Informal Financial Sector Research Articles

Socio-Economic Impact of Informal Financial Sector and Inclusive Growth: Empirical Evidence from North Central-Nigeria

The paper examines the socio-economic impact of informal financial sector and inclusive growth in north central –Nigeria. The notion behind inclusive growth entails analysis how employment opportunities arise and change with growth process with time. Economic growth can be accompanied by an increase in informal sector employment. Informal financial sector may support growth by reducing cost of borrowing, collateral, bureaucratic process and improving competitiveness. However, a well-functioning and regulated informal financial economy will be a critical prerequisite to achieve sustainable growth in north central-Nigeria. And also, a widespread informal financial sector with regard to employment, enterprise, and productive activities is frequently perceived as a barrier to full participation in the economy and as a hindrance to long-run economic development and poverty alleviation in this region. This is because the link between, informal financial sector, growth and inclusiveness is not fully understood. Inclusive growth has been defined as growth that takes place in a context in which economic opportunities-including employment opportunities expand, the poor’s access to these opportunities improves, and inequalities are reduced. This paper seeks to investigate the socio-economic impact of informal financial sector activities, inclusiveness’ and economic growth in north central - Nigeria. A systematic random sampling method was used to collect data from 500 informal financial sector operators in Abuja, kogi and Niger states. A multivariate panel logit model statistic was used to analyze the data in order to identify the perception of socio-economic impact of Informal financial sectors on economic growth in north central- Nigeria. The findings revealed that informal sector operators has a positive and significant impact on growth in the region; while poverty-mentality, illiteracy, high inflation, low infrastructure, access to credit, social safety nets and information dissemination are the major problems encountered by these institutions. The paper recommends among other things the education of the rural poor to embark on viable projects, infrastructural development and favorable government policies so as to regulate the sector becomes relevant

Rural Saving Mobilizations and Economic Development in Akamkpa Local Government Area of Cross River State - Nigeria

This study presents an analysis of “Rural Saving Mobilizations and economic development in Akamkpa Local Government Area of Cross River State Nigeria”. The data available shows that savings mobilization plays an important role in rural development and in rural Economy like Akamkpa Local Government Area of Cross River State Nigeria. The major objectives of the study are to examine the mobilization of rural savings in Akamkpa Local Government Area of Cross River State and the factors militating against the mobilization of savings in the area. The study also assesses the roles and contributions of the formal and informal financial sectors in the mobilization of savings from the rural area. Primary and secondary data were collected from the rural households and the two major financial institutions in the area then (the Union Bank of Nigeria Plc, and the peoples Bank of Nigeria). The analysis shows that 80% of Awi- the Cross River State College of education Community indicated a greater percentage of their awareness to save their money in the bank. It was also discovered that out of 351 workers of the State college of Education, Akamkpa, 243 or 69.23% save with the Union Bank of Nigeria, Akamkpa Branch under the salary payroll Accounts. While 108 or 30.77% save with the people Bank of Nigeria, Akamkpa branch respectively. The study also reveals that the higher the rate of interest, the greater the inducement to Savers to increase their savings and supply more funds. policy implications of the study are that the government or the monetary authority should maintain the equality of saving and investment where the market rate of interest equal to the natural rate.

May the Soul of the IFS Financial System Definition RIP in Developing Countries

In this paper, we dissect with great acuteness contemporary insufficiencies of the IFS (2008) definition of the financial system and conclude from sound theoretical underpinnings and empirical justifications that the foundation, on which it is based, while solid for developed countries, holds less ground in developing countries. Perhaps one of the deepest empirical hollows in the financial development literature has been the equation of financial depth in the perspective of money supply to liquid liabilities. This equation has put on the margin (and skewed) burgeoning phenomena of mobile banking, knowledge economy (KE), inequality…etc. We conclude that the informal financial sector, a previously missing component in the IFS conception and definition of the financial system can only be marginalized at the cost of misunderstanding recent burgeoning trends in mobile phone penetration, KE and poverty. Hence, the IFS definition has incontrovertibly fought its final dead battle and lost in the face of soaring trends highlighted above. Despite the plethora of econometric and policy-making sins the definition has committed in developing countries through bias estimates and misleading inferences, may its soul RIP.

