Informal Financial Sector Research Articles

The Role of Fintech and Its Influence on Transforming Retailers from Informal Financial Sector to Formal Financial Sector

The Role of Fintech and Its Influence on Transforming Retailers from Informal Financial Sector to Formal Financial Sector

Financial System Development and Economic Growth: A Critical Analysis of the Literature

Any developing countries (DCs) want to achieve strong, sustained growth to ensure their sustainable development by 2030. Indeed, promoting economic growth is one of the targets of the majority of the Sustainable Development Goals (SDGs) set by United Nations member countries. In their agenda, financial system development cited as an effective means of enabling developing countries to achieve high rates economic growth. However, research into the relationship between finance and growth has produced controversial results, showing that financial development is not always conducive to economic growth. These non-consensual findings call for further research into the subject. With this in mind, the aim of this paper is to critically analyze the literature on the subject with reference to the characteristics of developing countries. We have used the stylistic facts observed in these countries to see whether the way in which studies are conducted is in line with reality. These facts revealed that, as conducted, theoretical and empirical work does not really illustrate the nature of this relationship in the case of developing countries. The authors do not take into account certain specificities of these countries. The studies focus mainly on the formal financial sector, whereas in developing countries, the majority of the population is unbanked, so they tend to turn to the informal financial sector for savings and credit. In Pagano's theoretical model, on which most empirical work is based, the efficiency of financial intermediation is assumed to be an exogenous variable. However, in developing countries, many factors influence this function: poor governance, prevailing corruption, inefficiency of the legal system, government intervention in the financial sector, culture of non-repayment. Banking sector development is generally captured by credit to the private sector. However, in developing countries, the majority of bank credit is allocated to large commercial enterprises that sell mainly imported products. The indicators generally used to capture financial markets development do not reflect the amount of financing actually obtained by listed companies. Rather, they measure the level of secondary market activity, whose mission is to ensure the liquidity of securities and determine their prices. Taking account of financial dualism and integrating factors linked to the institutional environment, borrower behavior and financial intermediaries into the resource allocation function would be a significant advance in the literature.

Unlocking the potential India's informal financial sector: Implications, characteristics, and policy perspectives

Unlocking the potential India's informal financial sector: Implications, characteristics, and policy perspectives

Financial Funding for Small and Medium-sized Enterprises (SMEs)

The purpose of this paper is to provide a comprehensive understanding of SME funding issues and promote more inclusive and sustainable funding approaches for SMEs. The method used in this paper is qualitative by looking for papers derived from existing journal literature within ten years, looking for findings or results related to variables in this paper. Discuss results and findings from the literature found. The results of this paper after being presented in the form of a conclusion that makes contributions related to the field of finance. SMEs have an important role to play in African economies, but they often struggle to access formal financial services. Informal finance is becoming the preferred choice in some situations. Recommendations include building a regulatory framework, increasing linkages between the formal and informal financial sectors, and leveraging financial technology (FinTech) for financial access. Financial inclusion and risk management of SMEs are also important. This conclusion highlights the role of SMEs and the financial challenges that must be overcome to support economic growth.

Financial inclusion, vulnerability coping strategies and multidimensional poverty: Does conceptualisation of financial inclusion matter?

AbstractPolicy emphasis on financial inclusion and deepening has shifted away from measures capturing formal financial services only and towards the development of more inclusive financial markets which account for both formal and informal services. This study examines the effect of financial inclusion and vulnerability coping strategies on multidimensional poverty, where the conceptualisation of financial inclusion is based on four perspectives—(i) one that focuses on only the formal financial sector, (ii) another that concentrates on only the informal financial sector, (iii) one that considers only the mobile money sector and (iv) finally, one that combines all financial markets (i.e., formal and informal including mobile money). Findings show that the conceptualisation of financial inclusion does not only matter in identifying the financially included but also has an implication on how financial inclusion influences multidimensional poverty. Financial inclusion measures that use only formal financial products and services understate their potential effects on multidimensional poverty, thus, justifying the need for a financial inclusion measure that considers both formal and informal sectors. Incorporating informal financial products and services in the measure reduces multidimensional poverty more for female‐headed households and those in rural settings. Households' adoption of vulnerability coping strategies has the potential to reduce the likelihood of being multidimensionally poor.

Determinants of using formal vs informal financial sector in BRICS group

The determinants of the usage of the formal versus the informal financial sector within the BRICS countries are analysed. Regression tree and probit methods are applied to a subset of observations from the 2021 Global Findex database. Results of these different methods are robust and complement each other. The main findings are: (a) Individuals with regular income has higher probability of using the formal financial sector; (b) There is a nonlinear relationship with age and the financial sector channels, individual above 36 are less likely to use the informal channel but are more likely to use the formal channel.

