Impact Investing in Informal Enterprises

Impact investments are investments made into companies, organizations and funds with the intention to generate social and environmental impact alongside a financial return. The Global Impact Investment Network (GIIN) states that this sort of investment provides capital to address the world’s pressing challenges in sectors such as microfinance, sustainable agriculture, renewable energy, conservation and affordable and accessible basic services such as housing, healthcare and education. The aspect of this form of investment that makes it stand out from other vehicles of investment is the fact that it is aimed at generating positive impact beyond financial return. In this sense, it is a viable solution to the sustainable growth and development of micro, small and medium sized enterprises. It is a tool that can be used to provide patient capital to entrepreneurs, more so if it is blended with grants.

(Source: http://www.blog.kpmgafrica.com)

A study that was conducted in West Africa by Dalberg found that impact investments are primarily made by private equity and venture capital funds, Development Finance Institutions (DFIs), Micro Finance Institutions (MFIs), foundations and institutional investors. “Impact investing in West Africa” noted that the needs of individual enterprises varied depending on factors such as their business model, size and maturity stage as well as human resource capacity. Beyond financing needs, many enterprises require business development services in a way that enables them to develop their ideas and create well managed, financially sustainable operations.

Some of the challenges that stand in the way of achieving the goal of developing sustainable business ventures in as far as engagement with impact investing is concerned include a lack of education, skills and difficulty in accessing information among the entrepreneurs that are required to turn their ideas into bankable projects. Also, the lack of awareness of the actual implications of engaging impact investors prevents many businesses from accepting this type of capital. This is due to the fact that owners of small and medium sized enterprises fear losing control of their businesses. Further, the study noted that the lack of incentives to convert from informal to formal business structures was a hindrance for impact investors in as far as engaging the informal sector in West Africa goes. The high costs that are linked to business formalization which include licences, taxes and other operating costs discourage most informal businesses from making the transition to formality.

The report put forward some ways in which the above challenges can be mitigated for an enhanced and more proactive engagement with impact investment. These include the need for a broader range of flexible products to address the gap for businesses with smaller financing needs. This is particularly necessary for new enterprises where the entrepreneurs’ funding needs are too small for traditional debt or equity financing. In this sense, they propose angel financing or royalty-based debt with manageable levels of interest as well as supporting business development services.

The other solution highlights the need for investors to adapt their investment practices to the local climate. By being more flexible in this manner, they will be in a better position to change their investment criteria, thus opening up their business to a large number of potentially profitable deals. This will also place local entrepreneurs in a position where they can access much needed capital to enhance their business ventures. This sort of engagement will support the growth of informal businesses to formal businesses and further assist them to transition into larger private equity and traditional commercial bank investments.

Last but not least is the proposal to build networks and awareness beyond impact investors to encompass business support organisations, relevant government bodies and development partners with the intention of increasing awareness of existing definitions of impact investing. Other goals of these networks should be to increase the awareness of the benefits of venture philanthropy among grant-making organizations, increase the understanding of equity investments among business owners and focus outreach efforts towards high net worth individuals and highly-educated Africans in the diaspora.

litualex@gmail.com

Informal Economy Analyst

 

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The African Retail Market

According to the United Nations Economic Commission for Africa (UNECA), the African retail market is characterised by approximately 90% of transactions occurring through informal channels. This points to the existence of an opportunity for the increased establishment of formal retail presence to capture larger portions of this market share. Tapping into markets that are dominated by the informal economy presents formal retailers with a key to unlocking the potential of the African market in as far as leveraging the customer base presented by the population therein. However, hurdles such as the diverse consumer mix, low levels of established distribution networks, infrastructure constraints and political and economic uncertainties are some of the challenges that big formal retail chains have to contend with when setting up in-country operations.