New Financial Development Indicators: With a Critical Contribution to Inequality Empirics

The employment of financial development indicators without due consideration to country/regional specific financial development realities remains an issue of substantial policy relevance. Financial depth in the perspective of money supply is not equal to liquid liabilities in every development context. This paper introduces complementary indicators to the existing Financial Development and Structure Database (FDSD). Dynamic panel system GMM estimations are applied. Different specifications, non-overlapping intervals and control variables are used to check the consistency of estimated coefficients. Our results suggest that from an absolute standpoint (GDP base measures), all financial sectors are pro-poor. However, three interesting findings are drawn from measures of sector importance. (1) The expansion of the formal financial sector to the detriment of other financial sectors has a disequalizing income effect. (2) Growth of informal and semi-formal financial sectors at the expense of the formal financial sector has an income equalizing effect. (3) The positive income redistributive effect of semi-formal finance in financial sector competition is higher than the corresponding impact of informal finance. It unites two streams of research by contributing at the same time to the macroeconomic literature on measuring financial development and responding to the growing field of economic development by means of informal financial sector promotion and microfinance. The paper suggests a practicable way to disentangle the effects of the various financial sectors on economic development. The equation of financial depth in the perspective of money supply to liquid liabilities has put on the margin the burgeoning informal financial sector in developing countries. The phenomenon of mobile banking is such an example.

How Has Mobile Banking Stimulated Financial Development in Africa?

In the first empirical assessment of the incidence of mobile banking on financial intermediary development in Africa, we use two definitions of the financial system: the traditional IFS (2008) and Asongu (2011) measures of financial sector importance. When the conception of a financial system is based only on banks and other financial institution (IFS, 2008), mobile banking has a negative incidence on traditional financial intermediary dynamics of depth, activity and size. However, when a previously missing informal-financial sector component is integrated into the definition (Asongu, 2011), mobile-banking has a positive incidence on informal financial intermediary development. Three major implications result from the findings. (1) There is a growing role of informal finance in developing countries. (2) The incidence of the burgeoning phenomenon of mobile-banking cannot be effectively assessed at a macroeconomic level by traditional financial development indicators. (3) It is a wake-up call for scholarly research on informal financial intermediary development indicators which will oriented monetary policy; since a great chunk of the monetary base(M0) in less developed countries is now captured by mobile-banking.

New Financial Intermediary Development Indicators for Developing Countries

Financial development indicators are often applied to countries/regions without taking into account specific financial development realities. Financial depth in the perspective of monetary base is not equal to liquid liabilities in every development context. This paper introduces complementary indicators to the existing Financial Development and Structure Database (FDSD) and unites two streams of research. It contributes at the same time to the macroeconomic literature on measuring financial development and responds to the growing field of economic development by means of informal financial sector promotion and microfinance. The paper suggests a practicable way to disentangle the effects of the various financial sectors on economic developments.

New financial development indicators: with a critical contribution to inequality empirics

The employment of financial development indicators without due consideration to country/regional specific financial development realities remains an issue of substantial policy relevance. Financial depth in the perspective of money supply is not equal to liquid liabilities in every development context. This paper introduces complementary indicators to the existing Financial Development and Structure Database (FDSD). Dynamic panel system GMM estimations are applied. Different specifications, non-overlapping intervals and control variables are used to check the consistency of estimated coefficients. Our results suggest that from an absolute standpoint (GDP base measures), all financial sectors are pro-poor. However, three interesting findings are drawn from measures of sector importance. (1) The expansion of the formal financial sector to the detriment of other financial sectors has a disequalizing income effect. (2) Growth of informal and semi-formal financial sectors at the expense of the formal financial sector has an income equalizing effect. (3) The positive income redistributive effect of semi-formal finance in financial sector competition is higher than the corresponding impact of informal finance. It unites two streams of research by contributing at the same time to the macroeconomic literature on measuring financial development and responding to the growing field of economic development by means of informal financial sector promotion and microfinance. The paper suggests a practicable way to disentangle the effects of the various financial sectors on economic development. The equation of financial depth in the perspective of money supply to liquid liabilities has put on the margin the burgeoning informal financial sector in developing countries. The phenomenon of mobile banking is such an example.

