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Informal sector

The case for informal bonds

This article argues for the implementation of an alternative financing mechanism for informal small and very small businesses in Africa that would allow them to benefit from other formal financing…

This article argues for the implementation of an alternative financing mechanism for informal small and very small businesses in Africa that would allow them to benefit from other formal financing opportunities under better conditions than those offered to them today.

A review of current funding mechanisms

African economies today are still predominantly financed by the banking sector, which carries the disadvantage of elevating the banker to the status of a sort of multi-sector specialist who groups entrepreneurs in various sectors such as the agri-food, energy, consulting, and even new technology sectors, into the same single portfolio.

Private equity investors focus almost exclusively on large deals in order to ensure the monitoring of their investments (although fortunately some of them have oriented their investment strategies towards small and medium-sized businesses).

Microfinance institutions, whose success is due to a financing model adapted to small-size loans and small companies, but unfortunately carries some significant drawbacks, including the application of high interest rates.

We could also mention meso-finance, which is quite new and essentially functions as an intermediary between traditional banking and micro-bank financing. Nano-credits, which are generally below 100,000 FCFA, are offered by some Fintechs but are still quite rare.

Finally, an informal and parallel financing system has been created which is a sort of “street financing”
system that applies predatory interest rates and abusive loan terms and requires, among other things, the borrower’s debit card as a guarantee.

This overview of existing financing mechanisms makes one thing clear: the informal sector, which according to the International Labor Organization represents more than 85% of jobs on the African continent, has been completely left behind. It is therefore necessary to develop an alternative financing mechanism to cater to this vital segment of our economy.

The overview of existing financing mechanisms makes one thing clear: the informal sector, which represents more than 85% of jobs on the African continent, has been completely left behind.

The informal sector as a life raft

The informal economy constitutes a veritable life raft for the vast majority of Africans. In the case of Europe, this life raft is characterized by each state’s social welfare model, and each country has defined a minimum wage that allows every worker to provide for the basic needs of his or her family.

In Africa, this life raft is characterized by one’s informal activities. The public administration employee who earns 65,000 CFA francs per month (100 €) and who has 6 children to support, will need to develop an additional activity in the informal sector in order to make ends meet and feed his or her family.

Financing our informal sector, therefore, amounts to financing our social welfare network. The informal sector simply cannot remain the forgotten or poorly equipped part of our economy that it is today.

Today, the African financial market should represent hope, an option, through the inclusion of informal entrepreneurship. Each player in our economic network should be able to access an opportunity through this financial market.

This is why we are calling for the implementation of a new product, which we could refer to as “informal bonds”.

Each player in our economic network should be able to access an opportunity through this financial market.

What are informal bonds?

According to the International Monetary Fund (2017), the informal sector represents between 20% (South Africa) and 65% (Benin, Nigeria) of the GDP of African countries. Contrary to popular belief, informal does not necessarily mean poorly organized. In fact, some informal businesses such as planting or motorbike taxi driving, for example, organize as Cooperatives or Groups.

The idea of the informal bond is simply to allow business groups that have historically demonstrated good organization and governance to seek financing for their members through the financial market by issuing what would be called an “informal bond”, a bond dedicated to financing informal business activities.

A group’s leadership would select, thanks to their knowledge of the sector and of their members, the beneficiaries as well as the loan amounts granted to them.

Assuming that the group has previously demonstrated moral probity, it would be possible for all or part of the bond to be guaranteed by a bank or a state guarantee fund.

For security and transparency reasons, loans and repayments would be made directly via “mobile money” transfer between the custodian bank of the operation and the informal entrepreneurs.

This concept could encourage the progressive structuring and formalization of informal actors, who would have specific guidelines to follow in order to qualify for this financing mechanism (group membership, record keeping, opening of a mobile money account, etc.) For their part, the States would benefit from an increase in tax revenues.

