Tapping into the informal economy

Experience gathered while working as a salesperson shed light on the mode of operation of businesses that are classified as informal. Interactions with these entities were often riddled with out of the norm characteristics, an aspect that was key to their survival. Due to the fact that the ability to sustain businesses of such a nature is highly dependent on a mode of operation that infringes on the principles of formal business, it did not come as a surprise when I was exposed to business practices that would be otherwise not fall under the scope of formal business operation, but which were a determination of how well they performed.

(Image source: https://coinpedia.org)

A common mode of operation that I was exposed to revolved around distribution businesses which only had one registered business for the purpose of legal conformity but had at least five other branches that operated informally, in that they were outlets that were drop off and collection points for their clients. In these predominantly rural markets, the subsidiary outlets were preferred due to the discounted rates that they offered that were mainly enabled by the volume of products that they pushed out into their wide market reach.

Ideally, the amount of revenue that could be collected from these by the respective county governments vis a vis the payments that they make to the county authorities pale in comparison. Which begs the question, why do businesses that generate so much revenue choose to remain under the radar in this sense? Beyond sealing such loopholes that rob county governments of crucial revenue, it is of the essence for a business environment to exist whereby levies and taxes charged match service delivery by governments to businesses.

When referring to service delivery, key issues that constantly came up included the physical business environment revolving around matters that deal with sanitation and security, repetitional levies charged across different counties as well as market infrastructure challenges such as proper road networks that enhance market access. These are crucial to building links with an informal sector that is highly undervalued and under rated, considering that as per statistics from the Kenyan Economic Survey 2018 released by the Kenya National Bureau of Statistics (KNBS), the sector accounts for 83% of employed Kenyans.

There are key systemic issues that need to be addressed, as they are in the most part responsible for businesses being considered too risky for financial institutions, while at the same time being a reason as to why they thrive. The lack of a financial track record hugely facilitates their being off the radar of government authorities. Also, the issue of collateral is a stumbling block for small businesses that are run by women, due to a discriminant property rights and inheritance system.

In a bid to improve livelihoods and reduce poverty rates in the country, tapping into the positive aspects of the ecosystem that is the informal sector will go a long way in achieving this goal. Issues that deal with business practices that enhance their viability for access to finance such as proper bookkeeping, ancient legal rights as well as the availability and access to health insurance options are vital for strategic growth of the sector.

litualex@gmail.com

Informal Economy Analyst.

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Addressing Informality

The report “Women and Men in the Informal Economy” by the International Labour Organization (ILO) states that informal employment is the main source of employment in Africa, accounting for 85.8 percent of all employment, or 71.9 percent, excluding agriculture. Further, their research points out that 92.4 percent of all economic units in Africa are informal. An even more staggering statistic from the report is that 97.9 percent of the agricultural sector on the continent is informal.

(Image source: https://www.redpepper.org.uk)

The growth in the size of the informal economy should send a signal to policy makers that therein lies an untapped opportunity in as far as reaping mutual economic benefits. By this, I mean that due to the fact that in Kenya this sector of the economy contributes about 83% of employment demographic outside agriculture and yet only accounts for about 30% of the country’s GDP. This indicates that there is a gap that could be exploited. Some of the factors that inform this scenario revolve around issues such as the low levels of productivity as well as profitability in the sector. On the other hand, there has been an increased push to try and unlock issues that the sector grapples with such as access to finance, which has been a key factor that inhibits them from scaling their operations.

In an effort to make informal businesses profitable entities that can increasingly feed into formal business value chains as well as reduce their high-risk profile to financial institutions that they approach for credit, there are a couple of points that need to be taken into mind. The first and foremost is that of ensuring that small businesses develop the internal structures that can be used to measure their operations. These include proper financial records through book keeping which involves maintaining well structured and up to date records of accounts and financial transactions. This will enable them to not only be in a better position when applying for credit, but also ensure that they absorb these funds for purposes that will help them to scale up.

