International Journal of Commerce and Management Research

ISSN: 2455-1627, Impact Factor: RJIF 5.22

www.managejournal.com
Volume 2; Issue 4; April 2016; Page No. 12-17

Gap thesis and the survival of informal financial sector in Nigeria

1
Chude Nkiru Patricia 2 Chude Daniel Izuchukwu
1
Department of Banking and Finance, Chukwuemeka Odumegwu Ojukwu University, Igbariam Campus P.M.B 6059 Awka,
Anambra State. Nigeria.
2
Department of Accountancy, Chukwuemeka Odumegwu Ojukwu University, Igbariam Campus P.M.B 6059 Awka, Anambra
State. Nigeria.

Abstract
The study investigated the gap thesis and survival of informal financial institution in Nigeria. The study made use of descriptive
survey. The study also found that for survival of informal financial institution need external intervention or support. Descriptive
research design was used with correlation analysis. The result indicates that that informal financial sector in Nigeria have much
influence on poverty alleviation in Nigeria. The study also indicates that informal financial institutions encounter so many problems
which hinder their operations drastically. This is because the members are mainly women, not highly educated, and are mainly
farmers, artisans and few local traders and the loanable fund to the institutions are very meagre, hence the informal financial sector
still find it difficult to survive. We therefore recommend that, In order to have a sustainable informal financial institutions
intervention, the government should also keep infrastructures in place especially good motor-able roads that link more remote areas
to markets. The government should create special fund to be manage by CBN, towards supporting the operation of the informal
financial institutions in Nigeria. Finally, the CBN should use part of its special fund for SMEs to support the operations of informal
financial institutions in Nigeria.

Keywords: Gap thesis, Informal, Financial, Institution, CBN, Factor Analysis.

