Economic and Social Issues in Rural Informal Savings and Credit Association; Lessons for Reform in Rural Credit Schemes in Nigeria

Their institutional weakness and obvious lack of formal organizational structures notwithstanding, rural informal savings and credit associations persist and remain extremely popular among the very poor in the society. This paper hypothesis that this is because they are able to resolve the problems of asymmetry information, transaction costs, adverse selection, moral hazards and other related risk, that are associated with formal financial sector. The impressive capability of traditional savings and credit associations in coping with the above problems reveals a strong character trait of such association. This trait shows a strong linkage between social and economic factors, and how a better undertaking of such trait can give a deep insight into how formal rural credit scheme can be reformed. It also shows more importantly how the large informal sector can be brought into mainstream economic activities. Data for this paper originated from empirical studies of traditional rural savings and credit association in Ado Local Government Area of Ekiti State, Nigeria in 2004. This study shows that these associations appear to cope well with the risks associated with formal financial sector by exploring social relationships, using collateral substitutes and reducing the imbalance in information between the lender and the borrower. The study also investigates the more than proportionate participation of women in such association and reveal that this may be due to the fact, they are more likely to be shut-out of the formal financial sector because of social and economic factors. The paper concludes by showing that the informal savings and credit associations reveal more of our social and economic capability than the formal sector. A better understanding of this may eventually help us to development a better and more pragmatic rural credit scheme