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Abstract:
Informal financial sector may actually be larger than the formal financial sector yet monetary policy has been directed to the formal financial sector ignoring the informal financial sector. This has been attributed to lack of information about this sector. Failure to incorporate the informal financial sector into monetary policy accounts for partial ineffectiveness of monetary policy. This study sought to create an understanding of how the informal financial sector works. It sought to identify the factors that influence borrowing in the sector. The specific objectives included; to identify how socio-economic characteristics influenced borrowing from the informal financial sector, to determine how loan characteristics influenced borrowing from the informal financial sector and to identify how distance from borrowing source influenced borrowing from informal financial sector. The study used both primary and secondary sources of data. The study targeted micro and small enterprises in Thika town. A structured questionnaire was used. A multinomial logistic regression analysis was conducted on the variables. Results showed that Collateral requirements, application fees and interest rates were the main deterrents of borrowing from banks. It is therefore recommended that any interventionist who wishes to encourage borrowing from the informal financial sector should desist from asking for physical collateral but rather rely on social collateral, should ensure that application fees are minimal and that interest rates charged are low.
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