CHAPTER ONE
INTRODUCTION
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 socio-economic growth.
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.
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