Impact of Informal Financial Sector (IFS) on Small And Medium Scale Enterprises (SMEs) in Nigeria

Abstract

Informal Financial Sector, Informal economy or grey economy is that part of economy that is neither taxed, regulated nor monitored by any government agencies. Unlike the formal sector, activities of the informal sector are not calculated in a country’s Gross National Products (GNP) or Gross Domestic Products (GDP). The Informal sector groups, Informal micro-enterprise and Small-scale industries have raised issues in the area of definitions have not yet been fully addressed. Although the sector has become the engine of socio-economic growth and development in Nigeria; Informal Financial Sector is the bed rock for most SMEs in Nigeria. In a related development, Small and Medium-scale Enterprises (SMEs) occupy a central place in economic growth of a nation. SMEs have a fundamental role to play in the development of an economy and this cannot be overemphasized. SMEs serve as training arena for entrepreneurs and could become channels for mobilizing local savings, ensuring more equitable distribution of income and reducing the migration of manpower from the rural to urban areas. On this note, government has identified the need for the development of Informal Financial Sector and SMEs. One of such sectorial is the introduction and pursuit of policies such as concessionary financing to encourage and strengthens the growth of SMEs in Nigeria. However, a well functioning informal economy will be a critical prerequisite to sustainable growth. This is because the link between informality and SMEs in Nigeria is not fully understood. This study seeks to investigate the nexus between Informal Financial Sector and SMEs in North central-Nigeria using a binomial probit regression approach with data from structured questionnaires having Informal loan and Informal savings as variables. The findings revealed that the odd ratio of INFLOAN against the IFS chance of SMEs development is 1.09. The study therefore concluded that there exists a significant relationship between IFS and SMEs in north central-Nigeria. The study recommended that there is need for government intervention and supports for Informal Financial Sector in the areas of saving mobilization and investment in Nigeria.