Nigeria’s Informal Financial Services Sector

Written by Christiana Charles-Iyoha

Nigeria’s informal financial services sector is serviced and fuelled by micro enterprises, micro entrepreneurs in the informal sector as well as unemployed citizens who attempt either saving up or borrowing micro start up capital through this service; maintaining this service to both build up operating capital and access microcredit when the need arises. However, insurance is a critical missing aspect in this financial services sector. Micro businesses like medium and macro businesses also suffer unforeseen challenges such as fire incidents, loss of goods, seizure of goods, accidents, robbery, etc.

The informal sector is the engine of economic growth, an increasing driver of economic development. An analysis of economic activities in the informal sector indicates sale of food (raw food materials); cooked food (mama puts including fruits, vegetables, spices, oils, etc); cooking utensils, soaps, building materials, cafes, recharge cards, car parks, mechanics, tailors, fabric merchants, drivers, okada, artisans, schools, coaching activities, alajo, and a host of other micro economic activities.

The informal financial services sector mirrors a people’s determination to access financial services against all odds. Largely micro, the informal financial services sector proliferates cities, towns, villages, creeks and just anywhere you find a commune of Nigerians and anyone living amongst them.

Informal financial services include: the traditional daily, weekly or monthly contribution savings and loans scheme; age grade and other associational meetings; the government licensed community money lender; the village savings scheme; personal home savings scheme where money is hidden in a secure place and the rotational savings and loans scheme (ROSCA) known as Esusu. It is a traditional scheme involving trusted members who make daily, weekly or monthly contributions that are disbursed to individuals in turns; usually interest free on a daily, weekly or monthly basis after members make their contributions.

Though informal, these informal financial services models are highly organized, often structured and specifically tailored to the needs and financial capacities of the people, such that individuals or families save within their financial capabilities on daily, weekly, biweekly and monthly basis. The same principles apply for accessing credit. For example, a daily, weekly, monthly contributor is able to access credit from the deposit Collector/practitioner based on his/her contributions consistently paid overtime as well as trust earned from a financial relationship. 

The traditional daily, weekly or monthly contribution savings and loan scheme known in several Nigerian traditional societies with different names such as ‘ajo’ in Yoruba language, ‘AKAWO’ in Okrika language, ‘oha’ in Igbo language is practiced on a wide scale in both urban and rural communities in Nigeria.

The AKAWO provides both savings and loans through:

• Daily contributions of a fixed amount that can be progressively increased over time by individuals or groups

• Weekly contributions of a fixed amount that can be progressively increased over time by individuals or groups

• Bi-weekly contributions of a fixed amount that can be progressively increased over time by individuals or groups

• Monthly contributions of a fixed amount that can be progressively increased over time by individuals or groups

These daily contributions held in trust by the AKAWO practitioner, either male or female provide a pool of available funds for loans to both contributors and non-contributors. Contributors have easier access to loans without interest while non-contributors must provide guarantors in addition to paying interest rates on loans.

Other forms of access to savings and loans include:

• The traditional village savings and loans scheme. Through various associational groups, individuals make daily, weekly, monthly contributions that are collected at the end of the year. Much more like formalized cooperatives, these groups are referred to as meetings.

• Esusu: A number of individuals come together and contribute money on weekly, monthly or yearly basis. This form a pool of funds from which each member gets a lump sum of money for use.

• The village money lender

• And recently, cooperatives

• Personal Home Savings

 Other forms of access such as loans from family members, friends and the government licensed village money lender are far between. However, members of the communities resort to them as financial needs arise.

 

Community Access to Informal Financial Services/Interviews with Ajo practitioners in Lagos. 

(Madam XYZ)

Madam XYZ is a graduate of Education from a College of Education in South West Nigeria. She is happily married with four children. An erstwhile teacher and trader of sorts, the quest for increased income to meet skyrocketing family obligations pushed her into the informal financial services sector as a daily savings contribution Collector.

According to her, the business has 150 clients within a 20kilometer stretch in Satellite Town and Ijegun of the Amuwo-Odofin Local Development Area. Clients’ contributions vary between N50 to N1, 000 per day while collection also varies. Some clients collect their total balance at the end of every week while some collect at the end of the month. Her clients are micro entrepreneurs engaged in micro businesses that range from provisions stores to food commodities, cybercafés, lottery kiosks, tailors, mechanics, commercial motor cyclists. Their business capital range from N10, 000 to N200, 000.

Registration is pretty informal as all a client needs to do is collect a card for N20, fill it out and return to the ajo practitioner and thereafter commence contribution. If a client defaults contribution and is able to make a weekly contribution rather than the full month, the ajo contributor still collects her commission which is a day’s contribution of the total contribution.

On loans to clients and non-clients, the repayment rate is 50%.

She makes an average of N50, 000 per month, and this money is reinvested monthly. Before she started this ajo work, she had no job and nothing was forthcoming from her husband. With 3 children to care for, she commenced a business that required little or no start up capital. Today, she has a car, a shop and a building she is putting up.

First published in www.poldec.org/blog