(Source: https://thisisafrica.me)

The “African Powers Of Retailing Report 2015” published by Deloitte tracks the progress of the top African retail performers on the continent. While the top 25 retailers have a limited operational presence in Africa, operating in 21 out of 54 countries on the continent, other countries, such as Algeria, Sudan and Ethiopia, are among the top 10 countries by retail market size but have no listed African Retailer present. Nigeria is the largest retail market in Africa with a retail size of US$122.9 billion as of 2013. However, East Africa – particularly Kenya – is still being identified as the next market for major South African players. Apart from Kenya’s attractive GDP of US$56.1 billion at the time this report was published, it has 25-30% formal retail compared to 60% in South Africa.

It is worthy to note that Nigeria’s retail market is largely fragmented, with the top 6 retailers accounting for barely 2% of sales and 98% of Nigerians shopping in small, local and informal outlets. The importance of the informal economy in Africa cannot be overlooked considering the fact that small, local and informal retail transactions account for 96% in Ghana and 98% in Nigeria and Cameroon. Even in Kenya, the vast consumer base in rural areas still shops at informal outlets, which accounts for approximately 70% of retail shopping. Zimbabwe also has a fragmented retail market and is seeing a recent upsurge in small “tuck shops”.

It further states that as the African economy continues to improve and expand, it is likely that groceries will be a key driver of industry growth across the continent’s retailing industry. The approach that retail multinationals in search of developing their presence in Africa have used in a quest to set up operations in the African retail market is that of acquisitions of local companies or directly establishing their retail stores in-country. How increased access to the informal sector will play out as retailers compete for share of wallet beyond the main urban centres remains to be seen.

Given the above statistics, an avenue which would be worth considering for formal retail multinationals is that of incorporating an informal market operational strategy into their business models. Developing deliberate linkages with this sector of the economy will be a huge game changer and bolster business for both sides of the equation.

litualex@gmail.com

Informal Economy Analyst

 

Lessons from Hernando De Soto on the Informal Economy

Hernando De Soto’s Theory on the informal economy looks at the reason as to why capitalism is a system that cannot work in developing countries. The theory explains why capitalism has succeeded in particular western countries and failed in other parts of the world. As he aptly puts it, the major stumbling block that keeps the rest of the world from benefiting from capitalism is its inability to produce capital.

(Source: https://images-na.ssl-images-amazon.com)

He further adds that in these areas where poverty is prevalent, most of the poor possess the necessary assets to produce capital. The problem in place is that these resources are held in defective forms in terms of a lack of proper documentation, a lack of property rights and basically no form of formal representation hence the reason why they cannot be turned into capital. In this sense, these assets can only be traded in informal circles.

Further, seeing as the broader definition of the informal economy encompasses unregulated economic activities in an environment in which similar ones are regulated, businesses in the informal economy often feel comfortable operating outside the official government regulatory framework. This makes them susceptible to a myriad of risks from which they cannot gain legal protection.

According to De Soto, a country with any proportion of informal economy will never have reliable macroeconomic figures. This is due to the fact that informal economy systems lead to a strong preference of using cash while carrying out transactions. It gives birth to a situation whereby the influence of informal activities on an economy can only be measured by indirect means with a long information delay. This is true in as far as getting data on the informal economy goes. A good example is that of the Micro Small and Medium Sized Enterprises 2016 Survey by the Kenya National Bureau of Statistics which is an estimated projection of the informal economic space in the country. It was compiled using official data that was available on the sector, leaving out a lot of small and micro businesses in their analysis.

Strategic efforts aimed at strengthening informal businesses in a way that they gradually grow from micro, small and medium enterprises into formidable formal enterprises should focus on fixing the systemic legal and policy issues that force these businesses to operate outside the legal frameworks. By doing this, we will be building a society where wealth creation is an aspect that is achieved and felt across the different levels of the socio-economic demographic.

In an interview with McKinsey & Company, a management consulting firm, De Soto demonstrates the relationship between the informal economy and poverty in the following words, “It is very simple if you are poor in a Third World country. If you don’t make an income in the first month, you are dead in the second month. So, it is very hard to be unemployed in a Third World country, because life takes place on another level. The sign of progress that I would like to see is that the body politic basically recognizes that the poor are an enterprising poor. They are not the problem, but the solution”

litualex@gmail.com

Informal Economy Analyst