IMPACT OF INFORMAL MICROFINANCE ON ENTERPRISE

FINANCIAL CRISESOnafowokan OLUYOMBO PhD

Department of Financial StudiesRedeemer’s University, Ogun State, Nigeria

oluyomboo@run.edu.ng & oluyomboo@gmail.com

Conference paper presented at Coping with Crisis: Re-evaluating the role of crises in economic and social history. Collingwood College, Durham University, United Kingdom. 26 – 28 July,

2013

I would like to thank Redeemer’s University for funding this study through her research grant.

Background on Microfinance• A financial service arrangement for low

income earners to save and take loan• To reach the un-reached with tailor made

financial services• For those that cannot meet formal

banking requirements• With less restrictions in operating an

account

Research objective

To assess the roles that informal microfinance – cooperative societies -

play during financial crises in enhancing rural dwellers ability to survive periods of reduced cash flow and coping with

difficult times in their enterprises.

The study investigates how rural people who live in locations where there is no formal financial institutions manage

their financial crises by using members of informal microfinance scheme –

Cooperative Societies - that are fully funded by the programme participants

without any assistance from donors and government in rural areas of Ogun

State, Nigeria.

Significance of the study

This study is significant because it shows if the cooperative is in the best position to

provide financial intermediation of mobilising fund in form of savings from the surplus of some members, and giving same as loans to make up for the deficit of other members in time of financial needs in their

enterprises.

Research hypothesis

Participation in informal microfinance – cooperatives - does

not lead to ability to survive periods of reduced cash flow.

METHODOLOGY• Ogun State consists of twenty local governments divided into three

senatorial districts. • Two local governments that are more rural were selected in each senatorial

district• Five cooperatives were randomly selected in each local government area to

make a total of thirty cooperatives. • A random sampling of 10 individuals from the membership list of the 30

cooperatives were selected to participate in the survey questionnaires, which give 300 sample size.

• Responses to the questionnaire from only 287 people • Participants comprises of two groups – loan members and no-loan

members. • The no-loan members are members of the cooperative societies, but they

did not take loans as at the time of the study. • The choice of loan and no-loan members is to enable the researcher to use

the no-loan members as the control group for the loan members.

Table 1. Survey Participants

Senatorial

District

Loan Members No-loan Members Total

Male Female Male Female Ogun Central 24 37 16 16 93

Ogun East 33 36 12 17 98

Ogun West 40 29 14 13 96

Total 97 102 42 46 287

The responses from the questionnaires are presented using simple percentages in tables.

Further quantitative analysis was carried out using the SPSS statistical package for chi-square tests for independence - used in

comparing the relationship between two categorical variables based on cross tabulation

tables.

RESULTS AND DISCUSSION Financial Constraint in Business A question was directed to loan and no-loan members to ascertain if they ever faced any financial constraints at any point in the process of conducting their businesses. The result is presented in figures and percentages in table 4 below. Table 4 Financial Constraint in Business No-loan

Members n=88

Loan Members

n=199 Those unable to conduct business at some point due to lack of money in the last twelve months

No. % No. %

44

50

141

71

Financial Difficulty at Some Point In table 4 above, 71% (141 respondents) of loan members and 50% (44 respondents) of no-loan members reported that they were unable to

conduct their enterprises at some points due to lack of money. In addition to the result in the table above, there is a need to know the membership period of those who at some point lack money for their

business and this is shown in table 5 below.

Table 5 Enterprise Financial Difficulty at Some Point Membership Duration No-loan Members

n=88 Loan Members

n=199 No. % No. % 0 – 1 year 19 22 5 3 2 – 5 years 15 17 72 36 6 years and above 10 11 64 32 Total 44 50 141 71

Loan Availability at Difficult TimeThe purpose of this segment is to find out if loan

members were able to meet their financial needs in time of financial constraint from the cooperative loan.

This is to determine if the cooperatives can absorb financial shock from her members especially in solving financial problems in their businesses.

The response from a question as stated in table 6 below was used to find out if those with financial

constraints were able to solve the cash flow problem faster as a result of loan from the cooperative.

Table 6. Access to Business Loan in Difficult Time Loan Member1

n=199 Loan Member2

n=141 Membership Duration No. %3 No. %4 0 – 1 year 5 3 2 40 2 – 5 years 72 36 58 81 6 years and above 64 32 55 86 Total 141 71 115 82

1. Those with lack of money at some point for their business 2. Those who were able to solve cash flow problems faster by taking loan from the program 3. This is express as percentage of loan member respondents i.e. 199 4. Express as a percentage of loan member with lack of money at some point. e. g. 58/72 x 100

• The significance or otherwise of the result presented in this section is determined using chi-square tests on the research hypothesis stated below.

Ho: Participation in informal microfinance does not lead to ability to survive periods of reduced cash flow

Chi-square test statistic value is 82.466 with an associated significant level of 0.000 is smaller than the alpha level of significance of 0.05.

The result is significant and shows that participation in a cooperative lead to ability to survive periods of reduced cash flow. In other word, there is an association between being a loan member and surviving periods of reduction in enterprise cash flow.

CONCLUSION• The effect of the association between the two variables

determined from the symmetric measure is the Phil coefficient of 0.544 which suggests that the effect of being a loan member in a cooperative is high and positive in surviving periods of reduced financial crises.

• On the average, about 54.4% of loan members with financial constraint in their enterprises can depend on the cooperative through the loan to meet their financial needs and be able to continue their businesses.

• A chi-square test for independence indicated significant association between participation in cooperatives and survival of periods of reduced cash flow in an enterprise, X2 (1, n=199)=82.466, p=0.000, phi = 0.544.

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