Is there value out of the informal sector? Small scale businesses have the potential to awaken the economy, and be the lifesaver to an otherwise sinking ship
Small scale businesses have the potential to awaken the economy, and be the lifesaver to an otherwise sinking ship

Small scale businesses have the potential to awaken the economy, and be the lifesaver to an otherwise sinking ship

Linda Tsarwe Business Correspondent
The market is divided on whether or not the economy will achieve its forecast growth in 2014. Government is estimating a 6,1 percent growth, a number that has been met with high scepticism by many.  
Already, into the year, the economy has shown signs of weakness, as judged by recent reports about the closure of a number of companies that are finding it difficult to stay afloat under the current economic hardships.

As companies under-perform due to lack of capital, it is highly probable that more closures may characterise the year.
Significant capital injection is of the essence, if medium to long term growth can be realised.

However, in a quest to find an immediate solution to initiate the economic recovery process, there is debate on how the informal sector could actually champion that process.

Of course this has been met with discord, as not all believe that the sector is capable of bringing significant value to the table.
For years now, the banking sector has always claimed that it houses fewer deposits relative to money flowing through the informal economy.

As at 31 October 2013, the banking sector had deposits amounting to US$3,951billion against a Gross Domestic Product of US$13.1billion. This is possible justification that the greater part of money generated in the country is not flowing through the formal banking channels.

Although it does not follow that the gap represents funds in the informal sector, there is possibly a higher proportion of it that is.
If true, then surely the informal and small scale sectors of the economy deserve the hyped attention.

Banks have been refocusing their marketing strategy to woo the so called ‘unbanked’, with some level of success. Government, on the other hand, have been calling for support towards Small to Medium scale Enterprises (SMEs), in acknowledgement of the potential benefits it can contribute to the economy.

In addition, recent news reported that the insurance sector will be focusing on offering their products to the informal sector. Traditionally, they would target the formal companies, especially in the non-life insurance space.

However, the business environment has shifted and fortunes seem to be fading for many large companies. Insurance business has been depressed due to dwindling economy, and a change of strategy would be required in such times.

Although not immune to the infections of a deteriorating economy, small value businesses seem to be more resilient as compared to the bigger corporates mainly because the former are not as capital demanding as the latter. Generally, the closure of bigger companies has ignited an interest towards the previously ignored smaller players.

In fact, bigger companies such as Econet have already made moves to tap into such markets, through the introduction of Ecocash, two years ago.

The product has been accepted across all divides, but most importantly, by the informal traders as well as the SMEs.
The platform has managed to generate more turnover than what some banks have achieved over the same period. Late last year, Ecocash advanced its product offering from being a payment and money transfer platform to include a savings account, Ecocash Save where one can save from just a dollar.

These are small values that have a potential to reach millions, and reinstate the culture of saving that had been eroded mainly due to low incomes.

The inspiration for Econet came out from the World Bank Survey of May 2013 which showed that 72 percent of SME business owners mainly save at home and through informal mechanisms.

Econet is also planning on reintroducing their insurance product, through Ecocash.
In wholesome, the package will have the effect of getting the informal traders, who are usually not keen on banking their money, to be slowly included into formal financial services.

This means more transactions over the mobile money platform, which will increase revenue for Government which introduced US$0,05 tax on mobile money transactions.

However, although there is a strong case for the informal sector, there are peculiar risk factors that justified why most banks have been reluctant to extend support.

There is fear that funds will be mismanaged mainly due to financial indiscipline and lack of expertise. Many informal traders have run down their business, due to mismanagement.

Some do not have the requisite business know how and, out of ignorance, fail to make the right decisions for business continuity.
There is also a belief that many informal traders have a bad credit culture, and extending loans to such a group is exposing oneself to high default risk.

The Minister of Indigenisation once commented on how a number of local businesses have benefited from credit earmarked for Indigenisation, but has in turn not been honourable enough to repay their loans. If this is the case, then the attitude of informal traders is destructive.

Ideally those funds should help revamp small businesses, following which money should be repaid gradually and support other would be smaller business people.

However, with a mentality of ‘free lunch’ among the borrowers, the endeavour becomes meaningless as it benefits only a few individuals.
Achieving 6,1 percent growth is going to be a mammoth task, and chances of achieving it are quite slim.

However, notwithstanding the risk, the informal businesses have potentially high benefits to support economic growth to some extent.
These can be through contribution to exports, generating employment among many. Bigger companies do not look like they will get out of the woods     soon.

Recovery will take time, even in the event that capital is injected. Small scale businesses have the potential to awaken the economy, and be the lifesaver to any otherwise sinking ship.

The writer is primarily responsible for this article and certifies that the opinion on the subject or any other views expressed herein reflects the writer’s personal views. The writer has taken all reasonable steps to ensure that the information in the article is correct and no liability is accepted for any loss arising on reliance on it. All opinions and estimates expressed in this report are (unless otherwise indicated) entirely those of the writer. For feedback and comments email — [email protected]

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