Introduction Nigeria. Relatedly, Oloyede (2008) [11]. identified the informal

Informal financial sector provides avenue for savings and financial providers as the rotating savings and credit
credit facilities for farmers in rural areas and for low-income association, money lenders, daily contribution scheme, social
householders and as well as small and medium enterprises club and cooperative, thrift and credit association.
(SMEs) in urban areas informal sector. Informal financial In developing countries, about 70% of adults have no access to
sector is made up of the institutions that are not integrated with financial service (Richter, 2011) and this could be higher in
the formal financial sector and virtually out of the control of rural areas, while about 90% of the rural sector financial needs
the legal framework. They are poorly developed and managed are satisfied by informal rural finance providers (World Bank,
to the extent that they are limited in reach. These informal 1994). The report specifies that the informal sources provide
financial players include the local money lenders, thrift and the bulk of rural dwellers’ financial needs for five active
credit associations, and cooperative societies, among others. occupational groups, namely: farmers, artisans, market
In general terms, there are different types of informal finance women, traders and local manufacturers.
providers in the world; some of these operate in groups as These informal financial institutions do not have defined
associations and unions within a particular community, relationship with the formal financial institutions to the extent
profession, clan and companies. The informal finance that their funding is critically curtailed coupled with high rate
providers in India are the traditional money lenders, pawn of defaults in repayment by the borrowers, which makes their
brokers and trade specific lender (Singh, 2004). Nathan (2004) survival uncertain. Above all these informal financial
reported that the informal finance providers in Uganda include institutions face stiff competition from the financial institutions
cooperative and credit societies, government credit scheme, in the formal sector particularly the microfinance banks.
NGO, money lenders, commercial firms employers, relatives
and friends. These informal finance providers provide their Objective of the Study
savings and loan services on favourable terms and at cheaper The objective of the study is to identify the reasons for the
cost (Oloyede, 2008) [11]. weak position of the informal financial institutions in Nigeria
World Bank (2000) [9]. and Akingunola and Onayemi (2010) and viable strategies that can ensure their survival building on
identify informal rural finance providers in Nigeria to include: the results and research gaps of the past studies.
trade and input supply financing, cooperative societies, non-
governmental organisations (NGOs), esusus, families, friends Literature Review
and money lenders. Informal finance providers as identified by Conceptualization of informal financial institutions
Buckley (1997) include supplier’s credit, money lenders and Informal finance is a broad concept that encompasses the wide
rotational savings scheme. Iganiga and Asemota (2008) [3]. range of financial activities and services that take place beyond
identifies NGOs, money lenders, friends, relatives, savings the scope of a country’s formalized financial institutions and
collectors, rotating savings and credit association, credit unions lie outside financial sector regulations. Informal finance is
and cooperative societies as main providers of rural finance in common in both urban and rural contexts and is usually based
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on personal relationships and socioeconomic proximity. In 1) Loan Transactions
contrast to formal finance, most informal providers focus on A loan involves the exchange of current resources for
one service - savings, credit, money transfers, or insurance - future resources. It therefore involves a promise. If a loan
rather than offering a bundle of services. Informal finance transaction occurs in a risky environment and if a complete
arrangements in Africa range from West and Central Africa’s set of markets for contingent commodities does not exist,
deposit collectors known as susu or esusu collectors and then the promised transfer of future resources may not be
tontines, to the hawala cross-border money transfers, which are certain. The character of the loan transaction will then be
commonplace in North & East Africa, and stokvels, which influenced by the risks faced by the parties involved, and
have long been a feature of South African financial life. by their knowledge of each other and the activities they
undertake.
Types of informal financial institutions
In West Africa, there are peculiar types of informal financial 2) Information asymmetry
institutions such as identified and discussed as follows. In this context, the possibility that lenders do not have
perfect information regarding the characteristics of
1) Susu or esusu collectors: They provide access to credit as potential borrowers. There is a great deal of heterogeneity
well as the possibility to save and withdraw money for a among farmers in any village. While lenders might have a
small fee. In the susu arrangement, a saver agrees to good idea about the average characteristics of the pool of
deposit a specific amount determined in consultation with potential borrowers, they may not have complete
the collector for an agreed period of time (usually a information concerning the characteristics of any
month). At the end of the period, the susu collector renders particular borrower. This may lead to problems of adverse
the accumulated savings to the client, keeping one day's selection.
savings as commission.
3) Credit rationing
2) Tontines: These are another prominent means to pool The players in the informal financial sector do not have
resources, whereby a group of individuals agree to adequate loanable funds with which to satisfy and meet the
regularly pay small amounts into a common fund - the demand of the many borrowers. In the case of too many
tontine – which is then loaned for a month, without prospective borrowers contending for limited funds, the
interest, to one of the members. Typically, these people lenders are under pressure to ration the available
share similar interests or common relationships, which magnitude for them.
strengthen social control and ensure the functioning of the
scheme. 4) Financial market fragmentation
Information asymmetries is responsible for financial
3) Hawala: This is a traditional means of transferring funds market fragmentation. There is the interaction between
across borders and within countries, whereby funds are well-informed local lenders who face a high opportunity
transferred by means of a network of hawala brokers cost of capital (perhaps due to highly seasonal demands or
(hawaladars) who charge a fee or an exchange rate spread highly covariate risks within the region) as one segment of
in exchange for their services. The strength of the hawala the market. There is the poorly-informed (perhaps
system is that it is fast, cheap, confidential and easily institutional) lenders who have access to capital at a lower
available. opportunity cost as another segment of the informal
financial markets.
4) Stokvel: This is a common group saving scheme in South
Africa, is similar to the Tontines schemes: members meet 5) Adverse selection
monthly and deposit a certain amount of money into a Information asymmetries is also responsible for adverse
common fund. The accumulated amount is then paid out selection of borrowers who are either members of the
to one of the members on a rotating basis. The First institutions or non-members. The lenders may not have
National Bank in South Africa offers special stokvel bank enough information about the borrowers who would
accounts for group savings and as of 2002, about 12 provide inadequate information towards securing loan
percent of the population was member of a stokvel. facilities from the lenders. This scenario leads in most
cases to moral hazards on the part of the borrowers who,
5) Funeral insurance arrangements: These are a common more often than not, default in repayment.
product of community-based informal insurance
associations within what is called a burial society, aimed Empirical Review
at ensuring that sufficient funds are available to cover Iganiga and Asemota (2008) [3]. examine the Nigerian
funeral expenses. An estimated 28 percent of the unorganized rural financial institution and operations: A
population in South Africa and 21 percent in SACU is part framework for improved rural credit schemes in a fragile
of a burial society based on the contributions of its environment using correlations. Empirical results shows that
voluntary subscribers. traditional savings and credit associations (TRASCAs) are
prevalent in semi-urban and rural areas among semi-skilled and
Characteristics of informal financial institutions unskilled workers and traders, while daily Saving Enterprises
The peculiar characteristics of the informal financial (DSEs) and Professional Money Lending Scheme (PMLs)
institutions, compared to the formal financial institutions, are strive in semi-urban and urban centers among artisans, traders
as follows. and skilled workers. The performance analysis of these
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unorganized financial markets possibly reflects strong savings Nwakanma, Ikechukwu and Godfrey (2014) [4]. investigate
propensities and more robust lending activities. rural to microfinance banking: contribution of micro credit to
Noah, Gafar and Muftau (2009) [2]. examine the relationship Nigerian economic growth. Autoregressive Distributed Lag
between informal financial institutions and poverty reduction (ARDL) technique was employed in analyzing the time series
in the informal sector of Offa Town, Kwara State. The paper is data. The study finds significant long-run relationship between
a report of an empirical study on the extent of poverty in the Nigeria’s economic growth and micro credits disbursed, while
informal sector of Offa town, Kwara State, Nigeria and the role causality runs from economic growth to micro credits
of an informal financial institution (Rotating Savings and (unidirectional). Accordingly, increase in the quantum of
Credit Associations ROSCAs) in reducing poverty among the micro credits as well as development of long tenured micro
people. Using a set of household data, P-alpha-class poverty credit products are recommended as strategies to enhance the
measure and a multiple regression analysis. The findings contributions of micro credits to Nigeria’s economic growth.
shows that money received from ROSCAs and spent on food, Ndugbu, Ojiegbe, Lawrence and Okere (2015) [6]. in a study of
housing (e.g. rents), health care, business activities have the the relationship between bank and non-bank financial
expected signs, thus fulfilling our a-priori expectations, while institutions and the development of the Nigerian economy. The
those spent on asset accumulation, education and insurance are data collected were analysed using the E-views econometric
inversely related to poverty reduction in the informal sector of software under the ordinary least square (OLS) regression
Offa town, thus contradicting their a-priori expectations. analysis. The study as confirmed by the result of the joint test
Babajide (2011) [7]. investigated the effects of micro-financing revealed that the financial institutions play prominent role on
on Micro and Small Enterprises (MSEs) in South-west Nigeria. the growth and development of the Nigerian economy.
The study examined how micro-finance and non-financial However, it was further revealed that individual contributions
micro-financing activities and features such as group of the explanatory variables varied. For example, the Deposit
membership, pre-loan training, cross guaranteeship, loan size, Money Banks were revealed to have impacted very
technical and managerial training, among others, impact on the insignificantly to the growth and development of the Nigerian
survival, growth, productivity and performance of Micro and economy. This may not be unconnected with the unwholesome
Small Enterprises in Southwest Nigeria. The validity and practices in the banking sector such as granting of
reliability of the instrument were measured using Cronbach‟s loans/advances to “ghost” applicants, diversion of loans and
alpha which gave a result of 0.72, while predictive form advances granted, high incidence of moral hazards.
validity was 0.84. Four hypotheses were raised and tested at
0.05 significant levels. The findings revealed that micro Theoretical Framework
finance and micro-financing enhance survival of Micro and The Supply - leading Finance Theory
Small Enterprises (MSEs) but not sufficient for growth and This research work is also anchored on the supply – lending
expansion of such Micro and Small Enterprises. The result also Theory. To the theory finance should be supplied in advance
revealed that microfinance has positive effects on productivity of the demand for it. This theory came as a result of both
and performance of local entrepreneurs. The findings from the Keynesian economic thinking and of the post war view that
interview sessions revealed that micro financing is not developing countries must get through some stages to get to
effective and substantially being practiced in Nigeria as many where developed nations are. Among other things governments
MFBs grant more individual loans than group based loans, were to accumulate capital for economic development. The
thereby increasing their running cost and putting their portfolio supply – leading finance theory emerged between 1940s and
at risk. Sambe, Korna and Abaniyan (2013) in a study of the 1950s (Robinson, 2001) [10].
effect of informal financial institutions on socio-economic The three basic ideas of this theory were: that the governments
development in Nigeria. The study made use of randomly of developing countries were responsible for their economic
sampled 200 respondents as questionnaires. Chi-square was growth; that high yielding agricultural technologies were
employed in the test of hypotheses. Dependency theory was needed for economic growth; and that most farmers cannot
used in analysing the study. Findings showed that Informal afford inputs needed for the new technologies. In other words
Financial Institutions were more effective in reducing poverty farmers need subsidized credit inform of cash or inputs like
among members than non-members. Furthermore, the fertilizer for them to contribute to economic growth. A
institutions guaranteed more access to credit than non- subsidized credit will make the allocation of credit effective so
members and lastly, Informal Financial Institutions were as to promote an enhanced economic growth, (Robinson, 2001)
[10]
effective in promoting investment among members as . The theory saw the rural areas of developing nations very
compared to non-members. crucial for economic development and as such needed a lot of
Oleka and Eyisi (2014) [1]. ascertain the effect of informal credit subsidies, the farmers who were poor could not be able
financial institution on poverty alleviation in Nigeria. Data to save. Secondly, they may not be able to pay for high cost of
collected were analyzed using simple percentage and market oriented credits and also provided the required
descriptive statistics. Findings revealed that informal financial collateral securities. Government subsidies and donor funds
institutions has no significant effect in alleviating poverty in were seen to be very important as convential institutions hardly
Nigeria; while poverty-mentality, illiteracy, low infrastructure lend to rural dwellers or the poor. So such subsidized credits
and cultural loan-defaults are the major problems encountered will help in income redistribution. There was-de-emphasis on
by these institutions. The paper recommends among other savings as the poor had little or nothing to save, (Robinson
things the education of the rural poor to embark on viable 2001) [10]. Out of this, in the 1960s and 1970s, large scale
projects so as to reduce loan defaults arising from unviable subsidized credit institutions sprang all over the developing
ventures. nations (Robinson, 2001) [10].

