No Result
View All Result
Friday, March 31, 2023
Citi Business News
  • Home
  • News
    • All
    • Agriculture
    • Economy
    • General
    • Government
    • Local Economy
    • Top Stories

    BoG cautions against use of Ghana Cedi for bouquets and hampers

    CUTS International pushes for passage of Competition bill

    DBG partners UGBS to deepen development finance

    GH¢5.5bn approved by Parliament not only for Blackshield customers – SEC

    BoG assures of enhanced educational campaigns to ensure proper handling of local currency

    Youth in Accountable Governance calls for passage of outstanding revenue bills

    GRA reiterates calls for businesses to embrace  E-VAT

    IES predicts drop in fuel prices from April 1

    Journalists trained on the Enrolment of cocoa farmers in pension scheme

  • Business
    • All
    • Agribusiness
    • Banking And Finance
    • Manufacturing
    • Markets
    • Mining
    • Oil And Gas
    • Real Estate
    • Tourism
    • Transport

    CUTS International pushes for passage of Competition bill

    DBG partners UGBS to deepen development finance

    Bank of Ghana increases Monetary Policy rate to 29.5%

    Industry experts convene to discuss diversification strategies for pension funds

    It’s time to give women top posts in multilateral institutions – GCBL Chairman 

    Global Chamber of business leaders enters into partnership with IEFS

    Gold for Oil policy will save Ghana $4.8bn annually – Veep

    Energy Minister scheduled to speak on Ghana’s near-term opportunities at NAEPEC 2023

    Standard Chartered appoints Ebenezer Twum Asante as Chairman of Board of Directors

  • TECHNOLOGY

    Cyber Security Authority commences licensing and accreditation regime

    Twitter is reportedly planning to charge businesses $1,000 per month to keep gold verified checks

    Ghana withdraws $672m back-tax demand from MTN Group

    MTN to fight $773m tax bill from government

    Telcos to implement 1% E-Levy charge from today

    Huawei Equips 500 Traders in FinTech

    Africans urged to bolster adoption of Bitcoins

    What does 2023 hold? Predictions in payments for the year ahead for Africa

    Meta considered building a Twitter competitor to capitalize on Elon Musk’s ‘crisis’ at company

  • INTERNATIONAL
    • All
    • Africa
    • Asia
    • Europe
    • Middle East
    • US

    Ghana and South Africa urged to leverage on AfCFTA to boost bi – lateral relations

    Silicon Valley Bank crisis: What led to stock crash, what lies ahead?

    Medical devices market projected to expand by $ 7.1 billion by close of year

    African Union adopts Africa Prosperity Dialogues AfCFTA action plan

    Third World Network Africa urges Africans to be strategic about AfCFTA

    5 important things to know about the African Continental Free Trade Area agreement

    $130bn and $170bn needed annually to bridge Africa’s infrastructural gap – Bawumia

    Feed Africa Summit: African Development Bank to commit $10bn to make continent breadbasket of the world

    Nigeria’s national debt hits an all time as the country struggles with repayment

  • FEATURES
  • Videos
Citi Business News
  • Home
  • News
    • All
    • Agriculture
    • Economy
    • General
    • Government
    • Local Economy
    • Top Stories

    BoG cautions against use of Ghana Cedi for bouquets and hampers

    CUTS International pushes for passage of Competition bill

    DBG partners UGBS to deepen development finance

    GH¢5.5bn approved by Parliament not only for Blackshield customers – SEC

    BoG assures of enhanced educational campaigns to ensure proper handling of local currency

    Youth in Accountable Governance calls for passage of outstanding revenue bills

    GRA reiterates calls for businesses to embrace  E-VAT

    IES predicts drop in fuel prices from April 1

    Journalists trained on the Enrolment of cocoa farmers in pension scheme

  • Business
    • All
    • Agribusiness
    • Banking And Finance
    • Manufacturing
    • Markets
    • Mining
    • Oil And Gas
    • Real Estate
    • Tourism
    • Transport

    CUTS International pushes for passage of Competition bill

    DBG partners UGBS to deepen development finance

    Bank of Ghana increases Monetary Policy rate to 29.5%

    Industry experts convene to discuss diversification strategies for pension funds

    It’s time to give women top posts in multilateral institutions – GCBL Chairman 

    Global Chamber of business leaders enters into partnership with IEFS

    Gold for Oil policy will save Ghana $4.8bn annually – Veep

    Energy Minister scheduled to speak on Ghana’s near-term opportunities at NAEPEC 2023

    Standard Chartered appoints Ebenezer Twum Asante as Chairman of Board of Directors

  • TECHNOLOGY

    Cyber Security Authority commences licensing and accreditation regime

    Twitter is reportedly planning to charge businesses $1,000 per month to keep gold verified checks

    Ghana withdraws $672m back-tax demand from MTN Group

    MTN to fight $773m tax bill from government

    Telcos to implement 1% E-Levy charge from today

    Huawei Equips 500 Traders in FinTech

    Africans urged to bolster adoption of Bitcoins

    What does 2023 hold? Predictions in payments for the year ahead for Africa

    Meta considered building a Twitter competitor to capitalize on Elon Musk’s ‘crisis’ at company

  • INTERNATIONAL
    • All
    • Africa
    • Asia
    • Europe
    • Middle East
    • US

    Ghana and South Africa urged to leverage on AfCFTA to boost bi – lateral relations

    Silicon Valley Bank crisis: What led to stock crash, what lies ahead?

