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The Unbanked Four-Fifths: Informality and Barriers to Financial Services in Nigeria

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  • Michael King

    ()
    (Institute for International Integration Studies, Trinity College Dublin)

Abstract

Four-fifths of the adult population do not have access to formal financial services in Nigeria. This paper examines the characteristics of 'unbanked' households in Nigeria, investigates the extent and determinants of supply and demand side barriers, and explores the specific role played by informality in financial exclusion. There is evidence to suggest that in Nigeria the unbanked four-fifths have lower incomes, lower education, are less likely to have a mobile phone, and have lower levels of financial sector knowledge and formal documents in their name than the remainder of the population. A non-mutually exclusive framework for analysing barriers to formal banking is developed and insights on the characteristics of sub-groups of the unbanked population who face particular barriers are provided. While poverty and distance to bank branch are the most important barriers cited, informality also plays a significant role and tackling informality directly represents an opportunity for financial inclusion policy. Using instrumental variables, the precise role played by informality in financial exclusion is estimated and for individuals with four and five documents, it is found that an additional document increases the probability of being banked by 17 percent and 15 percent respectively. Length: 45 pages

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Bibliographic Info

Paper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp411.

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Date of creation: Oct 2012
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Handle: RePEc:iis:dispap:iiisdp411

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Related research

Keywords: Access to finance; barriers to banking services; informality; Nigeria; financial inclusion;

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References

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  1. Honohan, P. & Beck, T.H.L., 2007. "Making finance work for Africa," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125420, Tilburg University.
  2. Borsch-Supan, Axel & Hajivassiliou, Vassilis A., 1993. "Smooth unbiased multivariate probability simulators for maximum likelihood estimation of limited dependent variable models," Journal of Econometrics, Elsevier, vol. 58(3), pages 347-368, August.
  3. World Bank, 2008. "Finance for All? Policies and Pitfalls in Expanding Access," World Bank Publications, The World Bank, number 6905, January.
  4. Gordon H. Hanson, 2010. "Why Isn't Mexico Rich?," Journal of Economic Literature, American Economic Association, vol. 48(4), pages 987-1004, December.
  5. Erik Jonasson, 2011. "Informal Employment and the Role of Regional Governance," Review of Development Economics, Wiley Blackwell, vol. 15(3), pages 429-441, 08.
  6. Michael King, 2012. "Is Mobile Banking Breaking the Tyranny of Distance to Bank Infrastructure? Evidence from Kenya," The Institute for International Integration Studies Discussion Paper Series iiisdp412, IIIS.
  7. Oded Galor & Joseph Zeira, 2013. "Income Distribution and Macroeconomics," Working Papers 2013-12, Brown University, Department of Economics.
  8. Vassilis A. Hajivassiliou & Daniel L. McFadden & Paul Ruud, 1993. "Simulation of Multivariate Normal Rectangle Probabilities and their Derivatives: Theoretical and Computational Results," Working Papers _024, Yale University.
  9. Beck, Thorsten & de la Torre, Augusto, 2006. "The basic analytics of access to financial services," Policy Research Working Paper Series 4026, The World Bank.
  10. Honohan, Patrick, 2008. "Cross-country variation in household access to financial services," Journal of Banking & Finance, Elsevier, vol. 32(11), pages 2493-2500, November.
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Cited by:
  1. Michael King, 2012. "Is Mobile Banking Breaking the Tyranny of Distance to Bank Infrastructure? Evidence from Kenya," The Institute for International Integration Studies Discussion Paper Series iiisdp412, IIIS.

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