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Theory of a Moneylender Table 3: Frequency Distribution of Education Qualification
The theory is the coexistence of formal and informal finance in Level Frequency Percent Cumulative Percent
underdeveloped credit markets. Formal banks have access to Fslc-Waec 48 34 34
unlimited funds but are unable to control the use of credit. OND/HND 40 28 62
Informal lenders can prevent non-diligent behavior but often B.Sc & above 53 38 100
lack the needed capital. The model implies that formal and Total 141 100
informal credit can be either complements or substitutes. The
model also explains why weak legal institutions raise the Source: Authors Computation 2015.
prevalence of informal finance in some markets and reduce it From table 3 above, 34% of the respondent have between First
in others, why financial market segmentation persists, and why School Certificate and West African Examination Council,
informal interest rates can be highly variable within the same 28% have between Ordinary National Diploma and Higher
sub economy. The theory also establishes that entrepreneurial National Diploma certificates, while 38% have Bachelor of
and informal lender assets are complements for low levels of Science or its equivalents and Masters of Science/Masters of
wealth and substitutes when informal assets increase. Business Administration and Ph.D.
Intuitively, when neither the informal lender nor the
entrepreneur is not enough such that best investment is Table 4: Frequency Distribution of Occupation
realized, the two complement each other in drawing on formal
Cumulative
sector funds. If the informal lender debt capacity does not Occupation Frequency Percent
Percent
constrain investment, the entrepreneurís preference for formal Student 46 33 33
funds implies that she substitutes away from informal to formal Civil/Public
funds. Equivalently, formal and informal lenders complement 33 23 56
Servant
each other in providing external finance for low levels of Business Men 10 07 63
wealth, while acting as substitutes when the informal sector is Professional
52 37 100
wealthier. bodies
Total 141 100
Methodology Sources: Authors Computation 2015.
This work is based on contextual investigation relying on the
past studies and available literature in the subject of informal Table 4, indicated that 33% of the respondents were directors,
financial institutions' performance, areas of weakness, and 23% were secretary, 07% were senior staff, while 37% of them
strategies that are amenable for their survival in the Nigerian were junior staff.
context. The study also made use of descriptive survey.
Presentation of Results
Results As stated in above, the relationships between gap thesis and
The Findings of this study was presented in tables using simple survival of informal sector in Nigeria were analyzed using
percentage for the analysis. mean, variance, standard deviation, coefficients of variation
The personal characteristics of the study sample are presented and factor analysis.
in this section in tables 1 to 5 as follows:
Table 6: Mean, Variance, Standard Deviation and Coefficients of
Table 1: Frequency Distribution of Sex Variation of Questionnaire Responses