    Medical devices market projected to expand by $ 7.1 billion by close of year

    African Union adopts Africa Prosperity Dialogues AfCFTA action plan

    Third World Network Africa urges Africans to be strategic about AfCFTA

    5 important things to know about the African Continental Free Trade Area agreement

    $130bn and $170bn needed annually to bridge Africa’s infrastructural gap – Bawumia

    Feed Africa Summit: African Development Bank to commit $10bn to make continent breadbasket of the world

    Nigeria’s national debt hits an all time as the country struggles with repayment

  • FEATURES
  • Videos
No Result
View All Result
Citi Business News
No Result
View All Result

East Africa: Why informal financial markets are here to stay

bycitibusinessnews
May 23, 2017
in Africa, East Africa
Share on FacebookShare on TwitterShare on Whatsapp

It is argued that African financial markets are highly fragmented, creating both formal and informal structures.

While formal financial markets are largely controlled by the Capital Markets Authority (CMA), informal financial markets (IFMs) are outside the CMA’s regulatory and supervisory control.

IFMs include Shylocks, merry-go- rounds (chamas), pawn brokers, credit societies, and traders. IFM lenders are also outside the radar of the Central Bank of Kenya.

Formal and informal financial markets serve different clientele with no linkages between the clientele served. It is therefore unclear whether the existence of informal financial markets presents a problem or a solution to the fragmentation of African financial markets.

Historically, money lenders were regarded as parasites who exploited impoverished peasants due to the high interest they charged. For instance, some charged over 30 per cent per month which translates to more than 360 per cent per annum.

From the formal sector perspective where banks charge about 14 per cent per year, the interest charged by money lenders is a rip-off.

But how many can access funding from banks? Today, informal lenders provide efficient financial services to a large clientele ignored by the formal sector. In many developing countries, the informal sector account for over 60 per cent of total lending.

In spite of the role played by IFMs, some studies argue that liberalising restrictive policies can expand the formal sector leading to the elimination of informal lending. This argument is not in touch with grassroots reality.

Financial transactions involve the exchange of money in the present for a promise to pay in future. However, most lenders lack the ability to establish whether a borrower will actually pay.

This problem is due to information asymmetry, adverse selection and moral hazards in credit markets.

Information asymmetry occurs where one of the parties to a financial transaction has more information than the other. In most cases the borrower has information about his financial position and the purpose of the credit he is taking while the lender is in the dark.

Adverse selection occurs when there’s a lack of symmetric information prior to a deal between a borrower and a lender.

On the other hand, moral hazard occurs when there is asymmetric information between the two parties and change in behaviour of one party (in most cases, the borrower) after the lending transaction has been concluded.

Imperfect information may lead to market failures that hinder risk management causing wide differences across lenders in relation to the cost of screening, monitoring and enforcing loans.

As demand for loans exceeds supply, adverse selection and moral hazard increase causing lenders to resort to non-price rationing rather than raise interest rates.

Information asymmetry is prevalent in low-income economies where information flow is limited and financial information is lacking or costly to obtain.

Information gathering costs for large financial institutions keep rising causing lenders to shun the market. This creates opportunities for informal financiers who can easily gather information at low cost using local networks.

Social sanctions

In addition, legal system weaknesses such as lack of title deeds and the land ownership transfer problem can affect the cost of loans.

This forces formal lenders to shun loaning and decline some securities due to absence of markets for confiscated assets in the case of default.

Informal financial markets address this problem by use of personal relationships, social sanctions and various collateral substitutes such as reputation, group responsibility and interlinked transactions (loan linked to purchase of a tangible commodity like water tank).

IFMs effectively operate on one side of the market, specialising in some specific target clients, use limited legal documentation and are largely relationship based.

Parliament recently introduced a law which caps banks’ lending rates at four per cent plus the Central Bank Rate (currently at 10 per cent). This was informed by banks’ perennial failure to lower lending rates even when the CBK lowered Treasury bill rates.

However, excessive government intervention leads to inefficient and underdeveloped financial markets. Interest rate ceilings or caps tend to increase demand but reduce supply of funds, forcing lenders to ration credit by other means.

Kenya should have a supportive legal and regulatory framework by passing laws which promote the growth of informal financial markets.

–

Credit: CNBC Africa

ADVERTISEMENT

Related Posts

Africa

Ghana and South Africa urged to leverage on AfCFTA to boost bi – lateral relations

byEmmanuel Oppong

The South African High Commissioner to Ghana, Her Excellency Grace Jeanet Mason is urging businesses in Ghana and South Africa...

Read more

Medical devices market projected to expand by $ 7.1 billion by close of year

African Union adopts Africa Prosperity Dialogues AfCFTA action plan

Third World Network Africa urges Africans to be strategic about AfCFTA

$130bn and $170bn needed annually to bridge Africa’s infrastructural gap – Bawumia

Feed Africa Summit: African Development Bank to commit $10bn to make continent breadbasket of the world

Nigeria’s national debt hits an all time as the country struggles with repayment

Next Post

Kenya: NSE up Sh289bn in three months on dividend chase

Video on Demand: Business Weekly

ADVERTISEMENT
Citi Business News

© 2019 Citi Business News - CitiBusinessNews.com by CNR Digital.

Navigate Site

  • Home
  • News
  • Business
  • TECHNOLOGY
  • INTERNATIONAL
  • FEATURES
  • Videos

Follow Us

No Result
View All Result
  • Home
  • News
  • Business
  • TECHNOLOGY
  • INTERNATIONAL
  • FEATURES
  • Videos

© 2019 Citi Business News - CitiBusinessNews.com by CNR Digital.