THE CONTRIBUTION OF THE INFORMAL FINANCIAL INSTITUTIONS TO THE GROWTH OF SMALL SCALE ENTERPRISES IN NIGERIA. A CASE STUDY OF COOPERATIVE SOCIETY IN TAKUM LOCAL GOVERNMENT AREA, TARABA STATE
1.1 BACKGROUND TO THE STUDY
The economies of third world countries such as
Nigeria operate with dual financial institutions. On one hand are group which function
through direct governmental control known as Formal Financial Institutions such
as Commercial Banks, Insurance Companies and Mortgage Banks. And on the other
hand are those financial institutions which are not directly controlled by
government, called Informal Financial Institutions such as money lenders,
cooperative societies, thrift and loan societies, local bankers, cooperatives etc.
It should however be noted that statutory dominance of formal financial sector
since independence is hinged on the thinking that the sector would stimulate
the growth of the economy and ensure the upliftment of the socio-economic lives
of the people.
It has been contended that the Formal financial
sector will promote savings and investment, improve opportunities for credit,
and engender reduce poverty. But it has been observed that Formal financial
institutions have seriously come short of the expectations as they have made
things harder for Nigerians through stringent conditionalities for credit, poor
customer services and high interest rates (Frank, 1998). Even the micro finance
institutions that was created for the purpose of developing the small and
medium scale enterprises has not been able to realize any of the objectives for
which it was created, thereby leaving the small and medium scale enterprises to
be sourcing for their respective means.
The introduction of the informal financial institutions
by individuals and groups is to cushion the effects of the Formal financial
institutions on the socio-economic wellbeing of the people. This practically
done by borrowing loans to small and medium scale enterprises and individual
for the purpose of expanding their respective businesses. It has been
acknowledged all over the world that small and medium scale enterprises are the
powerful tool any country can use to stimulate fast and sustainable
The informal financial institutions are creation of
the indigenous people with aim of making credit/loan facilities more accessible
to the people and SMEs so as help solve their socio-economic and financial problems
(Gulong, 2012). Although not directly under the control government and its
authorities, Informal Financial Institutions have pierced through government
institutions and organizations, and variety of formal and informal organizations.
In almost all organizations, there seems to be existence of Informal Financial
institutions established for specific or general purposes which allow people to
contribute funds periodically which are given to members as loans or credit. A
typical example is the cooperative societies formed by various staffs of
government establishments and institutions.
Small scale enterprises prefer to operate with
these institutions as their conditions for credit are soft, coupled with faster
administration of loans with low interest rate compared to Formal Financial
Institutions. Takum Local government area of Taraba State is semi-urban area
which is composed of varying population in terms of occupations as it is
composed of government workers, farmers, traders and business men/women,
private sector workers and transporters. However, the area does have formal
banking system, but most people depend on informal financial institutions
existing in the area for their financial transactions such as savings and
loans. This study is therefore aimed at determining the contribution of
informal financial institutions on the growth of small scale enterprises in
Takum Local government area of Taraba State.
1.2 STATEMENT OF THE PROBLEM
The contribution of informal financial institutions
has been explained by variously by researchers and thinkers. According to
Aryeetey (1995) Informal Financial Institutions could be conceptualized as
those institutions that embrace all financial transactions that takes place beyond
the functional scope of various countries and other financial sector
regulation. These institutions are not controlled directly through major
monetary and financial policy instruments but are created by individuals and
groups with no legal status. Studies on the impact of informal financial
institutions on business development have been conducted by researchers and
they found positive effects of informal financial institutions such as
micro-credit programmes on the growth of business and the welfare of the
people. The study showed that the programme reduced poverty through
micro-finance and thrift societies. It also increased women empowerment,
improved savings and purchase of agricultural inputs and ensured easy access to
loans with considerably lower interest rates.
1.3 OBJECTIVES OF THE STUDY
following are the objectives of this study:
examine the contribution of the informal financial institutions to the growth
of small scale enterprises in Nigeria.
examine the role of informal financial institution in providing more credit
facilities to small scale enterprises in Nigeria.
examine the role of informal financial institution in boosting economic growth
1.4 RESEARCH QUESTIONS
are the contributions of the informal financial institutions to the growth of
small scale enterprises in Nigeria?
is the role of informal financial institution in providing more credit
facilities to small scale enterprises in Nigeria?
is the role of informal financial institution in boosting economic growth in
There is no significant relationship between informal financial institutions
and the growth of small scale enterprises.
There is significant relationship between informal financial institutions and
the growth of small scale enterprises.
1.6 SIGNIFICANCE OF THE STUDY
following are the significance of this study:
results of this study will educate the general public especially managers of
small scale businesses on the relationship between informal financial
institutions and the growth of small scale enterprises.
research will be a contribution to the body of literature in the area of the
effect of personality trait on student’s academic performance, thereby
constituting the empirical literature for future research in the subject area.
1.7 SCOPE/LIMITATIONS OF THE STUDY
study will cover the relationship between informal financial institutions and
the growth of small scale enterprises.
LIMITATION OF STUDY
Financial constraint- Insufficient fund tends to impede the efficiency of the
researcher in sourcing for the relevant materials, literature or information
and in the process of data collection (internet, questionnaire and interview).
Time constraint- The researcher will
simultaneously engage in this study with other academic work. This consequently
will cut down on the time devoted for the research work
Aryeetey, E. (1997). The
Characteristics of Informal Markets in Sub-Saharan Africa: Journal of African
Economics, 4 (1)47-56
Gulong, P.N.(2012) The Role of
Informal Financial Institutions on Socio-economic Development of Mangu Local
Governemnt Area, Plataeu, Nigeria: Unpublished B.Sc project, Department of
Sociology, University of Mkar, Benue State, Nigeria
Frank, A.G. (1998) Crisis in the
Third World Economy, New-York: Holmes and Meier