Sex Frequency Percent Cumulative Percent Questionnaire Variance Standard Coefficient

Male 78 55 55 Mean Deviation Variation of Items
Female 63 45 100 1. 4.4 3.87 1.97 44.77
Total 141 100 2. 16 51.2 7.16 44.75
Source: Authors Computation 2015. 3. 21.6 93.31 9.66 44.72
4. 20 80 8.94 44.70
5. 17.6 61.95 7.87 44.72
From table 1: 55% of the respondents were male, while 45%
6. 8 12.8 3.58 44.75
were female. 7. 6.4 8.19 2.86 44.69
8. 8.8 15.49 3.94 44.77
Table 2: Frequency Distribution of Age 9. 19.2 73.73 8.59 44.74
Age Frequency Percent Cumulative Percent 10. 13.6 36.99 6.08 44.71
25-25 34 24 24 11. 12.8 32.77 5.72 44.69
26-30 26 18 42 12. 15.2 46.21 6.80 44.74
31-35 38 27 69 13. 9.6 18.43 4.29 44.69
36 & above 43 31 100 Author’s Computation 2015.
Total 141 100
Source: Authors Computation 2015. In order to eliminate possible errors, data collected were edited,
coded and tabulated base on their frequency distribution. Also
Judging from table 2 above, 24% of the respondents were the mean, variance, standard deviation and coefficient of
between the ages of 18-20years, 18% of the respondents were variation of the distribution were determined as shown in table
between 21-30years, 27% were between 31-40years, while 5 above.
31% were between 50years and above.

