Informal Financial Systems and Poverty Reduction in Developing Countries: Evidence from Nigeria

Abstract

The complex nature of the impact of informal financial institutions on poverty reduction in emerging nations remains a subject of interest. Although these systems are widely present and play a vital role in providing financial services to consumers and businesses, their specific contribution to poverty alleviation has not been extensively investigated. This study analyzed the complex correlation between informal financial systems and poverty alleviation, with a specific focus on developing countries. This research integrates quantitative and qualitative data to explore the complex characteristics of informal financial systems and their impact on poverty alleviation. This study reveals that the effect of informal financial systems on the alleviation of poverty exhibits non-uniformity. Various systems, ranging from microfinance organizations to savings clubs, demonstrate differing levels of efficacy within diverse circumstances through informal financial institutions play a significant role in alleviating poverty through several processes, such as enhancing credit and savings accessibility, promoting entrepreneurial activities and business expansion, mitigating susceptibility to economic fluctuations, and enhancing social capital within communities. It was discovered that contextual factors, such as the legal environment, level of economic development, cultural norms, and availability of alternative financial services, exert a significant influence on the efficacy of informal financial institutions. Findings from the study makes it advisable for policymakers and practitioners to embrace a nuanced perspective, acknowledging that employing a uniform technique for informal finance systems may yield adverse outcomes. Tailored interventions that take into account the unique system, context, and individual traits are of utmost importance. The legislative framework significantly influences the efficacy and security of informal financial systems. Policy initiatives should prioritize the establishment of suitable regulatory structures that effectively strike a balance between fostering innovation and safeguarding consumer interests. Efforts aimed at reducing poverty and promoting economic growth should be complemented by policies that aim to improve financial inclusion through informal systems, especially in regions where access to conventional banking services is limited.

Keywords: Financial System, Poverty Reduction, Credit Access, Microfinance