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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Labour Exploitation

In a research article published in the Arts and Social Sciences Journal entitled Economic Informal Sector and the Perspective of Informal Workers in India, the authors explore various dynamics that characterise the informal economy. Some of these include aspects covering job security, social security, rural urban migration, child labour, and exploitation of working women. They further point out a common phenomenon that is common with the informal economy whereby the lack of reliable statistics on the size, distribution and economic contribution of the informal sector has for long been a major constraint in providing a realistic understanding of its significance as well as working conditions in the sector. This has often led to its neglect in development planning.

(Source: http://www.worldpolicy.org/sites/default/files)

Most of those engaged in informal activities are mainly the underprivileged in society and opt into the sector as of an alternative source of employment and income, in a quest to better their livelihoods. The authors go on to say that some of the reasons as to why people choose to run businesses in the informal sector vary from the lack of a basic level of education and skill sets that enable them to get jobs in the formal sector, to the prevalence of poverty in the communities in which they exist. These factors, coupled with those such as rural urban migration that is driven by the quest for better living conditions and job opportunities, are drivers for the rapid growth of informal sector businesses in third world countries. The precarious situation that most of these individuals end up being caught up in involve working conditions that leave them vulnerable to various forms of abuse and exploitation.

According to a briefing paper by the Overseas Development Institute, the informal sector has its own obstacles, particularly for those working illegally or without registration. Some of these include inadequate access to credit, bureaucratic licensing requirements and regulatory restrictions, as well as overzealous policing which entails the removal of informal vendors, demolishing kiosks, confiscating stock and denying licences. In their view, informal work is a mixed blessing depending on context. On one hand it can be seen to offer an escape route from poverty in areas where informality is the norm due to the high demand for goods and services within such a community. On the other hand, instances where informal workers are more isolated exposes them to various systematic legal obstacles. This ideology is supported by the fact that urban areas differ in their economic diversity and their ability to respond to higher concentrations of consumers.

They argue that costs are likely to be higher in cities that are experiencing economic growth, because growth entails higher monetisation of basic services and other non-food items such as housing, transport, and informal payments to maintain livelihoods. While costs of living are higher in rapidly-growing cities, there may also be more income-earning opportunities. However, it is not necessarily clear that more opportunities translate into better working conditions or remuneration for the poor. Further, the flow of people into cities can be destabilising and push urban wages down. As a result, a growing number of migrants live in the informal sector, confined to unskilled, low-paid and low-security work.

It is clear that the informal sector is grappling with the issue of the wellbeing of workers that are engaged in it. Most importantly, giving a voice to the plight of those that are engaged in the sector with a view to actively engage governments and organizations in conversations on how to best address this challenge, is a positive step forward in seeking a credible solution to the problem.

litualex@gmail.com

Informal Economy Analyst

The Cost Of Informality

In a quest to formalise informal businesses, there are certain factors that stand in the way of this goal. It is clear that a good number of informal enterprises operate the way they do due to the underlying socio-economic background in which they find themselves working. For example, most of these are formed in areas where poverty is prevalent. In a bid to make these businesses formalise and hence become viable and profitable entities, some of these factors need to be taken into consideration as they can be used as catalysts or incentives to formalisation.

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The International Labour Organization points out the fact that informality inhibits investment in bigger business ventures because they lack the necessary capacity and size to fully exploit economies of scale. One factor that drives this notion is their low levels of productivity due to poor access to skilled labour. However, this is not the case for larger formal enterprises for they are in a better financial position to access high-skilled labour and can hence fully exploit economies of scale which enhances their profitability.

The lack of secure property rights especially for micro and small enterprises deprives them access to credit and capital. This is a huge hindrance whenever they try to expand their business operations in the sense that their businesses do not possess the legal title deeds to the physical residences on which they conduct business. In this sense, their businesses cannot be used as collateral whenever they try to get loans from financial institutions. This mode of operation also makes it difficult for them to access legal and judicial systems to enforce contracts.  This aspect for example impedes them whenever they try to participate in the tendering processes of bigger companies or even government business.

Another obstacle for informal businesses is that most of them lack social protection. The fact that a vast majority of these are not registered units puts them in a situation where they are not recognised by governments under which they operate and hence fall outside of the official regulation network. This leaves them vulnerable to exploitation for they are not protected by social and labour legislation. Corrupt government officials often demand bribes to ensure that they remain in business, which is an unnecessary expense in the long run.

What comes out clearly is that some of the mitigation strategies that need to be embraced and implemented revolve around issues that deal with capacity development especially upskilling as this is a crucial requirement for boosting the productivity of informal businesses. Also, the development and harmonization of informal organisational structures should be done in a way that enables them to own the working spaces under which they operate, be it on a collective or individual basis.  More importantly, the improvement of conditions of employment in the sector in as far as occupational safety and health policies are concerned is another area that needs to be addressed. This includes looking into the promotion of labour rights, the extension of social protection to reach the most vulnerable and a favourable regulatory environment that discourages corruption.