On the issue of productivity, beyond access to finance are factors such as the level of skills and access to markets. In most cases, businesses in the sector are set up not as a first option but as a last resort and a means of survival. A good example is that of businesses that are set by people who cannot access the shrinking formal employment opportunities and thus pursue the option of setting up a business in an attempt to cater for their expenses. Such entrepreneurs usually do not posses the skills required to venture into the various business fields that they find themselves in. It is not surprising that most of these entities close shop within two to three years of operation.

Access to markets is a hindrance to the productivity of some informal businesses in the sense that it limits the output of their goods in instances where ready markets are not available. In the case of small scale farmers, a lack of markets for their produce makes them scale back on their production due to their inability to absorb the shock that comes from losses from wasted produce. Most opt to take the route of subsistence farming. Linked to this is the fact that most have to grapple with inadequate storage facilities that could mitigate such losses.

It is therefore prudent and timely for policy makers to implement a strategy that addresses the issue of informality as a priority. This will not only enable governments to comfortably widen their revenue source while, but also improve the livelihoods of people who are struggling to make a living.

litualex@gmail.com

Informal Economy Analyst.

How Counties can leverage Informal Business

Devolved governance units that were introduced in Kenya following the promulgation of the new constitution have localised the delivery of essential national government services as well as offered different parts of the country the autonomy to make specific decisions that impact the areas under their jurisdiction. This has seen the initiation of programs and projects whose conception is based upon the most urgent needs of the residents of the different counties. In this sense, the introduction of devolution into the governance structure of Kenya has helped in the decentralisation of power from the national government to county governments. Counties are now responsible for the direction in which they choose to go for they can now legislate their own laws through their county assemblies. Further, Counties have come together to form regional economic blocs whose main aim is to bolster trade within the member counties by pooling their resources.

(Image source: http://observatorioviolencia.org)

Revenue generation has been one of the challenges that counties have been grappling with. This aspect is crucial as it will make these units to reduce their reliance on national government for operational and development financing. In a quest to collect revenue, county governments have had to pass legislation that enables them to do so. This has led to a situation whereby each county has come up with its own levies and rates. For businesses that operate between two or more counties, such as those that are in agribusiness, conducting business has become a costly affair with the introduction of a variety of cess fees. This is the case as most of these businesses have to transport their goods to markets that are not in their counties of origin. They are thus required to pay multiple cess fees for those goods across different counties. This replicative system of taxation is expensive and particularly burdensome for micro and small businesses.

An aspect that has come out strongly during some of my work when interviewing informal traders in different parts of the country is that of favouritism and tribalism, which has become pronounced with the inception of devolved governments. People who are not from communities that are indigenous to certain counties are finding it difficult to operate even small businesses. This comes out strongly in instances where these businesses apply for loans at various county offices and are frustrated on the basis of their tribal affiliation. This factor has become so deeply rooted and has even played out in various sections of the media, with certain governors calling for the legislation of laws that arm twist institutions and private companies into ensuring that staffing in their organizations is constituted of up to 70 percent of indigenous members.

Further, when it comes to the allocation of spaces within which they can work, small scale traders are often side lined and often find themselves playing hide and seek games with county authorities to the detriment of their businesses. It is with this in mind that a bill has been introduced in the Kenyan Senate to address some of these obstacles. The bill proposes the formation of a Hawkers and Street Vendors Authority that will be tasked with the registration, regulation and monitoring of traders in this sub sector of the informal economy. The bill also aims at ending tussles concerning the payment of prescribed fees and charges by small scale traders and proposes that county governments designate vending zones for them.

