Why do Rural Community of Sri Lanka prefer for Informal Sources of Financing?

Abstract

The aim of this paper is to examine the factors that affect the preference of informal financing sources by the rural community of Sri Lanka. Data were gathered from 300 rural respondents in Uwa, Sabaragmuwa and Western Provinces of Sri Lanka using stratified sampling method. The main research instrument used was a questionnaire based on seven point Likert scale. Descriptive Analysis, Multiple Linear Regression Analysis and Stepwise Regression Models were used to analyse data. Research findings revealed that previous experience with informal borrowings, relationship with the lender, loan size, repayment flexibility and less collateral requirements significantly and positively affected the preference of informal financial sources by the rural community of Sri Lanka. Interest rates charge by the informal lenders have a significant and negative impact on the preference to use informal financing which reveals that interest rate is the core factor to make the informal financing unpopular. Legal requirement did not affect preference of informal sources of financing by rural community of Sri Lanka significantly.