An Assessment of South Africa’s Vulnerability to Terrorism Financing and the Counter-Terrorist Financing Framework

Terrorism financing poses a direct threat to South Africa’s national security as well as the integrity and reputation of its financial system. Terrorism financing has the potential to finance and enable terrorist activities locally and abroad. Over and above posing a security threat, it also impacts the integrity of non-financial institutions such as charities and non-profit organizations which could be exploited, often unwittingly, for the financing of terrorism. Terrorist groups make use of multiple methods to raise move, store and/or use funds and exploit the inherent vulnerabilities of countries’ regulatory, financial, law enforcement and security frameworks. Their techniques vary and depend on the sophistication and objectives of terrorists, terrorist organizations and their sympathizers. Terrorism financing investigations are usually extremely complex, particularly with regard to the identification of financiers and ultimate end-users of the generated funds. This is due to the myriad financial transaction mediums such as cash and crypto assets, the international nature of transfers between financial jurisdictions, the informal financial sector (e.g. Hawala), as well as the capacity and capability challenges faced by financial institutions, regulators, supervisory bodies and law enforcement agencies. Funds intended for terrorism related activities may be derived from legitimate as well as from illicit sources, making terrorism financing particularly difficult to detect, disrupt and prevent. The constant evolution of terrorism financing methods in response to new and increasingly sophisticated countermeasures remains a continual challenge locally and for international financial oversight bodies such as the Financial Action Task Force (FATF) and its regional-style bodies. This paper will investigate and assess South Africa’s vulnerability to terrorism financing and the counter-terrorist financing framework to effectively combat terrorism financing. The key issues to be appraised include an assessment of factors that contribute to SA’s vulnerability to terrorism financing. A counter-terrorist financing framework adopted by SA.

Gender saving groups: Formalizing village saving groups with a gender lens

This concept paper introduces a research collection on gender saving groups/ village savings loan association and financial inclusion that sets out to provide insights and evidence that enable the formal financial sector or practitioners to link with the informal financial sector to better reach women with digital financial services. The research brings together some articles and our innovative thoughts on financial inclusion that discuss specific range of interventions and experiences. It also explores and presents the opportunity for and challenges to meaningful financial inclusion for women non-literate and non-numerate populations. This article interrogate the methods used to reach last mile communities (rural and urban) and highlight the need for holistic, multi-layered programming that supports social norm change and addresses the actual constraints faced by members of these VSLA and communities.

The Role of Financial Institutions in Smallholder Agriculture Development:Ethiopian Context

Financial constraints in smallholder agriculture remain pervasive in developing countries like Ethiopia. The government of Ethiopia is doing its best to tackle the financial bottleneck through financial inclusion and several institutional arrangements that hinder smallholders’ agriculture that represent the landslide figure in the country. This review is aimed at finding financial institutions serving smallholders in the country, evaluating the mode of service delivery of financial institutions regarding smallholder development, exploring the challenges of financial institutions, and examining the challenges that hinder smallholders in accessing services from financial institutions. There are formal, semi-formal, and informal institutions are delivering service packages to alleviate the smallholders’ financial problems through credit, saving, insurance, and to some extent, insurance services. In terms of terms, formal financial institutions (banks and insurance companies) have virtually no access to the rural population; they are all located in urban and semi-urban towns, classify smallholder agriculture as a risky business, discriminate against smallholders, and require collateral that smallholders cannot provide. However, they reach smallholders indirectly through loans they provide to the MFIs. MFIs and RuSACCOs are the main formal and semi-formal institutions that are mainly established on a poverty lending approach. Startup capital supply for SMEs is attached to MFIs indifferently. They are serving smallholders through loan provision and saving and have devised a group lending scheme where members will be accountable for others. Despite the financial inclusion proclamation, MFIs are dominated by the ruling political party. However, they are the most profound financial institutions that serve smallholders and the poorest segment of the population. Despite the tremendous expansion, progress, and the enormous resources mobilized by financial institutions in the country, especially MFIs and RuSACCOs, a substantial proportion of the rural population remains underserved. Due to the one-size-fits-all services of MFIs and the limitation of funds to expand clients, extremely low uptake and sluggish penetration of the credit service to smallholders indicates the prevalence of unbanked and untapped financial potential. Therefore, 80 percent of the poor and smallholders depend on the informal financial sector, mainly on Iqqub, Iddir, and money lenders, since they are culture-appropriate, flexible, easily accessible, and cost-effective. Insurance endeavors are rarely known in Ethiopian smallholders’ context despite its necessity. Thus, strengthening the capacities of MFIs and RuSACCOs, linking need-based input credit, designing a credit guarantee scheme, connecting these institutions with other government payment schemes, meeting the credit demands of commercial, semi-commercial, and subsistence smallholders, and launching and scaling up WII on a micro-insurance platform are all essential. Keywords: Financial institutions, formal, informal, semi-formal, smallholder agriculture DOI: 10.7176/EJBM/14-1-03 Publication date: January 31 st 2022

