Merry Go Round Concept and Informal Financial Markets in Kenya

Abstract

This study is a survey of informal finance sector efficiency, adequacy and economical viability with an in depth on merry go round concept (Chama) in Kenya. Sources of financing MSEs, policies and channels through which concept of merry go round can enhance financial engineering are explored. A comparison of informal finance practices in other countries is noted. Informal Finance Institutions among them the ubiquitous Merry Go Round are of ancient origin. Initially they provided mutual support during funerals and weddings. The study, however, revealed that they are increasingly being involved in financial services, mobilize their own resources and finance their growth from their profits. In Kenya majority of research has been on formal Micro Finance Institutions. This study forms a new platform for exploring informal finance sector in Kenya. Key features of merry go round finance forms crux of the study hence able to generalize practical principles of informal finance. An exploratory study of merry go round with aid of a questionnaire was used to collect primary data from fifty randomly selected MSEs in Nairobi with bias on those embracing merry go round spirit. Data was analyzed using descriptive statistics with measures of central tendency applied. First hypothesis was inferred using mean, second using mode and median for third hypothesis. This study upholds hypothesis that services offered by Chamas are highly valued and MSEs owners mainly raise funds from Chamas apart from personal savings, only turning to external funding as last resort. Respondents felt that some services are efficiently provided by informal finance sector better than by formal finance sector. Chama members felt that money they save or invest is not taken away to pay salaries, rents or operating costs as in case of MFIs or Saccos. Important policy implication is the need to link emerging informal institutions with formal ones so as to capitalizing on the later positive values. With expansion of money economy, Chamas if assisted to upgrade operations and integrated into wider financial market their impact will be phenomenon in any economy. Dynamics in economic activities and difficulties in meeting financial needs of the poor urges for revising laws in Kenya such as Banking Act and enactment of Credit and Savings Act. Until then it comes as no surprise of the rise of pyramid finance schemes and bogus credit lending agencies in Kenya.