Academic journal article Journal of Financial Management & Analysis

'Hot' Money Flow through Informal Financing Ensures Sound-Cum-Prudent Managerial Handling : Financial Management Approach - Case Studies of U.S.A. and Nigeria

Academic journal article Journal of Financial Management & Analysis

'Hot' Money Flow through Informal Financing Ensures Sound-Cum-Prudent Managerial Handling : Financial Management Approach - Case Studies of U.S.A. and Nigeria

Article excerpt

Introduction

Writing on an important issue of 'cold' and 'hot' money1 is a difficult assignment as there may be as many different views as there are neo-Keynesian economists and financial practitioners and, in this context, the words of the one-time Prime Minister of Great Britain, Harold Macmillan ring a bell:

One nanny said, 'feed a cold'; she was a neo-Keynesian; Another nanny said 'starve a cold'; she was a monetarist.

Agricultural producers and executives (urban based borrowers) have access to two capital markets : institutional and non-institutional. The institutional sources include government lending agencies, farmers, cooperatives, commercial and merchant banks; the noninstitutional (informal) sources comprise friends, neighbours, relatives, professional moneylenders, produce buyers, traders and merchants. Developing countries plagued with many economic difficulties and resultant financial problems find it very difficult to extend and ensure easy funds flow to agricultural financial institutions on whom the fanning population depend: Consequently small farmers, traders, etc., are forced to resort to informal sources of financing.

The non-institutional sources (informal lenders) provide most of the credit used by small farmers and executives while the institutional lenders constitute the major supplier of credit to larger farmers and urban-based borrowers. The dominance of large-scale urban-based company borrowers could be due to the fact that most institutional lenders, especially the banks, are located largely in urban centres and relatively far away from farmers. This implies that most small-scale, rural-dwelling farmers have not benefited, as fully as they should have, from institutional credit. Some of the hindrances faced by the farmers include complicated, cumbersome and time-consuming loan processing procedures. Ineffective supervision, inadequate or complete absence of financial projections/planning and misdirected conception of the nature of farm credit.

CASE STUDIES

U.S.A. : Pawnshops

(20 to 30 percent of U.S. Adult Population Choose cash-only Transactions)

(Caskey-Zikmu nd Research Findings2)

While pawnshops are an important source of credit in the U.S.A. for many low-income consumers not competing directly with other financial institutions for customers, no serious study of pawnbroking in the U.S.A. has been made since the 1930s. Broadly speaking, pawnshop customers have two characteristics :

* First these customers (with low incomes and little education and do not maintain bank accounts) have high credit risk and so cannot borrow on an unsecured basis. Indeed, pawnshop lending rules require the borrower to leave personal property with the pawnbroker as collateral.

* Second, pawnshop customers typically require small denomination loans that traditional lenders are unable or unwilling to provide on a secured basis. For example, in its 1988 Annual Report Cash America Investments, a publicly traded company operating about 100 pawnshops in Texas, Oklahoma and Louisiana states has this to say :

It has been estimated that 20 to 30 per cent of America's adult population chooses to deal with cash only transactions which require neither bank accounts nor credit cards.

Relevant and revealing data suggest the pawnbroking industry grew in the 1980s and early 1990s in some states very rapidly. Time series data on state pawnshop licenses are available for only a few states, but the available data show the number of outstanding pawnshop licenses grew in six out of seven states of the U.S.A. In Oklahoma and Texas part of the rapid growth in pawnbroking may be explained by the economic disruptions caused by the fall in crude oil prices. For example in 1988 approximately 6900 pawnshops operated in the U.S.A. - about one pawnshop for every two commercial banks. While a publicly traded company owns a chain of pawnshops in the South Central part of U. …

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