Traditional financial institutions are paying a considerable role in the Nigerian economy by providing borrowers with informal loans. Besides providing financial support, credit facilities are also promoting social cohesion among people living in towns and villages. In addition, credit facilities are also helping startups and thereby encouraging entrepreneurship.

Esusu and Ajo are traditional financing institutions in Nigeria, which operate like a credit union, an insurance scheme and a savings club.

How Informal Financial Sector Is Organized

People from different locations and especially those with similar interests or problems, organize themselves in groups from mutual help. Despite the presence of banks in Nigeria, informal banking is still in existence since banks cannot reach all the people from towns and villages. It creates co-existence between formal and informal banking sectors. The most common traditional forms of rotating savings and credit associations, informal savings club arrangement between a small group of people are Esusu or Ajo, and they serve various needs such as savings, loans and mutual help.

How Esusu works.

Evans Osabuohien and Oluyomi Ola-David from the College of Business and Social Sciences, Covenant University, Nigeria, note that esusu remains popular despite the establishment of formal microfinance institutions in Nigeria. It is used by workers of the informal sector, market places, rural and urban communities and religious groups. It is particularly popular among low- and middle-income earners. Many rural workers rely on it because they are poorly paid and therefore do not have access to the formal financial system.

Other groups usually focus on development in the community and others are meant for social obligations to assists people in times of need. Nevertheless, some of them are mandatory, while others are voluntary. Most of these groups are categorized under Esusu that focuses on providing loans, saving and mutual help. They enable members to contribute to saving, while also providing loans and offering social support in times of need.

What You Need to Know about Informal Financing

Informal financing enables social connections by allowing strangers to unite and create relationships. Possibly, social connections are the main reason that has led to the success of Esusu and Ajo. People are willing to contribute money not to let down the rest of the group members. This bond keeps people intact, enabling them to offer mutual aid to any member who may be in need.

Most of the groups have names that suggest their objectives. Some of the loan institutions include:
• Groups wishing to save every month
• Members willing to make weekly or monthly contributions
• Cooperative and credit unions
• Office savings group
• Local money lenders

Monthly or weekly contributions are channeled to the group’s treasurer, who then keeps a record of every member’s contribution. He is also the custodian of the money contributed. The size of the groups varies from one group to another, depending on a group’s objectives. However, too large groups usually have weak social connections. On the other hand, small groups may fail to meet their goals due to minimal contributions.

How Ajo works.

Benefits of Informal Financing

  1. Informal financing mobilises people to save money. Members contribute cash, which goes towards their savings and that of the group. Then the members receive the money after the agreed period. It can be at the end of the year or when it is a member’s turn if the policy of the group is cyclical savings. It is worth noting that the money usually does not have an interest since the groups do not have investment means. Instead, members receive less money than they contributed due to some expenses associated with service charges and depreciation. However, members receive cash in a lump sum in times of need.

  2. Informal financing also contributes to the development of the community and even for an individual. For instance, they have been used for the construction of schools and hospitals for use by the public.

  3. Provision of credit facilities. The main advantage of Esusu, for instance, is that it consolidates members’ contributions and when a member has an urgent need, he or she can borrow a loan. The loan can be repaid after an agreed period, or it may be deducted from the members’ annual returns or when their turn to receive the money comes.

  4. Informal financing usually has an advantage by getting discounts for buying in a lump sum. There are some groups whose objectives are to provide members with goods and services. Therefore, members contribute money and then purchase those services or products in wholesale. This enables them to buy them in wholesale, thereby getting significant discounts that are distributed equally amongst the members.

Further Information