Rotating Savings and Credit Associations: A Case Study of ‘Panampayattu’

ROSCA is a type of money exchange system which provides financial assistance to low income people by combining credit and savings and thereby improving the standard of living of the people. All ROSCAs are closely linked to informal financial sector during their inception and later most of the ROSCAs are brought forward to formal financial System. The present study focus on ‘Panampayattu, (a type of ROSCA prevailing in northern Malabar area in the Indian state of Kerala). The study shows that panampayattu has a huge scope to be the potential product in the product mix of financial institutions like banks. The study also lays out the comparative advantages of panampayattu with respect to other popular financial products in meeting the financial requirements of the low income people.

Interaction of formal and informal financial markets in quasi-emerging market economies

The primary objective of this paper is to investigate the interaction of formal and informal financial markets and their impact on economic activity in quasi-emerging market economies. Using a four-sector dynamic stochastic general equilibrium model with asymmetric information in the formal financial sector, we come up with three fundamental findings. First, we demonstrate that formal and informal financial sector loans are complementary in the aggregate, suggesting that an increase in the use of formal financial sector credit creates additional productive capacity that requires more informal financial sector credit to maintain equilibrium. Second, it is shown that interest rates in the formal and informal financial sectors do not always change together in the same direction. We demonstrate that in some instances, interest rates in the two sectors change in diametrically opposed directions with the implication that the informal financial sector may frustrate monetary policy, the extent of which depends on the size of the informal financial sector. Thus, the larger the size of the informal financial sector the lower the likely impact of monetary policy on economic activity. Third, the model shows that the risk factor (probability of success) for both high and low risk borrowers plays an important role in determining the magnitude by which macroeconomic indicators respond to shocks.

"Social Resources, Generalized Trust, and Entrepreneurs' Choice of Financial Sources in Western Chi"

The choices of financial sources are important decisions for entrepreneurs in developing countries. Whereas the coexistence of formal and informal financial sectors has catered to the heterogeneous...

How has Mobile Phone Penetration Stimulated Financial Development in Africa?

In the first macroeconomic empirical assessment of the relationship between mobile phones and finance, the author examines the correlations between mobile phone penetration and financial development using two conflicting definitions of the financial system in the financial development literature. With the traditional International Financial Statistics (IFS) (2008) definition, mobile phone penetration has a negative correlation with traditional financial intermediary dynamics of depth, activity, and size. However, when a previously missing informal-financial sector component is integrated into the definition, mobile phone penetration has a positive correlation with informal financial development. Three implications result: There is a growing role of informal finance; mobile phone penetration may not be positively assessed at a macroeconomic level by traditional financial development indicators; and it is a wake-up call for scholarly research on informal financial development indicators that will orient monetary policy.

Financial Sector Competition and Knowledge Economy: Evidence from SSA and MENA Countries

The goal of this paper is to assess how financial sector competition plays out in the development of knowledge economy (KE). It contributes at the same time to the macroeconomic literature on measuring financial development and response to the growing field of KE by means of informal sector promotion, microfinance, and mobile banking. It suggests a practicable way to disentangle the effects of various financial sectors on different components of KE. The variables identified under the World Bank’s four knowledge economy index (KEI) are employed. Three hypotheses based on seven propositions are tested. Results show: (a) the informal financial sector, a previously missing component in the definition of the financial system by the IMF significantly affects KE dimensions; (b) disentangling different components of the existing measurement of the financial system improves dynamics in the KE–finance nexus, and (c) introduction of measures of sector importance provides relevant new insights into how financial sector competition affects KE.