Small Entreprises Fundamental Problems in Bali Province

The problems faced by small businesses are closely related to a companion or facilitator in assisting. The lack of guidance makes it difficult for small businesses to develop. Based on the results of coaching and monitoring of 30 profiles of small business groups in Bali Province, there are several types of obstacles or problems that are often complained of by small business actors in the industrial sector in Bali Province, namely the low quality of human resources and the lack of entrepreneurial knowledge and competence resulting in everyday business and labor productivity. This can also be seen in the inability of business actors in terms of business management, especially in terms of recording/bookkeeping procedures. Many business actors also do not have a transparent legal entity, lack product innovation. Small businesses are considered to lack still knowledge of technology, management, information, and markets. Observing the problems faced by small businesses in the future, it is necessary to create a conducive climate, among others, by seeking peace and security in business and simplifying business licensing procedures, tax breaks, and so on. Government capital assistance needs to expand special credit with conditions that are not burdensome for small businesses to help increase their capital through the formal financial services sector, the informal financial services sector, guarantee schemes, and leasing venture capital funds. The government needs to improve training for small business actors in entrepreneurship, management, administration, and knowledge and skills in business development. Besides that, it is also necessary to apply the training results in the field to practice theory through the development of pilot partnerships.

Financial Inclusion and Its Impact on Inclusive Growth: The Macro-Economic Perspective in Sri Lanka

The term “Financial Inclusion” means the transfer of formal financial services at a reasonable cost to the vast sections of underprivileged and low-income group of the country. Financial inclusion and inclusive growth are the two sides of the same coin. Both are interrelated and interdependent. For growth to be inclusive, all people should access and use the formal financial services. In Sri Lanka, it is apparent that the inclusive growth is hampered by financial exclusion. Mostly, banking and other financial services are not distributed adequately, especially in rural areas of the country. Therefore, there is a large part of the rural population that involve in high risky informal financial transactions thereby involving with the informal financial sector. The present study attempt to examine the contribution of financial inclusion to enhance the inclusive growth of the country. This study concerned economic growth, poverty, equality and employment as main dimensions of the inclusive growth. As per the nature of the study, secondary data were collected from literature and other accepted reports. The research employed a regression model using E-views to analyse time series data from the period of 1985 to 2019. According to the findings of the research, results revealed that there is a significant positive impact made by the financial inclusion on the inclusive growth of the country. Further, the results explained economic growth as the most significant determinant and employment as the least significant determinant which is influenced by the financial inclusion in the Sri Lankan context.

Financial deepening indicators and income inequality of OECD and ASIAN countries

The present study examined the effects of financial deepening on income inequality using gross domestic product (GDP) and money supply proxies. A sample of 32 Organisation Economic Co-operation and Development (OECD) and ASIAN countries was examined during the period of 2002–2018. Using a robust methodology, many tests were applied to control the issues of heterogeneity and endogeneity. The findings of the pooled OLS, the pooled OLS group and GMM estimators showed that the financial depth proxies of the importance of the semi-formal and informal financial sectors had a positive and significant impact on income inequality in the OECD and ASIAN countries. Furthermore, the ASIAN countries had a positive and significant financial depth as a money supply proxy for the formal sector. In other words, the excessive expansion of the formal financial sector in the ASIAN countries compared to other financial sectors led to an unequal impact on income inequality. The effect was even greater when redistributing income in the semi-formal financial sector than in the informal sector for all major indicators. We concluded that the two main proxies worked in parallel by strengthening the informal and semi-formal financial sectors. It also indicates that regulatory institutions are gradually reduce the high level of inequality in the OECD and ASIAN countries.

