African Development Finance Journal

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

Obademi Olalekan Emmanuel, Olagunju Adebayo, Ogunbona Oluwaseun Daniel — Tue, 18 Jun 2024 08:04:51 +0000

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

Interest Rate Capping and Performance of Nairobi Securities Exchange, Kenya

: Andrew Masinde Musungu, Julius Korir, Farida Abdul — Tue, 18 Jun 2024 08:13:57 +0000

This studied the effect of interest rate capping on the performance of Nairobi Securities Exchange in Kenya after the adoption of the Banking Amendment Act (2016) following the Banking Amendment Act (2016). The new law imposed regulations lending rates on interest rates charged by commercial banks and interest rates applied on savings rate applicable on customer savings in commercial banks. The effect of lending rates, Treasury bills rates and savings rate on performance of Nairobi Securities Exchange in Kenya were the specific objectives of the study. The moderating effect of the volume of credit on the relationship between interest rate capping and the performance of Nairobi Securities Exchange in Kenya was also considered. Classical Theory of Interest Rates, Fisher’s Theory, the Arbitrage Pricing Theory and the Efficient Market Hypothesis were used in the study. Positivism philosophical views and explanatory design were employed. All the 20 firms which yield the Nairobi Securities Exchange (NSE) 20 Share Index constituted the target population. The census sample design approach was used to collect the secondary data. The study performed diagnostic tests, including the test for autocorrelation, homoscedasticity, multicollinearity, normality, model specification and model stability. Tests for time series properties, stationarity and cointegration were conducted. Furthermore, model specification and model stability checks were also performed, after which data was analyzed by use of Autoregressive Distributed Lag Model to find out the long run relationship and Autoregressive Distributed Lag Error Correction Model to establish the short term relationship. From the results, it was evident that interest rate capping affects performance of Nairobi Securities Exchange in several ways. It was generally concluded that interest rate capping affects performance of Nairobi Securities Exchange in Kenya. It was concluded that interest rate capping has an effect on the performance of Nairobi Securities Exchange in the long run. Lending rates had no effect on the performance of Nairobi Securities Exchange in the long run. Conversely, lending rate had a negative impact on the performance of Nairobi Exchange in the short run. It was, however, observed that Treasury bill rates did not affect the performance of Nairobi Securities Exchange in the long run. However, there existed a negative relationship between Treasury bill rates and the performance of Nairobi Securities Exchange in the short run. Availed by banks be an inverse moderator of the relationship in the long run. However, volume of credit creates a positive moderating relationship between interest rate capping and the performance of Nairobi Securities Exchange. In conclusion, it’s recommended that Central Bank of Kenya should refrain from reducing lending rates since it results into a decrease in prices of stocks, thus locking away prospective investors and curtailing economic growth.

Keywords: Credit Access, Interest rate Capping, Securities Market

The Mediating Influence of Organizational Capacity on the Relationship between Financial and Contract Management Practices and Construction Cost Overruns in Real Estate Projects within Nairobi and Kisumu Counties, Kenya

Joanne A. Kepher, Charles M. Rambo, Raphael O. Nyonje — Tue, 18 Jun 2024 08:20:28 +0000

Real estate projects often require significant investments and involve complex processes. Understanding the mediating effects of organizational capacity on the relationship between financial and management practices and construction cost overruns could help project managers anticipate challenges and implement risk-mitigation strategies, leading to smoother project execution and timely completion. This study established the mediating effects of organizational capacity on the relationship between financial and contract management practices and construction cost overruns. Using quantitative data from 351 project professionals who worked in projects enlisted by National Construction Authority between 2018 and 2019 in Nairobi and Kisumu counties respectively. Data analysis entailed descriptive statistics, correlation and regression analysis. The data was confirmed to be normally distributed and construct valid, which permitted statistical analysis. A significant linear relationship was identified between mediating effects of organizational capacity on the relationship between financial and management practices and construction cost overruns with improvements in organizational capacity leading to predictable changes in cost overruns. The regression analysis showed a strong positive correlation (R = 0.713) and explained about 50.9% of the variance in cost overruns as a result of organizational capacity. The p-values of 0.05, implied null hypothesis was rejected, therefore suggesting organizational capacity significantly mediate on the relationship between financial and management practices and construction cost overruns in real estate projects. The findings underscore the critical role of mediating influence of organizational capacity in managing cost overruns, emphasizing the importance of effective project management and robust organizational practices. Future studies need to shift attention to other crucial tenets of organizational capacity such as legal and regulatory compliance, monitoring and evaluation and learning and innovation policies to establish their effect on construction cost overruns in real estate projects.

Keywords: Organizational Capacity; Financial and Contract Management Practices; Construction Cost Overruns

The Relevance of Bank Lending Behaviour for the Efficiency of Public Credit Guarantee: Evidence from Nigeria

Favoured Mogbolu — Tue, 18 Jun 2024 08:24:29 +0000

The amount of credit additionality achieved by banks using public credit guarantees (PCGs) constitutes an important problem in policy concerns about the use of PCGs to fund credit rationed sectors. Policymakers and academic research evaluate PCGs as efficient methods for credit allocation to such sectors. The current evidence shows that bank lending behaviour, structured by the requirements of prudential risk guidelines determines the efficiency of PCGs. Studies find that banks using PCGs during the Covid-19 crisis adopted credit substitution, a practice of replacing unguaranteed credits with guaranteed credits which determines a lower credit additionality. This study used aggregate secondary data on the Agricultural Credit Guarantee Scheme Fund (ACGSF) and bank financial indicators in Nigeria and Non-parametric tests and the ARDL econometric models to analyse whether banks’ use of PCGs implemented as development policy tools under normal economic conditions in developing economies such as Nigeria also involve credit substitution. The study finds that the guarantee coverage has a direct positive effect on credit additionality in both the short run and long run periods but bank size and the share of bank agricultural credits in bank total credits each has negative effects on growth of additional credit. The study concludes that the PCGs may be seen as effective development policy tools for sustained credit additionality to credit rationed groups, and that bank lending behaviour has important consequences for the impact of the PCGs on credit rationed groups. The study recommends that policymakers require that guarantee fund be additional to existing market-based credits and that policymakers should encourage the participation of smaller sized banks.

Keywords: Public credit guarantees; banks; Credit additionality