Some of these issues can be dealt with in a way that is beneficial to both the informal businesses and the respective county governments. For a start, counties should support small business as these are a means to building a base for the growth of industries in their regions. By this I mean that most industries would require raw materials for their operations which can be locally sourced. This facilitation should be in the form of harmonization of fees and levies across counties in the different economic regional blocs. Another way this can be achieved is through supporting the ecosystem that boosts the livelihoods of the county residents. A good example is that of the agribusiness, whereby making farm inputs easily accessible to small scale farmers and investing in market structures for their produce will improve household incomes of the residents.

litualex@gmail.com 

Informal Economy Analyst 

 

Housing Poverty in Kenya

The challenge of offering affordable housing has for long been an uphill task for many developing countries. As at 2016, Kenya had 22,000 mortgages in the country of 45 million people. A report by investment and real estate firm Cytonn further notes that the low uptake in mortgages can be attributed to the high mortgage interest rates offered by financial institutions, which puts the dream of owning a home out of the grasp of many citizens. According to the World Bank, Kenya has a housing deficit of over two million units which increases annually by 200,000 units. Alongside this is the fact that nearly 61 percent of urban households live in slums.

(Image Credit: http://www.daaonline.org)

With one the pillars in the President’s Big Four Agenda focusing on the issue of affordable housing, efforts that look into how low-income earners can own decent housing have come to the forefront of government policy. Considering that about 90% of Kenyans are employed in the informal economy, it is timely that these strategies are being geared towards this segment of the population. In this sense, providing decent housing will be a step in the direction towards curtailing the growth of informal housing settlements, while at the same time reducing social inequalities.

One way of reaping the benefits of inclusive growth is by Incooperating this aspect to the Big Four industrialization pillar. In a quest to develop our manufacturing industries, it is crucial to integrate the building of housing for low-income earners around the different Special Economic Zones (SEZs) into the infrastructure plans of such projects. In this way, workers in these SEZs will be provided with an opportunity to own homes which they can pay for as they work. Further, integrating micro and small enterprises (MSEs) into the supply value chains will provide a means through which they can strategically bolster their incomes in a way that enables them to afford the houses. Linking infrastructure to industrialisation in this way will provide a means through which the affordable housing agenda can be met.

Another way of accelerating home ownership, particularly amongst low-income earners would be by channelling such efforts through cooperatives and more so, Savings and Credit Cooperative Organizations (Saccos). Seeing as these are bodies through which most informal sector participants operate, it would be a positive move for government to get them on board this strategy by incentivising them in a way that would enable these to offer housing loans at cheaper rates. This would strengthen the sources of affordable credit to low income groups. This is an avenue if pursued, would widen the reach of this program to those that desperately need this intervention.

Given the difficulty in accessing affordable housing in the country, the deliberate move by government to make this pipe dream a reality is one that will have a positive impact and contribute to the country’s economy by not only having multiplier effect on job creation in the construction sector, but also developing an ecosystem of services that will provide employment for those that serve the residents of these housing communities.

litualex@gmail.com

Informal Economy Analyst

Gender Dynamics in Kenya

The Kenya National Bureau of Statistics in conjunction with Statistics Sweden launched a booklet called Women and Men in Kenya. The booklet represents indicators focusing on areas such as population, health, education, employment, domestic violence and Persons with Disabilities (PWDs). It notes that women provide 80 percent of Kenya’s farm labour and manage 40 percent of the country’s smallholder farms, yet they own only roughly 1 percent of agricultural land and receive just 10 percent of available credit.

(Source: https://www.leru.org)

Life expectancy in the country has gradually been rising for both sexes over the decades, with women tending to live longer than men. In 1969, the average figure stood at 51 years while the same was 47 years for men. Fast forward to 2014, that figure had increased to 62 years for women and 60 years for men. Further, the fertility rate between the years of 1989 and 2014 has seen a drop of almost 30 percent, with the highest fertility rate trends being recorded amongst married couples and those who have not attained any level of education.

In as far as health issues are concerned, non-communicable diseases, which are also reffered to as chronic diseases, are those conditions that are usually not passed on from one affected person to others. Some of the risk factors which are the main causes of these diseases include tobacco use, unhealthy diets, insufficient exercise and alcohol misuse. In Kenya, breast and cervical cancer are the leading cause of cancer deaths in women, and prostate cancer is the top cause of cancer deaths in men.

