Problems of Orthodox Formal Capital Markets in Developing Countries, with Particular Reference to Nigeria
ADE T. OJO
In Nigeria and many other developing countries, the formal capital markets, which are essentially orthodox in nature, have proved grossly inadequate in financing business enterprises. These formal capital markets, broadly defined to include banks and other western-type financial institutions and markets, having been largely introduced by expatriates about a century ago, have some major adaptation problems that have made it quite difficult for them to cater to the financial needs of the bulk of indigenous business enterprises. Their operations in such a maladapted form are thus increasingly being criticized in these countries, particularly in Nigeria, where the president and other policymakers often criticize the formal financial institutions and markets as unhelpful in promoting economic development in the desired manner, making the large informal sectors lag far behind.
The formal financial institutions and markets have been functionally unable, or have not cared, to accommodate the financial needs of small borrowers--farmers, small and medium-sized enterprises, and consumers--which account for a majority of economic units. The vacuum thus created in the nation's finances had to be filled. Here the informal institutions and markets, about which we know very little, have evolved to meet, by and large, the requirements of the small, most indigenous enterprises in farming, petty trading, and other activities in many less developed economies.
In the view of the Committee on the Nigerian Financial System ( Nigeria 1976), Nigeria had no financial system under the colonial era; what it had then was a set of financial arrangements within the financial system of the metropolitan country. The committee defined a financial system as the "congeries of financial institutions and arrangements which serve the needs of an economy." The service is rendered through (1) the provision of financial resources to meet the borrowing needs of individual and households, enterprises, and governments; (2) the provision of