiced to evaluate micro‐credit programmes, provides a unified framework for anlaysis, and discusses future research directions.

Discontinuance among new firms in retail: The influence of initial resources, strategy, and gender

Women-owned businesses represent one of the fastest growing segments of the U.S. economy. Their rate has increased more than six-fold since 1970. Despite this growth rate, the number of firms owned by women still lags behind that of men, and the sales and income of women-owned firms are significantly lower than those of men-owned firms. The discrepancy between the number of businesses owned by women and men and their economic success has been a popular theme among researchers. Some have suggested that performance differentials result from disparate structural positions women and men occupy in work and society, whereas others attribute the differences to deep rooted interpersonal orientations. This study examines whether the performance differences can be explained by variations in initial resources and founding strategy. We test whether women have fewer start-up resources, and if they do, whether they can compensate for these deficiencies through their founding strategy. Recent work in social psychology argues that strategic choice is shaped by experiences to which individuals have been subjected, and that women and men have fundamentally different socialization experiences. We test the assumption that if the strategy that women-owners adopt exploits the unique capabilities they derive from their socialization, they can improve the performance of their firms and ward off discontinuance. We examine the discontinuance pattern of 203 new firms in the retail industry. This industry was selected because women entrepreneurs often choose to operate in this industry, giving us a basis for comparing women-owned and men-owned firms. We classify the firms into six strategy archetypes. The arche-types range from a broad focus where founders emphasize multiple strategic foci simultaneously to narrowly targeted differentiation strategies. We assume that the experiential base of women entrepreneurs limits their successfully executing pricing strategies. We hypothesize that women-led firms decrease the odds of discontinuing by adopting one of two strategy types: (1) narrow differentiation strategies that seek to satisfy a narrow segment of the market and that do not rely on “pricing,” or (2) broad “generalists” strategies that emphasize service and quality but not pricing, and take advantage of women's capability for handling multiple stakeholders simultaneously. The results offer support for using an integrative model to explain the performance of women-owned firms. Women-owned firms have higher odds of discontinuing than men-owned firms, and women appear to have fewer resources to start their businesses. Women owners were less likely to have instrumental experience from working in the retail industry and start their businesses on a smaller scale then men but were no less likely then their male counterparts to have access to credit from formal financial institutions, or to be disadvantaged by starting fewer other new businesses. Despite some apparent situational disadvantage, resource deficiencies do not appear to affect the odds of women-owned businesses discontinuing as much as they do men-owned initiatives. The findings indicate support for the supposition that women owners can use founding strategy to decrease the odds of discontinuing business. A broad generalists strategy that represents a multi-focused approach was found to benefit women-owned businesses most. Overall, the results suggest that men use prior business experience and human capital to affect the survival status of their businesses. Women appear to find strategic choice more beneficial. Future research is recommended to further elaborate the integrative model. Special attention should be given to developing alternatives to measures traditionally used in gender research. Many researchers charge that those typically used reflect male derived measures. Similarly, greater attention should be given to understanding why the scale of women-owned businesses at start-up is substantially smaller than that of men, since scale has been shown to be related to subsequent growth and survival.

The use of village agents in rural credit delivery

Using a simple principal‐agent model this article examines the incentive problems that arise when a formal financial institution (such as a rural bank) utilises a member of the rural community to act as an agent in screening potential borrowers and collecting repayment. Optimal compensation schemes are derived for the agent and their implications are discussed. In addition, I show that the norms and rules that govern village life may aid the financial institution by helping to constrain possible strategic behaviour by the agent.

Credit constraints, credit unions, and small-scale producers in Guatemala

Efficient and equitable development outcomes may depend, in part, on whether formal financial institutions leave low-wealth producers tightly constrained in their access to credit. If so, can cooperative institutions efficiently relax these constraints? These issues are explored using survey data gathered from 950 small-scale producer households in areas of Guatemala with market-oriented credit unions that mobilize savings and make unsubsidized loans. Nonprice rationing by banks is found to be common among lower wealth households, while credit unions relax credit constraints for a significant portion of those rationed by banks, but not the poorest of the study households.