Connecting Informal Economy in Africa with formal systems

4 ways to bring Africa’s informal sector under the formal system

It is a general perception that the informal economy mainly relates to poverty, lack of employment and illiteracy, etc. However, it remains an indispensable part of a region’s growth and development. In Africa, the informal economy plays a key role in employment opportunities, farm produce, and GDP growth.   

According to International Labour Organization, the informal economy’s average GDP share is 41% in Sub-Saharan Africa. It is an even bigger employer, representing 66% of total job opportunities in Sub-Saharan Africa. Considering the pivotal role that the informal economy plays, it becomes essential to provide them with equal opportunities. The opportunities in terms of:

  1. Financial inclusion
  2. Access and usage of formal tools
  3. Financial literacy
  4. Jobs in multiple industries
  5. Better infrastructure and more. 

The one way that could bring the informal sector equal opportunities is to get it on the books. The good news is that various businesses and organizations are using technologies to build products and solutions to reach the excluded population. We, at Wakandi, bringing digital transformation to the informal economy with the help of technology. Read more on how we aim to do that.     

How to bring Africa’s informal sector under the formal system?

The informal economy is an integral part of Africa’s growth and development. It comprises farmers, young workers, self-employed people, small and medium enterprises. Thus, it is essential to bring the activities of the informal sector under formal regulations and taxations. Let us look at 4 crucial ways that can help bring Africa’s informal sector under the formal system. 

1. Focus on people’s needs and requirements

You need to listen to the customers and focus on their requirements. It’s the basic rule for every organization in the market. Bringing the informal economy under the formal system is about offering relevant solutions that address people’s needs and wants. Addressing their requirements can help you solve their challenges and improving their daily operations. Clinton Development Initiative (CDI) and Visa partnered to offer a digital payment system for farmers in Rwanda. CDI aimed to help improve farmers’ financial security and empower them economically. Their work would help farmers connect to markets and build stronger links with various stakeholders in the agricultural sector.  

2. Build digital ecosystems

The informal sector in Sub-Sharan Africa is highly cash-driven. Despite the rapid transformation in payments, 90% of retail payments are done in cash. Mobile technologies can play a crucial role in promoting digital payments and support newer business models by banks and tech startups. People would be able to make payments, get loans and other credit facilities through their mobile devices. Our Credit Association Management System (CAMS) is one great example of how digital systems can help people in the informal sector. 

CAMS is a unique digital system built for informal financial groups (IFGs) in Africa. The system can help them deposit monthly contributions, apply for loans, manage their finances and various admin-related tasks through their devices. It can come in really handy in this COVID-19 situation where people cannot get out of their homes. 

3. Promote awareness and build trust

Awareness and trust are amongst the major hurdles banks face in many African countries. According to many surveys and reports, trust remains a key barrier for many Africans for not using banking services. No innovative platform or service is helpful if the people don’t trust in using them. 

Spreading awareness and training around digital systems can help the informal sector attract to formal systems. People should feel safe and secure while using digital products offered by many banks and fintech companies. It will also help build trust amongst the societies which many banks consider as one of their biggest challenges.   

4. Collaboration of formal and informal enterprises

As we move to a more digitally advanced world, collaboration becomes a key component for inclusive growth. Banks must collaborate with fintechs and informal enterprises to look for deeper market opportunities. Banks can offer larger credit amounts for longer durations while government authorities can deliver services to every corner. SMEs and farmers can connect with the formal economy to drive business scale, innovation and growth. 

Conclusion

While the informal economy may never eliminate, we can ensure inclusive growth and opportunities with the power of innovation. It will help millions of people get rid of cash-only systems and explore new-age digital systems, making them ready for the future.

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