The financial mechanism for the poor: Evidence from Ghana

Traditionally, it is assumed without empirical evidence, that poor people are too poor to save hence hove been ignored by formal financial institutions. However, there exists a body of evidence showing the saving powers of the poor when given the chance. This paper presents some of the financial instruments used by poor people and gives brief discussions on the types of savings tools poor people use. These tools, the Rotating Saving Credit Associations (ROSCAs) and the Susu system, are traced to their historical roots. We then use data to show that clients of a microfinance institution actively use these savings instruments to raise lump sum. The data show that clients use several saving instruments in addition to the institutions compulsory dues. These savings tools, ignored by the financial sector could be used to mobilize deposits from the poor people by the sector. It is envisaged that both the formol and informal financial sectors would learn from such ancient savings institutions to mobilize deposits from poor households.

New Indicators for the Mobile Banking Nexus

Purpose: We make available new critical macroeconomic financial indicators to the research community. Nothing is more powerful than a phenomenon whose time has come. What is the macroeconomic empirical context of growing mobile banking? Perhaps one of the deepest empirical hollows in the financial development literature has been the equation of financial depth in the perspective of money supply to liquid liabilities. This equation has put on the margin, a burgeoning phenomenon whose time has come: mobile banking. Design/Methodology: We decompose financial depth into formal, semi-formal and informal sectors and then assess the incidence of mobile banking on each constituent. Thus the IFS (2008) definition of the financial system is extended to incorporate an informal financial sector in line with Asongu(2011). Three hypotheses based on eight propositions are tested using a plethora of endogeneity-robust and HAC standard errors estimation techniques. Findings: The informal financial sector (a previously missing component in the definition of money supply: M2) is positively affected by mobile banking, while the incidence of mobile banking is negative on formal and semi-formal financial intermediary development. The paper contributes at the same time to the macroeconomic literature on measuring financial development and responds to the growing field of economic development by means of informal financial sector promotion, microfinance and mobile banking. It suggests a practicable way to disentangle the effects of mobile banking on various financial sectors. Research implications: Since empirical research on the phenomenon has been hampered by lack of data, we make available macroeconomic financial indicators to the research community. The present paper is also in response to the numerous calls on the research gap in the literature that emphasize the need for research on mobile banking. The mobile-finance nexus is gaining momentum, yet relatively little scholarly research explores the incidence of these m-banking/m-payment (systems) on financial development. Practical implications: (1) There is a burgeoning role of informal finance in developing countries. (2) The incidence of the growing phenomenon of mobile banking cannot be effectively assessed at a macroeconomic level by traditional financial development indicators. (3) It is a wake-up call for scholarly research on informal financial intermediary development indicators which will guide monetary policy; since a great chunk of the monetary base (M0) in less developed countries is now captured by mobile banking. Originality/value: New financial indicators for mobile banking assessment based on insufficiencies in the financial development literature: liquid liabilities as applied to developing countries is misleading because a great chunk of the monetary base does not transit through the banking system but via informal networks like the growing phenomenon of mobile banking.

Financial Sector Competition and Knowledge Economy: Evidence from SSA and MENA Countries

The goal of this paper is to assess how financial sector competition plays-out in the development of knowledge economy (KE). It contributes at the same time to the macroeconomic literature on measuring financial development and response to the growing field of KE by means of informal sector promotion, micro finance and mobile banking. It suggests a practicable way to disentangle the effects of various financial sectors on different components of KE. The variables identified under the World Bank’s four knowledge economy index (KEI) are employed. Three hypotheses based on seven propositions are tested. Results show: (1) the informal financial sector, a previously missing component in the definition of the financial system by the IMF significantly affects KE dimensions; (2) disentangling different components of the existing measurement of the financial system improves dynamics in the KE-finance nexus and; (3) introduction of measures of sector importance provides relevant new insights into how financial sector competition affects KE.