Selected challenges associated with the reliance on customer due diligence measures to curb money laundering in South African banks and related financial institutions

Customer due diligence is a means of ensuring that financial institutions know their customers well through know-your-customer (KYC) tools and related measures. Notably, customer due diligence measures include the identification and verification of customer identity, keeping records of transactions concluded between a customer and the financial institution, ongoing monitoring of customer account activities, reporting unusual and suspicious transactions, and risk assessment programmes. Accordingly, financial institutions should ensure that their customers are risk assessed before concluding any transactions with them. The regulation of money laundering is crucial to the economic growth of many countries, including South Africa. However, there are still numerous challenges affecting the banks and other role players’ reliance on customer due diligence measures to combat money laundering in South Africa. Therefore, a qualitative research methodology is employed in this article to unpack such challenges. The challenges include the failure to meet the identification and verification requirements by some South African citizens, onerous documentation requirements giving rise to other persons being denied access to the formal financial sector, and the lack of express provisions to regulate the informal financial sector in South Africa. Given this background, the article discusses the challenges associated with the regulation and implementation of customer due diligence measures to enhance the combating of money laundering in South African banks and related financial institutions. It is hoped that the recommendations provided in this article will be utilised by the relevant authorities to enhance customer due diligence and effectively combat money laundering activities in South African banks and related financial institutions.

Financial Determinants of Informal Financial Development in Sub-Saharan Africa

This study assesses financial determinants of informal financial sector development in 48 Sub-Saharan African countries for the period 1995-2017. Quantile regressions are used as the empirical strategy which enables the study to assess the determinants throughout the conditional distribution of informal sector development dynamics. The following financial determinants affect informal financial development and financial informalization differently in terms of magnitude and sign: bank overhead costs; net internet margin; bank concentration; return on equity; bank cost to income ratio; financial stability; loans from non-resident banks; offshore bank deposits and remittances. The determinants are presented from a plethora of perspectives, inter alia: U-Shape, S-Shape and positive or negative thresholds. The study not only provides a practical way by which to assess the incidence of financial determinants on informal financial sector development, but also provides financial instruments by which informal financial development can be curbed.

The informal financial sector: The scale of disaster in Russia

Subject. The informal business more and more permeates the financial sector due to a growth in the digitization of the economy, developing IT and, consequently, cybercrime, increasing volume of e-payments. Objectives. I herein study trends in the informal financial sector of Russia and provide our recommendations for reducing the volume of cash withdrawal. Methods. The goals justifies my gradual study into legislative, regulatory, statistical, reference and periodical literature and the use of general scientific and special methods of research, such as the systems approach, formal logic, methods of comparative analysis, classification, graphical interpretation techniques, etc. Results. I analyzed trends in the scale of the informal economy and considered the integration of illegal business into the financial sector. I discovered what caused changes in the structure of higher-exposure transactions and cash withdrawal. The article also evaluates damage caused with cybercrime in the banking sector. I group basic elements of AML regulations, describe advantages of anti-legalization mechanisms and their adverse effect on the economy. The article provides my guidelines for the use of mechanisms countering the informal capital in Russia. Conclusions and Relevance. AML mechanisms should be used so as to prevent national security threats, without artificially hampering the development and advancement of the economy. The findings can underlies further research into anti-legalization activities as part of AML policy.

“Housing Prices Never Fall”: The Development of Housing Finance in Taiwan

ABSTRACT This article deals with the path-dependent features of financialization of housing in Taiwan, an East Asian developmental state. The levels of foreign capital and securitization in Taiwan’s housing market remain relatively low, meaning domestic capital, of which there is an abundance, is the major financial source of such speculation. The process does not include the retrenchment of the welfare state, because Taiwan has been a homeowner society. After financial liberalization in the 1980s, Taiwan’s state intervention in the housing and financial sectors has actually intensified via the enactment of more regulations to decrease the role of the informal financial and housing sectors. As a result of neoliberalization giving precedence to market mechanisms, various low-interest mortgage programs in the 1990s, all subsidized by public funding, have increased the rate of homeownership and sustained housing prices. Even though this varied the development of housing financialization, housing in Taiwan has largely become a tool of speculation, and housing affordability has become a serious problem.

