Informal loans in Nigeria

There are traditional financial institutions which predate the banking system that engage in limited financial intermediation by channeling funds between lenders and borrowers. Informal loans in Nigeria are key to improving access to credit and social cohesion in towns and villages.

Informal Markets

Communities form themselves into small groups in mutual aids. Even with the advent of modern banking, informal loans in Nigeria still persists largely because banks are inadequate to cover towns and villages. Thus, these traditional financial institutions exist side by side with modern banking system. The most common and popular of such institutions are those engaged in savings, loans and mutual aids called Esusu or Ajo in the country. Below are a variety of these institutions of the system:

1. Monthly saving groups
2. Towns, union, monthly contributions
3. Age group cooperative funds
4. Revolving loan association
5. Office savings groups
6. Local money lenders ;and
7. Cooperative ,thrift and credit union.

The names of the different types of the financial institutions indicate their objectives. Some Are mandatory like village group contributions aimed at specific project development; while others are voluntary merely to meet social obligations. They all, however, largely fall under the title Esusu, that is savings ,loans and mutual aids, a combination of savings for the raining day, a satisfaction of the immediate financial needs and mutual assistance in the case of need. The end use of these mutual aids is varied; it may be for individual use, corporate project financing , and public or communal development.

Mode Of Operation

The Esusu system is a revolving scheme which continues until each member has benefited from the scheme as is schematically illustrated below. in the case, contribution per month in a group of 10 is ₦100. that is total targeted contribution is ₦1,000

The funds that a member receives each month are net of his own contribution and therefore less than the total targeted   contribution by one unit of ₦100. In the end, however, every member receives ₦1,000 having added his one contribution in the absence of administrative costs as long as such costs are paid from the interest fund earned from loans to non members. From the point of view of intermediation, the recipient of the revolving fund receives a form of credit when it is his turn. This credit is repayable at a future date on the basis of contributions. The repayment is largely non interest bearing , although there has been recent introduction of nominal interest charges .

An Esusu member wishing to take up a turn earlier than his predated time may purchase the right of the turn of another member. the purchaser of the right can resell the right further or relend the funds to a non member at a price which is the interest payment in the case of a non member or a discount factor in the case of a member .thus, if A purchases B’s turn, A will be forced to take less than ₦1,000, the difference being the discount amount which accounts for the risk and interest forgone.

Also, based on the rotation factor, the last Esusu member, [and in that order reduced by one month factor] is the lender with the largest maturity waiting period before he can be repaid. He bears the highest cost both in terms of earning no interest in his lending and the waiting period before it is his turn. Where there is a charge on the credit along the line, he can be regarded as an investor, the maturity and interest payment of which will determine the total yield. At the repayment stage, the situation is reversed.

For a borrowing member, the guarantee is on the basis of trust, taken into account the integrity , local credit rating and the purpose of the loan. No collateral is required, as the consequence of default without any good reason can be very stiff; from community contempt to outright expulsion.

Benefits of informal loans in Nigeria

1. Intermediation functions: there are three major intermediation functions that the traditional financial system performs in spite of its crudity.
   1. Savings mobilization company: by the nature of the contributions, the amounts collected constitutes savings not only for each member, but also for the group. Depending on the variance of each type of contribution, savings can be based on affordability [unequal contributions per month]or it can mandatorily be equal amount of savings per month. Such savings are returned to members on the expiry of an agreed period usually at the end of the year following the subtraction of some service costs .in case of some monthly rotation or a cycle savings scheme, savings contributions are received by a member whose turn comes up at the end of the month. There is usually no interest earned on the amount of money saved since such savings have no investment outlet for intermediating it. It should be noted that the scheme does not give away additional income to the participants but a capital loss due to depreciation in the value of money and the waiting period. It does, however, provide lump sums of money in time of need.
   2. A discount function: however rudimentary, is built into the Esusu system as shown earlier. A purchases the right of B’s turn and the cost of purchase by A or the waiting by B is the discount, that is the amount A pays to buy B’s The amount is however not fixed, but fluctuating with the number of purchases of someone else’s right. the onus is on B to ensure that A pays according to schedule.
   3. Development function: depending on the relevant variance of the Esusu, the system has been used in the aid of community development especially in the aid of school and hospital projects.
2. Credit function: one major advantage of the different forms of Esusu is the provision of credit facilities to to members and non members, such credit may be interest free or not, while in case of case of non members the credit is interest bearing ,however nominal .the amount lent must however be repaid within a given period as the same fund may be needed to pass onto the next Esusu member on the basis of rotation. Money lending operations started from the credit functions of the Esusu system.

The economic role of the informal market

As discussed earlier, this sector of the financial system is unregulated. their cost of borrowing is unknown and therefore outside monetary control and regulations. the money lender, hidden hire purchase operators impose high interest rates outside the regulated rates and get away with it. There is no information about their operational performance and their contribution to the financialization of the system and to the economy.

The size of the informal sector vis-à-vis the formal sector of the financial system is unknown. These factors confirm the existence of a dual economy. However, what is significant about the informal market is that it is largely the source of capitalization of the poor, low income rural dweller in urban Nigeria. Loan terms, eligibility requirements[largely based on need]sources of funds are all modified to suit the needs of the ‘the people’ with an inbuilt social insurance element. Also important is the fact that most frequent use of the funds are for investment purposes-down payment of hire purchase of taxis, housing construction, building materials or trading.