Overall, the enrolment in all levels of education is higher for men than for women. The report presents a regional analysis of the proportion of children not in primary and secondary school in the country. North Eastern region has the highest rates in this aspect, with an average of 60 percent of children in the region not attending school. Central region recorded the lowest rate with an average of 9 percent.

Disparity in employment between women and men still exists despite some improvement being seen in recent years. For example, in 2016 the formal sector employed 66 percent men or 1,685,000 people and 34 percent women which is 880,000 people. There seems to be a significant proportion of more men than women employed in majority of the sectors, such as the agricultural and the manufacturing sectors. It is only in the service activities that women generally represent a higher percentage of formal employment than men with a representation of 52 percent (66,000) as compared to 48 percent (61,000) of men in 2016. These statistics point to the fact that a majority of women are employed in the informal sector.

The report clearly points out that women aged 15 to 49 years tend to experience domestic abuse at least two thirds more times more than men. In as far as domestic violence is concerned, 57 percent of women who are or have been married experienced physical violence that was perpetrated by their current partner as opposed to 11 percent of men. Sexual violence for the same demographic stood at 56 percent for women, while the same figure was 37 percent for men. Also, men who experience this sort of violence are generally less likely to seek help.

Persons with disabilities (PWD) represent 3.5 percent of the total Kenyan population, with 51 percent of them being male while 49 percent are female. All in all, despite the steps that the government has taken to narrow the gap in gender disparity, there is a lot more that can be done to support gender equity and equality in the country.

litualex@gmail.com

Informal Economy Analyst

The Significance of Investing in the Young Population

The Kenya Economic Report 2015 whose theme is ‘Empowering Youth through Decent and Productive Employment’ released by the Kenya Institute for Public Policy Research and Analysis (KIPPRA) is timely as it provides an indepth look at youth empowerment with a major focus on employment. The youth account for about 6o% of the labour force in the country, which is estimated to be growing at a rate of 2.9% per annum. According to the report, Kenya’s median age is estimated at 19 years and the proportion of the population that is below 15 years is estimated at 43%. Further, 78% of the population is aged below 35 years.

(Source: http://www.theeastafrican.co.ke)

A big challenge facing most youth is the lack of decent and quality jobs; almost three out of every four youth are engaged in the informal economy, traditional agriculture and pastoralist activities. The share of employment in the informal sector in total employment, excluding traditional agriculture and pastoralist activities, increased from about 17.1% in 1983-1987 to 82.7% in 2013/14. This significant increase in the informalization of employment can be attributed to a shrink in formal employment opportunities over the years. As is the case in most parts of sub Saharan Africa, most entrepreneurs opt to venture into informal business as a last resort for it is often the only way they can earn a living.

With Kenya’s median population age being below 20 years of age, in order to arrest the rapidly growing rates of unemployment that have seen a spike in the growth of entrepreneurial informality, the report calls for the development and implementation of employment creation policies and strategies to that will engage this demographic group. Some of the suggestions include investment in productivity enhancement skills, and quality job creation in fast growing and labour-intensive sectors such as services, agriculture and industry, while promoting the manufacture of export goods for the regional and international markets.

Given that about 88 per cent of manufacturing sector employment is in the informal sector, potential interventions in the sector would be a good place to begin. As is the norm, jobs in the informal sector are characterized by low wages and a general lack of social security benefits. In this sense, the quality of jobs provided by the sector are of poor quality. Also, due to the reason that informality is driven by incentives to minimize tax and compliance costs as well as other external factors such as challenges to access of credit, the report suggests that in order to create quality jobs, policy making should mitigate some of the constraints limiting their transformation to formal enterprises.

It is interesting to note that the report also indicates that Kenyan micro, small and medium sized enterprises (MSMEs) in manufacturing represent over 60% of establishments and account for 29% of those employed in manufacturing. The breakdown of MSMEs involved in manufacturing according to the 2016 MSME Report by the Kenya National Bureau of Statistics (KNBS) is 95% as micro, 3.8% as small and 1.2% as medium sized enterprises. The sector was ranked as the highest contributor accounting for 24.3% of MSMEs gross value added. At publication of this report, this figure stood at 11.7% of gross value added. This represents a 12.6% increase over a two-year period. The significance of ingraining a value addition angle into the manufacturing processes of MSMEs cannot be overstated as it will ensure that manufacturers in this sector of the economy not only reap the benefits of fetching higher market prices for their products, but also enhance the growth of robust value chains that are essential to the successful implementation of national industrialization plans. As is the case with most informal enterprises, firms grapple with issues that include limited access to technology as well as limited research and development activity.

