Developing an Original Theory of Financial Market Development in a Fragmented Emerging Economy

Financial market development theory developed for unified emerging economies inadequately accounts for the fragmentation between formal and informal financial systems characteristic of economies like Nigeria, and developing an original theory for financially fragmented contexts constitutes a significant contribution to financial development economics. This study developed an original Financial Market Development Theory for Financially Fragmented Emerging Economies, with empirical grounding in Nigeria's financial system. A constructive theoretical methodology was employed, combining systematic review of 82 financial development theory publications from 2018 to 2024, empirical analysis of Nigeria's financial market structure using CBN statistical data, EFInA survey data, and original enterprise survey data on financial service use from 600 firms across six states, and expert consultation with 25 financial economists. Systematic review confirmed that existing financial development theories inadequately theorised the coexistence of sophisticated formal markets (capital market, banking sector) with large informal finance networks (esusu, cooperative credit, moneylender), the competitive and complementary relationships between these segments, and the macroeconomic implications of persistent fragmentation. Original empirical analysis confirmed that 67 percent of SME financing combined formal and informal sources, that informal markets provided speed and relationship advantages while formal markets provided scale and longer tenors. The original Financial Market Development Framework for Fragmented Economies proposes a co-evolution model in which informal and formal financial markets develop in a sequence shaped by institutional, informational, and technological transitions. Expert review confirmed the framework's theoretical originality. Recommendations include policies preserving informal market strengths while bridging to formal market access.