Financial market fragmentation and reforms in Ghana, Malawi, Nigeria, and Tanzania

This article reports the findings from surveys of formal and informal institutions and their clients in Ghana, Malawi, Nigeria, and Tanzania. It investigates the hypothesis that reforming financially repressive policies would not be sufficient to overcome fragmentation of financial markets because of structural and institutional barriers to interactions across different market segments. The four countries have substantially fragmented financial markets, with weak linkages between formal and informal segments and interest rate differentials that cannot be adequately explained by differences in costs and risks. Nevertheless, the relatively low transaction costs and loan losses of informal institutions indicate that they provide a reasonably efficient solution to information, transaction cost, and enforcement problems that exclude their clients from access to formal banking services. The findings imply that financial liberalization and bank restructuring in the African context should be accompanied by complementary measures to address institutional and structural problems, such as contract enforcement and information availability, and to improve the integration of informal and formal financial markets.