Framework for linking the informal savings sub-sector with the formal stock investment market

Abstract

Global markets, especially emerging markets, reveal a presence of generally two types of financial saving and investment system, namely the informal financial system and the formal financial sub-sector. Often, the two systems of financial management are alienated from each other. However, informal savings practices (parts of the informal financial sub-sector) are widespread particularly in developing economies, including those of Sub-Saharan Africa where the popular indigenous financial saving practices are the rotating credit and savings associations, an umbrella concept that incorporates various practices such as door-to-door deposit collections, Christmas grocery and savings clubs, burial societies, Chilimba, Motshelo, Susu, Etoto, Nyangi, round tables, and stokvels, amongst others. The informal financial savings system is criticised for poor asset security, emphasis on social capital, poor financial returns, and high propensity for consumption. Indeed, wealth accumulated in these thrift funds are seldom invested in formal, financial investment market instruments that generate more than average returns, specifically equities (common stocks). The formal common stock investment sector offers numerous benefits, and these include risk management, diversification, capital appreciation, opportunity for dividend receipts, a liquid market, professional stock investment management, and asset security amongst others. Therefore, in contrast to the constraints and investment drawbacks associated with the informal financial savings system, the formal financial stock investment platform offers prudent investors opportunities to reap relatively higher returns, and grow wealth. Notwithstanding the apparent benefits of investing in the formal stock investment system, the majority of members of the informal savings market are estranged from the formal equity investment sub-sector. This study investigated these two, contrasting financial savings and equity investment services platforms, with the objective of constructing a framework for linking the informal savings system with the formal stock investment market. The study used both qualitative (interviews and grounded theory) and quantitative research methods to gather and analyze primary data. The questionnaire was used to collect quantitative data, which was analyzed using various structural equation modelling tools, including descriptive statistics, correlations, and path modelling. This study found that the alienation of the financial savings and stock investment platforms results in the exclusion of informal savings groups from equity investing opportunities. The framework for linking the two systems is anchored on several variables, namely a conscientious adoption of strategy to reach out to the informal savings groups, provision of equity investment education, an introduction of unorthodox marketing strategy. Further, the extension of financial investment products to traditional African savings communities constitutes a credible investment vehicle that improves their saving and financial investment performance. Moreover, a dignified treatment of indigenous savers by the formal financial sector and provision of asset security, positively influence and encourage informal savings groups to invest in the formal stock investment sector. Overall, all these variables converge to form a path that links these hitherto separate financial systems, namely the informal savings market and the formal stock investment system.