Sanderson Abel
There is a growing trend of informality in the Zimbabwean economy as the formal sector shrinks and the informal sector grows. This pattern depicts the serious structural constraints the country is facing. There is need to understand how policy makers can leverage on this sector to get the best out of it. The country’s experiences during the economic crisis of 2000-2008 supports this need, given the majority of the population derive their livelihood and continue to survive on incomes that are coming from the informal sector.
What initiatives are banks taking?
In an attempt to understand the inner workings of the informal sector and how the banks can leverage on the resources flowing in this sector, the Bankers Association of Zimbabwe and Zimbabwe Economic Policy Analysis and Research Unit (Zeparu) undertook a study of the informal sector in 2014.
The study has generally established that although the informal sector players could have little resources in isolation, when combined their resources are formidable and these can form the basis for financing critical economic activity.
What constraints does the informal sector face?
Despite its importance, the informal sector in Zimbabwe continues to face challenges which affect its ability to increase their contribution to economic success.
The constraints exist in almost all spheres that determine economic performance, including regulatory barriers, infrastructure, access to capital, human skills, and management and marketing skills.
Lack of access to finance is often rated as the most important constraint to informal businesses growth, preventing them from expanding their production capacity and hence productivity.
This relates to both informal small and medium enterprises, as well as smallholder farmers who often cite cash flow as their major problem.
Lack of official status, lack of collateral, low levels of literacy and inconvenient locations of banks are among the main factors impeding businesses in the informal sector from accessing finance.
Their main sources of finance, therefore, continue to be informal; moneylenders, relatives and savings and credit organisations, which cannot provide the necessary amounts of financing.
How can the financing challenges be circumvented?
Firstly there should be engagement among the banks and the players in the informal sector. Banks should thus engage the informal sector players and embrace and foster partnerships and clusters.
Under this arrangement informal sector players, through the assistance of banks, pool their resources by bringing their capital and expertise together to make a meaningful investment. This also allows them to gain knowledge further and skills from their partners than when operating as individuals.
If the small traders come together to work as groups or clusters, they should also be encouraged to register their associations to assist in easily identifying their location, assessing their challenges and also make banks aware of their existence.
During the BAZ study referred to above, the majority of the informal sector players indicated that they did not have bank accounts.
Most of them further indicated that they did not have a reason for opening accounts given that their incomes were transitory in nature.
There is an advantage if these individuals pool together and open a group account.
Opening an account with a bank has advantages to the group since the account allows individual small savers to pool their savings in a single larger account and leaves much of the account handling costs up to the group rather than the bank.
Since small savers are much more interested in the security of their funds and easy access to them, they are also often willing to pay more for that service.
Information sharing between banks and sector players is key in unlocking resources from the informal sector.
Small business owners most often possess more information about the potential of their own businesses but in some situations it can be difficult for business owners to articulate and give detailed information about the business as required by banks.
It has been established that some small business managers tend to be restrictive when it comes to providing external financiers with detailed information about the core of the business, since they believe in one way or the other, information about their business may leak through to competitors or to other regulators such as Zimbabwe Revenue Authority who might then pursue them for non-compliance on tax matters.
In a sector where individuals cannot amass enough resources for capital purposes, banks and the informal sector players can benefit order financing arrangements.
Banks would ensure that manufacturing firms get credit while at the same time banks have something to hold on to.
Although the firm might not be in a healthy position, if they have secured orders and the buyers confirm that they are willing to buy, such confirmations can be used as collateral.
Such order financing can involve payments made directly to the bank to eliminate any risk while the firms get the necessary take off into competitive production.
Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on abel@baz.org.zw or on numbers 04-744686 and 0772463008