The impact of Microfinance Institutions on the Informal Economy in Nigeria

This paper investigates the impact of microfinance institutions on the informal sector of the Nigeran economy drawing from a cross-sectional data of 14,189 customers from two major microfinance clusters – the Self-Reliance Economic Advancement Programme (SEAP) and ASHA Microfinance Bank Limited with a combined membership of over 700,000 clients. The study applies a descriptive and fully modified ordinary least square (FMOLS) model to evaluate the statistical relationship on average monthly borrowing amount and explanatory variables of factors that could affect the ability of clients to seek support from the various microfinance institutions. Empirical evidence suggests that amount of money borrowed by clients is significantly affected by the nature of business; whether the business is operating in the formal or informal sector, gender of the entrepreneur, and on the other hand whether the degree of borrowing is strongly affected by monthly household expenses of borrowers. The paper therefore concludes that the informal sector is largely supported by micro finance institutions but seeks a policy redirection for government to take steps to formalize the large stream of informal borrowers in order to improve domestic resource mobilization and actualize sustainable development of the Nigerian economy.