An appraisal of informal credit systems and small business financing in Ota Local Government Area, Ogun State
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Background of the Study
Informal credit systems serve as a vital alternative financing mechanism for small businesses, particularly in areas where formal financial institutions are inaccessible or unresponsive. In Ota Local Government Area, many small business owners rely on informal lenders and community-based savings groups to access funds. Such systems offer flexibility and speed in addressing urgent capital needs that formal credit might not meet (Egbunike, 2023). However, the lack of regulation and formal structure in these credit arrangements poses challenges such as high-interest rates and potential exploitation. The dual nature of informal credit—as both a financial lifeline and a source of risk—necessitates a critical appraisal. Researchers have noted that while these systems promote entrepreneurial activities and economic resilience, they may also jeopardize business sustainability (Olawale, 2024). This study investigates the dynamics of informal credit systems in Ota, evaluating their role in small business financing and exploring the balance between opportunity and risk (Ibrahim, 2025).
Statement of the Problem
Small business owners in Ota face challenges in accessing formal financial services, leading to heavy reliance on informal credit systems. While these systems offer immediate funding, they expose businesses to high interest rates and potential predatory lending practices. The lack of formal regulatory oversight creates vulnerabilities that may undermine business sustainability (Nwosu, 2023). This study investigates the risks and benefits associated with informal credit systems in Ota, identifying critical issues that hinder optimal financing for small businesses.
Objectives of the Study:
To assess the role of informal credit systems in small business financing.
To identify the benefits and risks associated with these systems.
To propose strategies for improving the reliability and accessibility of small business financing.
Research Questions:
How do informal credit systems support small business financing in Ota?
What are the key risks and benefits of relying on informal credit?
How can the current informal credit mechanisms be improved to better serve small businesses?
Research Hypotheses:
H1: Informal credit systems significantly contribute to small business financing.
H2: High interest rates in informal credit adversely affect business sustainability.
H3: Strengthening regulatory frameworks can improve the effectiveness of informal credit systems.
Significance of the Study
This study provides critical insights into the impact of informal credit systems on small business financing in Ota. It is significant for policymakers, financial institutions, and business owners seeking to understand and optimize alternative funding channels. The findings will help enhance financial inclusion and business resilience (Okoro, 2024).
Scope and Limitations of the Study:
This study is limited to the appraisal of informal credit systems and their role in small business financing in Ota Local Government Area. It exclusively focuses on informal financial practices without considering formal banking alternatives.
Definitions of Terms:
Informal Credit Systems: Unregulated, non-institutional lending practices.
Small Business Financing: The provision of capital for small business operations.
Ota Local Government Area: The administrative region in Ogun State where the study is conducted.
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