15 
 
Using the 5-point likert scale of 5, 4, 3, 2 and I used in the 0.142 and variance of 0.020. Loan Transaction (LT1),
questionnaire responses, means score of 3 and above were Information Asymmetric (IA2) and Adverse Selection (AS3)
rated as positive while those below 3 mean score were rated as are the independent variables in the research. They are account
negative. From table 7 below, the dependent variables which is for a mean score of 0.706, 0.823 and 0.799 respectively and
weakness (W) has a mean score of 0.804, standard deviation of standard deviation of 0.154, 0.169 and 0.159 respectively.

Table 7: Descriptive Statistical Analysis

Variables Mean Standard Deviation Variance
W 0.804 0.142 0.020
LT 0.706 0.154 0.024
IA 0.823 0.169 0.029
AS 0.799 0.159 0.026
Author’s Computation 2015

Table 7 above explains the descriptive statistical analysis measurement criteria based on other studies related to survival
between the dependent variable and the independent variables of informal financial sector in Nigeria. The same method of
using mean, standard deviation and variance. The descriptive analysis is conducted to identify the strongest underlying factor
analysis shows above indicates strong positive relationships of the dependent variable which weakness.
between the variables under review. The Eigenvalues and sum of squares loadings for the factors
The researcher incorporates factor analysis as criteria for are displayed in table 8 below.
validity. Confirmatory factor analysis is used for the

Table 8: Total Variance Explained

Initial Eigenvalues Extraction Sums of Squared Loading
Variables
Total % of variance Cumulative % Total % of variance Cumulative %
W 0.317 5.280 100
LT 2.396 39.929 39.929 2.396 39.929 39.929
IA 1.112 18.526 58.455 1.112 18.526 58.455
AS 0.931 15.513 73.968
Sources: Principle Component Analysis 2015

The results of principal component analysis indicate that, there of a moneylender and supply-leading theory of finance. Most
are two factors whose Eigenvalues exceed 1.0. The Eigenvalue of the economic scholars reviewed discovered that the
of a factor represents the amount of the total variance explained traditional finance institutions are powerful forums that can
by that factor. The two factors identified in this study explain positively improve the living standard of rural poor if properly
58.45% of the total variance. The first factor explained 39.92% empowered and that improper management of informal
of this variance. Similarly, the second factor explained 18.52% financial institution is the problem of its survival. The study
of the total variance. The percentage of variance combines for also found that for survival of informal financial institution
succeeding variables to make up 100 % variance. The need external intervention or support.
researcher incorporates Kaiser’s criterion and Cattell’s scree
test to extract the first two factors. According to Kaiser’s Recommendations
criterion, factors with Eigenvalues of 1.0 and greater than 1.0 1) Members of informal financial intuitions should be
are extracted for further investigation. Two factors are encouraged by way of organizing enlightenment program
identified for the factor analysis using the Eigenvalue criteria. to educate them on how to increase and manage their
(r=0.177). The variables hold a positive correlation at a monthly contribution for mega business and investment.
significance level of 0.05. The value shows that adverse 2) Government should arrange enabling environment of low
selection (AS) can help in survival of informal financial tax rate and financial support for these institutions as to
institution in Nigeria. ensure that adequate amount is given to members as
Based on the empirical result and works reviewed, we found interest-free loans.
out that informal financial sector in Nigeria have much 3) In order to have a sustainable informal financial
influence on poverty alleviation in Nigeria. The study also institutions intervention, the government should also keep
indicates that informal financial institutions encounter so many infrastructures in place especially good motor-able roads
problems which hinder their operations drastically. This is that link more remote areas to markets.
because the members are mainly women, not highly educated, 4) The government should create special fund to be manage
and are mainly farmers, artisans and few local traders and the by CBN, towards supporting the operation of the informal
loanable fund to the institutions are very meagre, hence the financial institutions in Nigeria
informal financial sector still find it difficult to survive. 5) Finally, the CBN should use part of its special fund for
SMEs to support the operations of informal financial
Conclusion institutions in Nigeria.
The study investigated the gap thesis and survival of informal
financial institution in Nigeria. The study made use of theory
16 
 
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