Linkages Between Formal and Informal Financial Institutions in South Eastern Nigeria

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.