By : Fabrice Kom Tchuenté

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Perspectives

Improving financial inclusion: adopting a pragmatic approach

According to the World Bank’s definition, financial inclusion is the ability for individuals and businesses typically excluded from traditional financial services to enjoy affordable access to financial products and services…

Every year, numerous conferences are held by the Bretton Woods Institutions to explore strategies on how to improve financial inclusion and develop financial literacy in Africa. Two years ago, the Central Bank of West African States (BCEAO) initiated a program to promote financial education and even set up a central department dedicated to financial inclusion issues. In addition, several countries such as Cameroon, Senegal, and Togo are working on their own inclusive finance strategies.

All of this suggests that there is a real lack of financial inclusion in most Sub-Saharan African countries, largely due to a lack of financial education. This could be resolved by encouraging African individuals and businesses to save through the formal channels of our respective local economies.

What we have learned from recent financial scandals

Many of us today would argue that it is difficult to get ahold of savings from African households. How then are we to understand the success of financiers who have obtained large sums of money through Ponsi schemes in recent financial scandals such as the MonHévéa case in Côte d’Ivoire or the MIDA phenomenon in Cameroon (as well as of other scandals that are probably yet to be exposed)?

These are organizations that guarantee 300%-400% profits in a number of months and that have continued to grow over the years in plain view of the authorities (sometimes even thanks to ads broadcast on national channels.)

There are at least two things we can learn from these financial scams.

First of all, in light of the large number of victims and the monetary amounts involved, we can see that savings do exist in African households. These savings consist principally of small sums (also called household savings) of all segments of the population.

It is also clear that these scammers possess persuasion techniques that enable them to obtain the savings that are so highly coveted by our numerous international development programs and that continue to escape local and legal financial institutions today.

Leveraging traditional administration

Financial education is clearly necessary for our African leaders and officials, who in some countries have been involved in the bad practices mentioned above, often due to a lack of knowledge on these subjects. To educate also means to raise awareness, and this could be done by explaining that savings rates of 20% or 30% do not exist (to say less of rates of 200%, unless we’re projecting savings for our great, great grandchildren!). We can only hope, then, that well-thought-out financial education strategies aim to educate officials and politicians as well as their constituents…

Financial education should not only be done at the civic level (sub-prefects, mayors, etc.), but also at the level of traditional administrators (e.g., traditional chiefs, neighborhood chiefs) who are the most effective agents for raising awareness in their communities.

African nation states could go even further by creating postal bank agencies within certain large chiefdoms in order to exploit close relationships of trust and respect that persist today between villagers and their traditional authorities

Integrating pragmatic solutions

The goal is not to point the finger at these voluntary initiatives designed to improve the social conditions of our populations, but rather to emphasize the need to incorporate the socio-economic and cultural fundamentals that guide/dictate our societies.

Grand plans are not necessarily effective agents of change. The approaches on this matter should be as pragmatic as possible. While a National Financial Inclusion Program sets a 5-, 10-, or 15-year goal for improvement, a pragmatic approach must set a goal for the near future, while working to immediately improve financial literacy, so that:

When the next harmful initiative emerges, it will not have anywhere near the same impact.
Civil society, especially the informal sector, can let go of the inferiority complex they nurture vis-a-vis the banks, for various reasons: low income, language barrier (for the illiterate…)

How can we understand that these same people had no trouble giving their savings over to illegal practices. The main reason was these scam artists’ promises to multiply their money.

African banks should communicate more with all these small savers, in a language that is relevant to them, promising them growth on their savings based on an interest rate.

This communication could also be led by the States, through the technological means of communication that 90% of Africans are now using. Mobile technology can be used to offer financial services, as is the case today (mobile banking), and as a means of increasing education and awareness on banking and financial concepts. This education could be transmitted not only through written text messages, for those who can read, but also through voice messages spoken in the local dialect, thus enabling illiterate or less-educated people to access this knowledge.

Financial education and, above all, greater financial inclusion, could only strengthen the development capacities and profitability of local entrepreneurship, which overwhelmingly operates in the informal sector, and whose members face numerous financial and organizational management challenges.

By : Fabrice Kom Tchuenté

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