Influence of financial linkages on growth of informal financial institutions in Homa Bay county, Kenya

Abstract

Major trends highlighted by Financial Access surveys in Kenya have shown strong expansion of both formal and informal finance use. This shows that formal and informal financial institutions are not simply substitutes for each other, but may be complementary and that clients value both their services. The dividing line between the two is not so clear-cut. The interpenetration/linkages in terms of operations and participants (i.e. lenders, borrowers & savers) involved, geographical location and the nature of activities sometimes results in a substantial flow of resources in both directions between them. However, there exist divergent views with regards to the influence of financial linkages on growth of informal financial institutions. Some researchers observe that financial linkages offer the first best solution to promoting growth of informal financial institutions in terms of credit access while others have indicated that using financial linkages may reduce credit access and impact negatively on growth. It is therefore difficult to attribute the witnessed growth of informal financial institutions in Homa Bay County to the influence of existing financial linkages. Relying on institutional theory of complementarily, this study thus purposed to establish the influence of financial linkages on growth of informal financial institutions in Homa Bay County. Specifically the study sought to: establish the effect of both financial training and Credit Information Sharing (CIS) and to determine the influence of volumes of group savings on growth of informal financial institutions. Correlational research design and stratified random sample of 300 respondents from a target population of 3,000 were used. Data was collected using semi structured pre-tested questionnaires analyzed through OLS multiple regressions and correlation. The Cronbach‟s Alpha was 0.709.Correlational results established that both financial training and CIS have a weak negative relationship with growth given by R= -0.226 and R= -0.326 respectively while group savings account has a strong positive relationship with growth given by R= 0.57. Financial training‟s influence is insignificant while both volumes of group savings and CIS have significant positive and negative influence on growth given by ß = -0.053 and p = 0.371(>0.05), ß = 0.541, p =0.000(< 0.05) and ß = - 0.259, p = 0.000(< 0.05) respectively. In general, the influence of financial linkages on growth of informal financial institutions is significant given that R = 0.636, R2= 0.405 and p = 0.000(< 0.05). The study thus recommends strengthening of both group savings account and CIS as forms of financial linkages for growth and stability in the financial sector. This should be done through regulation of activities of formal financial institutions together with creating a favorable environment for the operations of informal financial institutions. Finally, the study recommends further research to establish why persons with graduate and post graduate level of education are less likely to engage in the activities of informal financial institutions owing to the fact that both account for a mere one percent of respondents.