In a bid to encourage formalisation, the above factors need to be strongly considered. The most viable way to tackle the problem and move forward would be to target top tier small and micro businesses in each of the sub sectors in the informal economy and engage these in a pilot programme. This  would then be used to precisely map out the challenges faced on the path to formalisation with the aim of developing and implementing tailormade strategies for the different business sizes in each sub sector.

litualex@gmail.com

Informal Economy Analyst.

 

 

An Overview of the Informal Sector

The informal economy is characterised as micro and small businesses whose main reason for being established is that they offer an escape route from the tough economic conditions under which the entrepreneurs live. During the past decade, the sector’s growth has mainly been propelled by the shrinking availability of formal employment opportunities. This limited access to formal employment causes most of them to venture into alternative forms of self-employment as a means to making ends meet. As a result, there has been a change in the way people perceive the informal as being traditionally one that was the preserve of those who had attained a basic level of education. There has been a gradual shift in its perception whereby it was fondly referred to as the ‘Jua Kali’ sector, towards one which presents itself as an option for those locked out of formal employment opportunities.

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The Micro Small and Medium sized Enterprises (MSME) Survey 2016, a report released by the Kenya National Bureau of Statistics established that there were about 1.56 million licensed MSMEs and 5.85 million unlicensed businesses. The findings of the survey also show that total number of persons engaged in the sector was approximately 14.9 million Kenyans. Further, the Kenya Economic Survey 2017 indicates that the number of new jobs created in the economy was 832.9 thousand. Of these, 85.6 thousand were in the formal sector while 747.3 thousand were in the informal sector. The share of jobs in the informal sector represents a 5.9 percent growth from 83 percent in the previous year to 89.7 percent, or 13.3 million people. The problem is that employment in the informal sector is characterised by numerous low quality jobs.

Some of the challenges that informal businesses face include low capacity in as far as financial and technical skills are concerned. This makes it difficult for them to access financial collateral from financing institutions and produce materials that are not standardised. Poor and substandard physical working environments as well as inadequate protective gear means that they are less advantaged when it comes to attracting customers to their establishments and are exposed to health hazards. Limited access to market opportunities is another hurdle that those engaged in informal businesses have to contend with.

The Rockerfeller Foundation puts the number of informal workers who live in extreme poverty around the world at 700 million people, contributing to their vulnerability to poor health. Most informal workers have few resources, which makes accessing health care a challenge as it requires leaving work, which reduces their income and adds to health care expenses. As alluded to above, some of the common problems that Informal workers face include poor working conditions which puts them at a high risk of getting injuries. Most employees in informal establishments have no sick time which accentuates their job insecurity, and a majority of them do not have health or social protection.

Another important element of the informal economy is small scale farming. There needs to be a more proactive approach geared towards making it a formidable employer as opportunities for growth in this area are immense. Making farming inputs competitively cheaper, as well as capacity development through the provision of access to technical services as is in the case of agricultural extension officers will go a long way in ensuring that small scale farmers attain higher quality yields. Another area that would be worth considering is that of supporting small holder out-grower enterprises that are in a dependent, managed relationship with an exporter. These include farmers who do not own or control the land they farm or the commodity they produce as they produce relatively small volumes on relatively small plots of land. A good example in this case is that of French beans farmers who sell their produce to horticultural export companies. This move will go a long way in improving product quality that will enhance the competitiveness of Kenyan produce in the export markets thus ensuring a sustainable and equitable growth in that sector.

 

An angle that clearly presents itself as far as the rapid growth of the informal economy is concerned is that of a focus on making the sector a formidable employer by raising the quality of its employment. This can be achieved by changing the societal stereotypes whereby students who pursue vocational training are seen to do so as a second option after failing to secure university admission. The role that tertiary institutions such as polytechnics play requires a keener rethinking in as far as their significance to the provision of a strategically skilled workforce for our budding industries in the informal economy goes. Also, training in financial skills is another key factor in building up these businesses in a way that they will be well equipped to manage their growth. By developing a culture of documenting financial dealings, informal businesses will be better placed to access loans and grants from financial institutions. Further, more can be done to make it easier for informal workers to access affordable healthcare.

There is increased recognition that much of the informal economy today is linked to the formal economy and contributes to the overall economy; and that supporting the working poor in the informal economy is a key pathway to reducing poverty and inequality. To maintain sustainable growth in this sector, there needs to be flexibility in the way government operates so as to accommodate and support a hugely untapped taxable avenue. Key issues that would have to be looked into revolve around the formalization and recognition of their business operations. That being said, given the proper support and plan, the informal sector in our economy will provide an avenue to the growth and development of indigenous industries.

 

litualex@gmail.com

Informal Economy Analyst.

Working Poverty

During the past decade, there has been a rise in the number of people pursuing alternate means to employment as a means of raising their living standards. This can be largely be attributed to the high levels of unemployment as well as the rising number of people that are engaged in poor quality jobs. The informal sector creates poor quality jobs and is an avenue for a large percentage of the population to find an extra source of income.

