East Africa’s Informal Sector Is Growing: Who’s Investing In It, And Why

By Staff Published: January 1, 2017, 6:12 pm
East Africa's informal sectorPhoto: Gates Foundation/Flickr, CC BY-NC-ND/theconversation.com

Along with the dramatic population growth of the East African Community, its informal sector is growing, and now accounts for up to 90 percent of new jobs.

The East African Community (EAC) is an intergovernmental organisation of Kenya, Uganda, Tanzania, Burundi and Rwanda.

Operating off the grid (translation: not paying taxes) informal-sector employers and employees run the risk of punishment, fines, limited protection from police or contract enforcement, and lack of coverage from pension or other social support services.

But companies that can get services to the millions of consumers who use informal services are not only poised to make money for themselves — they also play a large role in the overall growth and development of the economies of the EAC.

From The Exchange. Story by Catherine Mandler, senior analyst at Statera Capital, and David L. Ross, managing director of Statera Capital and U.S. ambassador to the Open University of Tanzania.

Due to its large population in their productive years, Tanzania has the largest informal sector with approximately 20.1 million people employed or 77 percent of its labor force. On percentage terms Rwanda has the largest informal sector measured at just over 92 percent of total employment followed by Burundi with just under 92 percent. Uganda has the lowest informal sector employment in percentage terms at 70 percent.

How does the EAC compare to other regions of the world in the size of the informal sector?

For example, the informal sector of India is estimated to be 83 percent of total employment whereas developed nations in Western Europe and North America typically have less than 10 percent of the workforce in informal sector employment.

How much does the informal sector contribute to the economies of the EAC?

Our research suggests that the informal sector contributes 30-to-40-percent of the net GDP through agriculture, wholesale trade, and small retail services. This is lower than the sub-Saharan African average of 42 percent of GDP from the informal sector.

Whereas growth is often planned and controlled in the formal-sector jobs in banks, government, manufacturing, trade, or services, the pace of job growth in the informal sector is rampant with thousands of new young hustlers and hawkers starting fresh each month.

Working in the informal sector is typically a combination of skills and choices.

A lack of skills in literacy, math, and accounting are usually at the root of informal employment. As businesses mature, informality is a deliberate choice based upon challenges in administrative red tape, tax burdens, licensing requirements, corruption, safety requirements, and other challenges which add to end costs and make firms less competitive. Consumers of informal sector businesses support the continuation of the informal sector by virtue of their spending in the sector.

The government loses as it struggles to identify ways to collect tax on informal enterprises and employees. Estimates suggest that taxing informal sector sources can increase overall tax collections as much as 7 percent in Kenya.

The informal sector is not new in the EAC. It is a longstanding part of the economy with its own norms, methods and business customs. It will take time to reach the goals of formalization efforts.

The informal sector is not going away anytime soon. Where there are challenges or deficits, business and investment opportunities often emerge.

The following is a brief summary of a few market opportunities and investment ideas that could play upon the large and growing informal sector in East Africa.

Mobile money

By now most everyone in finance in East Africa has heard of and used M-Pesa which provides transactional services via mobile phone without the need for a bank account and is heavily used by the informal sector to transfer money and pay bills.

Microfinance

In the past few years branchless microfinance has emerged as a reliable and rapid funding source for the informal sector under brand names such as M-Pawa in Tanzania run by a collaboration between Vodacom and CBA Bank and Jumo Finance providing back-end mobile savings and loans through Tigo and other mobile providers throughout Sub-Saharan Africa.

Informal sector distributor

Getting goods and services to small shops in the urban informal sector has been a challenge for many large consumer goods manufacturers. This has been the focus of two companies in Kenya, Twiga Foods (which got a head start in distributing food and produce) and Sokowatch which has developed an innovative means to get a diverse set of fast-moving consumer goods from global manufacturers to urban shops with aggressive expansion plans throughout the region. SolarKiosk, a player in the rural markets throughout East Africa has taken the approach of running connected town centers surrounding a wholly owned electronics and consumer goods shop that would make the founders of Walmart salivate for the long-term growth prospects.
This is but a small list of several potential and emerging types of companies investing into and providing services to the informal sector in the EAC.

Read more at The Exchange.

 

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