Microfinance And Poverty Reduction: Some International Evidence

Year 2005 was called international year of microcredit by United Nations. Since, micro finance has proven to be an effective tool for poverty reduction this paper argues that microfinance can be considered an important element for an effective poverty reduction strategy. It shows that access and efficient provision of microcredit can enable the poor to smooth their consumption, better manage their risks better, gradually build their assets, develop their micro enterprises, enhance their income earning capacity, and enjoy an improved quality of life. Microfinance services can also contribute to the improvement of resource allocation, promotion of markets, and adoption of better technology; thus, microfinance helps to promote economic growth and development. Also the characteristics of financial systems in developing counties will be discussed and argued that formal financial sector is not consistent with the needs and requirements of the poor and the existence of informal financial sector is a response to the shortcomings of the formal financial sector.

Informal financial markets in Botswana: a case study of Gaborone City

The present study investigated informal financial markets in Gaborone, Botswana, with specific focus on the terms and conditions for informal credit, its main uses and the target clientele. The study used primary data, and analytical techniques that included descriptive statistics and analysis of variance. The results show that informal lenders give short-term consumption loans consisting of small amounts, charge very high interest rates, use innovative collateral substitutes such as automatic teller machine (ATM) cards plus personal identification numbers (PINs) and valuable household assets as security, and target mainly the non-poor. The paper makes three policy recommendations: an appropriate regulatory framework for the informal financial sector should be developed, interest rates and other charges should be systematically disclosed so as to encourage competition and reduce the high interest rates, and there should be legislation against the use of ATMs and PINs as security.

Do Institutions Have a Greater Effect on Female Entrepreneurs?

This paper compares the impact of institutions on individual decisions to become entrepreneurs in the form of new business start ups by males and females across 44 developed and developing economies between 1998 and 2004. We test four hypotheses; that women are less likely to undertake entrepreneurial activity in countries where the rule of law is weaker; where the state sector is larger; where the informal financial sector is weaker and where the formal financial sector is weaker. We use data from the Global Enterprise Monitor survey (GEM) which covers at least 2,000 individuals annually in each of up to 44 countries, merged with country-level data, from the WB WDI and Heritage Foundation. We start with a spectrum of institutional variables and by utilizing factor analysis prior to regression estimation models, we are able to obtain results that are more robust and address multicollinearity between the institutional measures. We find that women are less likely to undertake entrepreneurial activity in countries where the state sector is larger, and demonstrate that this result applies to both high aspiration and low aspiration entrepreneurship. We also find that women benefit more from the larger informal financial sector.

Livelihood diversification and moneylending in a Rajasthan village: what lessons for rural financial services?

The complexity of rural economies in developing countries is increasingly recognised, as is the need to tailor poverty reduction policies according to the diversity of rural households and their requirements. By reference to a village in Western India, the paper examines the results of a longitudinal micro-level research approach, employed for the study of livelihood diversification and use of informal finance. Over a 25-year period, livelihoods are shown to have become more complex, in terms of location, types of non-farm activities, and combinations of activities. Moreover, livelihood pathways taken continue to be critically affected by economic and social inequalities implicit in the caste system and tribal economy. A longitudinal micro-level research approach is shown to be one that can effectively identify the many complexities of rural livelihoods and the continued dependence on the informal financial sector, providing important insights into the requirements for rural financial products and services.

Informal finance and rural finance policy in India: historical and contemporary perspectives

From the 1950s up to the early 1990s the All-India data show an ever-declining share of informal credit in the total outstanding debt of rural households. Contemporaneous micro-level studies, using more qualitative research methodologies, provide evidence that questions the strength of this trend, and more recent All-India credit surveys show, first, a levelling, and then a rise, in the share of rural informal credit in 1990/91 and 2000/01, respectively. By reference to findings of a study of village moneylenders in Rajasthan, the paper notes lessons to be drawn. First, informal financial agents have not disappeared from the rural financial landscape in India. Second, formal-sector financial institutions can learn much about rural financial service needs from the financial products and processes of their informal counterparts. Third, a national survey of informal agents, similar to that of the 1921 Census survey of indigenous bankers and moneylenders, would provide valuable pointers towards policy options for the sector. A recent Reserve Bank of India Report on Moneylender Legislation not only explores incentive mechanisms to better ensure fair practice, but also proposes provision for a new category of loan providers that would explicitly link the rural informal and formal financial sectors.