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In the light of this factor, the International Labour Organisation (ILO) has released the World Employment Social Outlook 2017 report. It focuses on trends in job quality, paying particular attention to working poverty and vulnerable employment. What come out clearly is the contrast in the growth of the regional economies over the past decade vis-à-vis the employment and poverty trends. The report states that Sub-Saharan Africa continues to report the highest rate of youth working poverty globally, at almost 70 per cent in 2016, while facing rapid growth in the number of youth in the labour force.

It further states that Sub-Saharan Africa’s unemployment rate is forecast to be 7.2 per cent in 2017, unchanged from 2016. While the unemployment rate remains stable, the number of unemployed is expected to increase from 28 million in 2016 to 29 million in 2017 due to the region’s strong labour force growth. Poor quality employment, rather than unemployment, remains the main labour market challenge in the region. With this in mind, the lack of productive opportunities for youth and adults alike meant that 247 million people were in vulnerable employment in 2016, equivalent to around 68 per cent of all those with jobs.

Statistics from the report show that an additional 12.6 million youth in the region will enter the labour force over the next four years. Due to growth in the working-age population, the number of people in vulnerable forms of employment is expected to increase by 14.6 million. Further, the outlook is particularly challenging for women, who are more likely to be in vulnerable employment, largely as contributing family workers. The share of female workers categorized as contributing family workers, at 30.6 per cent, is more than twice the rate for their male counterparts, at 14.0 per cent, with women additionally over-represented in informal non-agricultural employment.

The issue of vulnerable employment is linked to that of working poverty. The report adds that Sub-Saharan Africa continues to be characterized by elevated rates of working poverty, with 33.6 per cent of all employed people living in extreme poverty in 2016 – i.e. on less than US$1.90 per day – and an additional 30.1 per cent in moderate poverty – i.e. between US$1.90 and US$3.10 per day. This corresponds to over 230 million people in sub-Saharan Africa living in either extreme or moderate poverty.

These numbers are a strong indicator as to why the informal economy continues to consistently grow in the region. The downside to having a large informal economy is that those that are involved in the micro businesses cannot afford to access proper medical attention as well as other social welfare benefits. It would be prudent for policy and decision makers to look into and implement strategies that grow the capacity of informal businesses to enable them to become profitable entities. This will reduce the high levels of poverty by providing sustainable incomes to a vast majority of households.

litualex@gmail.com 

Informal Economy Analyst 

Improvements to aim for in 2017

(Source: http://www.africa.com/wp-content/uploads/2016/05/Female-Vendor.jpg )

Informal businesses have often been perceived in a negative light. They are seen to be high risk ventures, a nuisance to formal enterprises and government as well as being of little assistance to the growth and development agenda of most nations. This is due to the fact that most of them have haphazard modes of operation and a majority are not registered and hence do not pay taxes. This sector has however registered rapid growth over recent years. In Kenya for example about 82% of those employed are engaged in informal businesses. The high levels of poverty has exacerbated this growth as a majority of people seek to make a living where jobs are hard to come by.

There are a wide range of issues that, if addressed, will see most of these businesses develop to a level where they will be even more positive contributors to the economy. A place to start would be offering financial literacy programs for those that operate these businesses. Due to the fact that a majority of them do not keep records of their day to day operations, it becomes difficult for financial institutions to offer any assistance because there is no clear basis from which performance can be tracked. The importance of basic skills like book keeping needs to be emphasized when developing capacity building programs for the sector.

Access to health facilities for informal workers is another area that can improved. In my experience while visiting various informal businesses around the country, most business operators have had to leave their work unattended as they try to seek medical attention whenever they fall sick. Most work under deplorable conditions without the required protective gear. The Kenyan government through the National Hospital Insurance Fund (NHIF) has launched a program that seeks to increase the number of informal workers who can access quality healthcare. The program aims to recruit 12 million Kenyans under a cover that sees them pay a monthly contribution of between Kshs 150 to Kshs 500 depending on their income status. This is a step in the right direction that needs to be replicated.

While interacting with businesses in the sector, a major hurdle that has consistently come up is the difficulty they face when trying to market their goods and services. Most do not have the skills required to widen their scope of customers. This is an area that should be considered by those developing capacity building programs for the sector. Another barrier has been the allocation of spaces they are given to operate their businesses. Most of these are in areas that potential customers cannot easily access and are often unattended to by those that collect revenue from them in terms of garbage collection. This considerably compromises the ability of the informal sector to attract clients and customers to their business.

Although information on those engaged in the informal economy is hard to come by, my experience indicates that the sector is ready for engagement; it is critical we tap into this goodwill. However, note that the Kenya National Bureau of Statistics (KNBS) released the Micro Small and Medium Enterprise survey in 2016. In as much as this is a move to be applauded, most of the players in the informal sector that I interviewed over the past few months feel that the report was inconclusive as it excluded a huge percentage of micro businesses. A proper census will need to be carried out to provide a clearer picture of where the sector stands. This will go a long way in better informing policy makers and those that would like to engage with the sector.

In conclusion, these interventions can be best leveraged through bodies such as the Micro and Small Enterprises Authority (MSEA), who have established a credible network around the country as well as various organizations and associations that work with the informal sector at the county level.

litualex@gmail.com

Informal Economy Analyst