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

Author

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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

Suggested Citation

  • Michael King, 2012. "The Unbanked Four-Fifths: Informality and Barriers to Financial Services in Nigeria," The Institute for International Integration Studies Discussion Paper Series iiisdp411, IIIS.
  • Handle: RePEc:iis:dispap:iiisdp411
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    References listed on IDEAS

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    1. Patrick Honohan & Thorsten Beck, 2007. "Making Finance Work for Africa," World Bank Publications, The World Bank, number 6626, January.
    2. Djankov, Simeon & Miranda, Pedro & Seira, Enrique & Sharma, Siddharth, 2008. "Who are the unbanked ?," Policy Research Working Paper Series 4647, The World Bank.
    3. Gordon H. Hanson, 2010. "Why Isn't Mexico Rich?," Journal of Economic Literature, American Economic Association, vol. 48(4), pages 987-1004, December.
    4. 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.
    5. Beck, Thorsten & de la Torre, Augusto, 2006. "The basic analytics of access to financial services," Policy Research Working Paper Series 4026, The World Bank.
    6. Oded Galor & Joseph Zeira, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 35-52.
    7. Erik Jonasson, 2011. "Informal Employment and the Role of Regional Governance," Review of Development Economics, Wiley Blackwell, vol. 15(3), pages 429-441, August.
    8. Hajivassiliou, Vassilis & McFadden, Daniel & Ruud, Paul, 1996. "Simulation of multivariate normal rectangle probabilities and their derivatives theoretical and computational results," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 85-134.
    9. 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.
    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.
    11. World Bank, 2008. "Finance for All? Policies and Pitfalls in Expanding Access," World Bank Publications, The World Bank, number 6905, January.
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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.
    2. repec:rss:jnljee:v4i3p1 is not listed on IDEAS

    More about this item

    Keywords

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

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

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