It is clear that tackling the challenges posed by informality is a key to providing a sustainable solution to youth unemployment in the country. Focusing on aspects that improve their productivity such as upskilling, increased access to technology as well as investing in research and development processes will enable those that are engaged in manufacturing to venture into value addition for their products. The trickle-down benefits of implementing policies that are centred around overcoming the aforementioned challenges will be an investment in this country’s future.

litualex@gmail.com

Informal Economy Analyst.

 

Facilitating Access to Credit for Small Business  

Last week, the World Bank released the Kenya Economic Update in which they look into ways in which credit to the private sector can be revived in a bid to accelerate growth in the economy. The Kenyan economy is projected to rebound and reach 5.8% of GDP in 2019. In order for this trajectory to be attained, one of the risks that have to be addressed is the need to jumpstart the recovery of credit growth to the private sector; particularly to Micro, Small and Medium sized Enterprises (MSMEs) and households. During the launch of the report, the Central Bank of Kenya Governor, Patrick Njoroge noted that the resilience of the Kenyan economy is largely attributed to its strong and vibrant private sector, whose backbone is MSMEs.

(Source: http://www.worldbank.org)

The document points out the fact that although the interest rate cap was meant to reduce the cost of credit, thereby making credit accessible to a wider range of borrowers, after a year of implementation the decline in credit growth to the private sector has continued with a couple of unintended negative consequences. One of these is that banks have shifted lending to corporate clients and government at the expense of small and medium sized enterprises and personal household loans. While the interest rate cap policy was an attempt to make credit less costly and therefore more accessible to borrowers, this policy objective has not been achieved. There has been a significant credit rationing to small and medium enterprises and for unsecured personal loans, while lending to the government and lower risk large corporates has increased.

It is interesting to note that the shift in the targeting of bank loan clients away from smaller and riskier borrowers is particularly impactful in Kenya, where riskier SME and micro borrowers make up roughly 80% of all borrowers. Smaller banks, who do not have a large corporate client base, are forced to maintain their portfolios in SME and consumer lending, but have stopped lending to new and unknown customers. The introduction of the rate cap has thus led to a situation whereby there has been a significant decrease in the disbursement of consumer and unsecured loans.

One of the recommendations that are presented in as far as dealing with the shrinking level of loan disbursement is that of recalibrating the current credit reporting system through which banks will be in a better position when it comes to making decisions on loans to risky borrowers, as opposed to the blanket one-size-fits-all approach that is currently being used. They will thus be able to offer financing that is priced per the risk of the borrower. To this end, in order to strengthen credit reporting in Kenya, the CBK is already working with commercial banks on increasing the quality of their consumer data and to include credit reporting data in lending decisions.

Another measure that can be taken to this effect is improving on the overall credit reference bureau data and products. Further, other lenders should be supported to also participate in the credit reporting system, such as SACCOs and microfinance institutions. The implementation of such reforms, coupled with a well-functioning credit bureau, will significantly improve pricing transparency among banks and broadly lower interest rates.

The document states that the goal of accommodating credit worthy borrowers with a higher risk profile, including personal unsecured loans and loans to SMEs calls for a more flexible pricing regime that allows banks to competitively determine loan prices. In order for this to be achieved there needs to be improvements in the institutional environment to prohibit predatory lending, through stronger consumer protections. For example, establishing a consumer protection bureau, could equip borrowers with greater bargaining power with banks and other lenders, promote more transparent pricing practices and increase financial literacy as well as allow for more effective dispute mechanisms.

litualex@gmail.com

Informal Economy Analyst.