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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Capacity Building for Informal Business

Efforts directed towards capacity building of micro, small and medium enterprises are yet to be well structured in a manner that ensures their sustainable growth. With their contribution to new jobs in Kenya standing at 90% and accounting for 35% of the country’s GDP, there is a gap that needs to be filled which will enhance their productivity. Most businesses in the informal sector continue facing steep hurdles that undermine their performance.

(Source: http://www.corporate-digest.com/images/news/)

The European Commission’s Guide for Training in SMEs puts forward actions that will enhance the performance of businesses in the sector. Some of the interventions consist of factors that ensure the success of a business from which valuable lessons can be drawn. These include anticipation of skills, assessment, adoption of a collective approach, exploitation of opportunities as well as providing guidance and support.

The anticipation of skills and competence related to the needs of the market is crucial in order for a business to remain relevant and up to date in a rapidly changing economy. A good example is that of businesses having the skills necessary to work with new technologies that will increase their output and make them more productive. This factor enhances the longevity of a business in a way that it constantly adapts to the needs of clients.

In the area of assessment, it is important for businesses to constantly carry out a needs assessment. This will put them in a better position when it comes to assessing their requirements, and thus assist in the setting of objectives that facilitate the planning of their operations. More importantly, the evaluation and modification of the results regarding the chosen objectives is a crucial element of developing a permanent culture of assessment. This process enables them to become dynamic in the markets in which they operate.

A collective approach is important when engaging with the informal sector. Public institutions in the field of training, professional bodies as well as social partners such as development finance institutions need to be actively involved in the development and execution of strategies that are aimed at strengthening the sector. This collective investment will provide a solid foundation for building and qualitatively growing this sector of the economy.

The collaborative effort mentioned above should be governed by the principle of guidance and accompaniment. This approach points towards the mentoring of informal businesses in a way that helps them to overcome the obstacles that they face. This can be done by assisting them to put in place and strengthen internal organisational structures such as having detailed and updated financial records. Businesses in this sector of the economy can also learn a lot from each other by sharing practices that make them more productive.

Last but not least is that informal businesses need to be facilitated in a way that will enable them to maximise the opportunities within their field of operation. In the light of this, the right information such as local and regional market opportunities need to be availed to them. This has to be coupled with policies that facilitate their access to these opportunities. When correctly equipped and facilitated, informal businesses will grow due to these new economic and social opportunities.

 

litualex@gmail.com

Informal Economy Analyst

 

 

 

 

Economic Survey 2017

The Kenya National Bureau of Statistics (KNBS) released the Economic Survey 2017 which presents an analysis of the key sectors in the Kenyan economy. In relation to the informal economy, the survey only focused on the employment angle of the sector. The rest of data on the informal sector was extracted from the MSME 2016 Survey. Getting comprehensive up to date data on the informal economy is still a big challenge.

(Source: http://www.procurementandlogisticsonline.com/wp-content/uploads/2017/04/IMG_20170419_121944)

The 2017 survey indicates that the total 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 created in the informal sector. The share of new jobs created in the informal economy represents a 5.9 per cent growth from 83 per cent to 89.7 per cent or 13.3 million people. Wholesale and retail trade, hotels and restaurants industries continued to absorb the highest number of employees, accounting for 59.7 per cent of total employment, while the manufacturing industry had a share of 20.4 per cent in informal sector employment.

A continual growth of the informal sector can be attributed to factors such as the shrinking availability of formal employment opportunities as well as the resilience of the Kenyan citizens. Informal sector growth in the country is however a problem due to the fact that most jobs in the sector are of substandard quality. This is because most are characterised by low wages, no social benefits as well as poor working conditions such as the lack of protective gear in most labour intensive businesses and operating in areas with insufficient social amenities such as access to water and toilets.

There were a number of statistics on the informal sector that were not highlighted such as an updated position on the key sub sectors. It would be useful to have information on the number of businesses that operate in the sector, as well as the overall contribution made to the Gross Domestic Product (GDP). This will paint a clearer picture of the sector in a way that can enable policy makers to adequately formulate strategies that would be beneficial in enhancing qualitative growth of this crucial component of the economy.

One of the suggestions on how this can be done is by starting out with a pilot project in one of the counties with a vibrant informal economy whereby data collection focuses beyond sifting through the records at county offices. This will allow for the concentration of efforts towards the conducting of a deeper statistical analysis of each of the sub sectors. Once this has been achieved, it can then be used as a benchmark for conducting a similar program countrywide. The gathered data would provide a clearer way forward when it comes to making informed decisions on how to channel the efforts towards implementing a sustainable plan that deals with the informal sector.

litualex@gmail.com

Informal Economy Analyst

 

 

The importance of ICT in Informal Business

We live in an age where access to information is at its highest level. With the onslaught of digital technology, the internet has become a vital source of unlimited information. This has been hastened by the increased availability of smartphones, which have made it possible for people to get onto the internet from wherever they are through these mobile devices. This technological advancement has transformed the lives of many people by making it easier for people to access various services from the comfort of their palm.

https://www.howwemadeitinafrica.com/wp-content/uploads/2016/10/Tala-600x300.jpeg

(Source: https://www.howwemadeitinafrica.com/wp-content/uploads/2016/10/Tala-600×300.jpeg  )

The effects of this advancement in technology has changed the way business is conducted by the introduction of new and innovative ways of reaching out to clientele. Micro-businesses have embraced the use of mobile payment technology in their operations. They view this mode of conducting business as an easier form of cash delivery to their suppliers and business partners and accessing loans as it is a system which is relatively affordable, personal and can be used anywhere and at any time. These factors have fast tracked its growth.

A study conducted by Internet World Stats indicates that Africa accounts for 16.6% of the global population and has an internet penetration rate of 26.9%. In comparison, the penetration rate in Latin America and the Caribbean is 59.4%, 56.5% in the Middle East, 76.7% in Europe and 88.1% in North America.  On the African continent, Nigeria leads with an internet penetration rate of 47.9%, which is 27.4% of the continent’s total internet usage. Kenya is ranked third with a penetration rate of 66%, contributing to 9.5% of internet usage. Population size was a major variable that was considered when conducting the study.

The penetration rate on the continent presents an opportunity that can be exploited as a means for businesses to reach a wider audience. The Kenya National Bureau of Statistics latest survey of Micro Small and Medium Enterprises indicates that 43.1% of MSMEs do not use Information and Communication Technology (ICT) because they don’t think that it is vital to their operations. 14.3% thought that it was too costly while 4.5% cited a lack of access to electricity as the reason. There is a need to educate MSMEs on the importance of ICT as a means to growing their businesses.

The survey also looked at the type of ICT equipment available in licensed businesses. 40.7% of the MSMEs had a mobile phone, 15.0% had a radio while 10.5% of the respondents reported not having any ICT gadget. Availability of the fax machine, tablet, digital / video cameras was reported by less than 5% of the respondents. This is a clear indication of the importance of mobile phones as a gateway to interacting with small businesses. A lot more can be done to facilitate business transactions in the informal economy considering that only 49.3% of the businesses surveyed use mobile money platforms. It is a platform that is yet to be fully exploited as it is often underrated as an avenue to develop business capacity.

litualex@gmail.com

Informal Economy Analyst