Informal Financial Sector in Kenya: The Case of Siaya District
This paper studies factors that affect an individual's probabilities of choosing amongst different financial institutions to save with and/or borrow from. A structured questionnaire was used to collect data on attributes of financial institutions (formal and informal) and on characteristics of individuals who had used these institutions over a period of one month prior to the interview. The data were analyzed using log it techniques. The empirical findings of the study reveal coexistence of informal and formal financial institutions in the study site. However, the informal institutions are more popular, having been used by 73 per cent of total respondents. The findings also show that distance, level of education, level of monthly income and collateral are significant determinants of selection probabilities for formal and informal financial institutions. On the basis of the empirical results, the study recommends that: (i) More formal financial insitutions be built in rural areas. (ii) Education programmes on finance and banking be intensified in the rural areas. (iii) Local .moneylenders should be recruited asI extension agents of formal financial institutions in rural areas. (iv) State loans, like those provided by the ICDC loan Agency in Siaya District, be channelled via informal financial institutions, especially Mutual Assistance Groups, under an overseer body.