A demand side view of informality and financial inclusion

EXECUTIVE SUMMARY
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SMMEs make up a significant portion of African economies. More than 60 per cent of the world’s employed population is in the informal sector. A larger proportion of the employed population (85.8%) in Africa work in the informal sector. However, these businesses, particularly those with lower levels of formality, face significant challenges that inhibit their development and potential contribution to the growth of the national economy.

The 2017 After Access Informal Business Survey shows that about seven in ten of informal businesses in the nine African surveyed countries trade or sell goods and a third provide services. The majority of informal businesses (54%) are owned by women, 41% by men and the remaining 5% are a joint venture between men and women. Nigeria (59%), Mozambique (50%) and Ghana (58%) are the three countries with the largest informal businesses owned by women.

While the informal sector seems to be the main contributor of the much-needed income for marginalised women in Kenya, Ghana, Mozambique and Nigeria, women are worse off in Rwanda and Tanzania. More than 60% of informal businesses in Rwanda and Tanzania are run and owned by men – a result that shows that both the informal and formal sectors in these countries are controlled by males. South Africa shares characteristics with Rwanda and Tanzania. Ownership of the informal sector in South Africa is still controlled by men. More than half (57%) of informal businesses in South Africa are owned by men, compared to only 30% owned by women.

Despite the informal sector being a major part of the economy in most African countries and providing income and employment for those marginalised from the formal economy, the sector has been forgotten by policymakers and is often financially excluded. Lack of funding opportunities for this sector has resulted in stagnation and the sector’s inability to formalise. The 2017 After Access Informal Business Survey shows that the informal economy is a major source of employment and income-generating enterprise for the majority who would otherwise be unemployed. The majority of those working in the informal sector in South Africa (70%) and in Mozambique (56%) have a primary education certificate, while 61% in Rwanda and 60% in Tanzania have no formal education.
In most developed countries, financial institutions are increasing their outreach and providing financial services to this marginalised sector. However, in Africa, informal businesses are excluded. Most start-ups use their own savings, as well as money from family and friends, to finance their businesses. The majority of informal enterprises in the nine surveyed countries are self-funded (83%), while 11% are supported by family members and 2% obtain funding from micro financial institutions. Access to finance in the formal banking sector by informal sector is minimal and close to non-existent (0.2%). The picture is similar across all the surveyed countries, with most of informal business start-up capital financed by own savings and the banking sector providing an insignificant amount of support.
Access to formal financial services by the informal sector is hampered by lack of credit history or bad credit history by the owner, inadequate collateral, a lack of skills and the knowledge to produce financial statements, and poor business models and plans. Most informal enterprises do not separate business finances from personal finances, and do not keep financial records. More than 60% of informal enterprises in all countries do not keep financial records and more than half in all countries except Kenya do not separate personal income from business income.

Financial exclusion is more acute in developing countries where more than 70% of individuals and small enterprises are unbanked. The 2017 RIA After Access informal survey shows that 76% of informal businesses in the nine surveyed countries do not have a bank account, 18% use the owner’s bank account and only 6% have a dedicated business account (see Table 5). Only 3% of informal businesses reported having had a loan from a bank and only 4% have a credit card.

Financial technologies (fintech) have the potential to disrupt the status quo and enhance financial inclusion in developing countries. Fintech’s ability to reduce information asymmetries and transactional costs, and foster wide outreach, makes it a potent weapon for fostering financial inclusion. Other than mobile money services, the use of fintech platforms such as those that allow for crowdfunding is still very low in Africa. Mobile money has been successful in East African countries and more specifically in Kenya, where 68% of informal businesses use mobile money services, followed by Rwanda (43%), Ghana (41%), and Uganda and Senegal at 36%. Mobile money has certainly fostered financial inclusion in these countries. The success of mobile money in Kenya has help the country to achieve higher levels of financial inclusion, with about seven in ten of Kenyan informal entrepreneurs having access to financial services either through mobile money services (68%) or banking services (28%), followed by South Africa, with majority using formal banking services (53%). In Ghana and Rwanda, 55% and 54% of informal businesses respectively are financially included. Financial inclusion remains low in Nigeria (24%), Tanzania (22%) and Mozambique (20%).

Access and use of ICTs, more specifically the Internet, which provides the greater network effect, is very low in Africa. The use of the Internet for business purposes in the surveyed countries is as low as 7% on average. South Africa, which has the highest individual Internet use among the 2017 After Access countries, at 53%, also has the highest Internet use by informal enterprises (24%), followed by Senegal (20%). Internet use by informal enterprises in Ghana, Mozambique and Nigeria is slightly higher than the overall average, at 8% and 7% respectively but far lower in Kenya (4%) and Uganda (4%). Rwanda, one of the poorest countries among the surveyed countries, with the lowest household and individual Internet use, has the lowest Internet use among informal entrepreneurs, with only 1% of them using the Internet.

The low levels of Internet use among informal businesses can be attributed to the lack of Internet-enabled devices. Only 1% of informal businesses in Rwanda have fixed-line connections and none of the surveyed businesses had a working computer. More than 90% of informal businesses in Ghana (96%), Kenya (96%), Mozambique (99%), Nigeria (98%), Tanzania (97%) and Uganda (97%) do not have a working computer. Computer ownership is only high in South Africa, where 20% of informal businesses own a computer. There is evidence of a lack of awareness of the Internet potential among most African informal entrepreneurs. A significant percentage of those who do not use the Internet, 85% in Kenya, 79% in Senegal, 73% in Ghana and 68% in Nigeria, gave a negative assessment of the need for the Internet in their businesses.
More than half (56%) of those who work in the informal sector are the youth as compared to adults (42%). The survey also found that 2% of informal businesses are managed by children. Senegal and Nigeria are the two countries with the highest number of children working in the informal economy, at 2% each, followed by Ghana at 1%. Kenya, Nigeria and Senegal have the highest numbers of the youth in the informal sector, while in South Africa and Uganda, the informal economy is comprised largely of adults.

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