Effect of Financial Prices on CBN Policy Decisions 2000-2018

This study investigated the effect of financial prices on CBN policy decisions between 2000 to 2018 by measuring the relationship between bond price level in Nigeria and CBN monetary decision policies (Monetary Policy Rate, Cash Reserve Ratio & Liquidity Ratio). In order to achieve this set objective, the study applied the methodology of Simple Linear Regression. The summary statistics shows that the probability value of the Jarque-Bera test statistics is greater than the critical value, implying that the data for the study is normally distributed The results of the empirical estimates revealed that bond price has a positive effect on monetary policy rate and the effect and the effect is statistically significant (p<0.05). This means that a unit increase in Bond Price will lead to increase in MPR by a margin of 68%. The result of the Simple Linear regression analysis shows that bond price has a positive effect on Cash Reserve Ratio (CRR) and the effect is not statistically significant (p>0.05). This means that a unit increase in Bond Price will lead to increase in MPR by a margin of 34.00%. The result of the Simple Linear regression analysis shows that bond price has a positive effect on monetary policy rate and the effect and the effect is statistically significant (p<0.05). On this basis, it is recommended that policy reforms, which would help reduce the influence of the informal financial sector, be implemented. This would enhance the influence of the central monetary authority in the financial sector, and by implication, reduce the fluctuation of bond price which is affected by the several stochastic factors operating in the economy.

Implications of the African Union Special Declaration on Illicit Financial Flows for financial services infrastructure in Africa

Regardless of whether they are part of the formal system or not, all sectors that provide financial services are obliged to take preventive measures to avoid being used to conceal or promote criminality. This is the outcome of sustained pressure emanating from initiatives to curb money laundering and the financing of terrorism. In the last few years, various international bodies, such as the African Union (AU), the Organisation for Economic Cooperation and Development (OECD) and the United Nations (UN) have begun to take the need to reduce illicit financial flows seriously. This has led to statements, of which the AU Declaration on Illicit Financial Flows (2015) is among the more recent, directed at governments and financial institutions. This paper discusses the implications of the AU Declaration on policy making by AU member states and institutional reform by all sectors within the financial infrastructure in Africa. It briefly surveys the record of formal financial institutions in preventing collusion in questionable transactions that could support illicit transfers, and finds that their record is generally not impressive. More will be required, in terms of redefining relationships with core customers, conducting due diligence, determining the activities to be reported as suspicious and preventing their abuse to perpetuate illicit transfers. The paper explores the contradictions that might impede the transition required by the AU Declaration, and suggests measures that may need to be taken to enforce compliance within the formal and informal financial sectors.

Remittance and financial inclusion in refugee migrants: inverse probability of treatment weighting using the propensity score

ABSTRACTThis paper investigates the impact on remittances on financial inclusion of refugee migrants. While financial inclusion is gaining traction in the humanitarian and development literature, the linkage with the potential to improve the wellbeing of refugees, who are part of an upward spiral in numbers, has not been tackled. We examine World Bank survey data of 1041 Syrian refugees, using the inverse probability of treatment weighting propensity score analysis (IPTW). The method minimises the influence of outliers and addresses unobservable and missing data biases, which can plague survey based data. We observe that common indicators of financial inclusion when applied to refugees, given their limited access to formal financial services, may introduce a bias as the informal financial sector and excluded formal financial sector services do contribute to inclusiveness. We adopt a broader protocol for our data, measuring financial inclusion through six metrics stemming from G20 proposals. Overall, there is an opportunity to deepen financial inclusion for refugees who receive or send remittances. The possibility of expanding the financial inclusion options, and for this to percolate through to greater social inclusion, proffers practical commercial steps and policy enabling actions.

The viability of international anti-criminal finance frameworks

Purpose The purpose of this paper is to draw attention to the effect of the growing informal financial sector (IFS) on the effectiveness of anti-criminal finance laws. Specifically, the growth of the IFS has been brought on by the unprecedented rise in refugee and migrant movement around the world. This paper will focus on how refugee smuggling in the Eastern Mediterranean and Western Balkan region – and the consequent rise of the IFS – has affected the suitability of apply anti-money laundering and financial action task force frameworks in these countries. Design/methodology/approach It assesses the effectiveness of national and international legal documents on anti-criminal finance. It also uses data sets and analyses secondary and primary sources to estimate the size and importance of the IFS. Findings The exponential and rapid growth of the IFS has undermined efforts to prevent the financing of trafficking, terrorism, corruption and money-laundering. The present legal devices to address criminal finance has been wholly inadequate and counter-productive. Research limitations/implications There are limited reliable or accurate data available on the IFS, how much money goes through it or how important it is to criminal activities such as money laundering or terrorist finance. Without field-research, this study remains exploratory. Practical implications The growth of the IFS and migratory movement is a complex dilemma that must be accounted for when seeking to truly improve anti-criminal finance laws, especially in developing and transition countries. Originality/value This paper demonstrates the importance of considering the IFS and migratory and refugee movements in creating legal instruments to combat financial crime. It also suggests a direction for future research.