Posts Tagged ‘formal economy’

Signs of Interdependency between the Formal and the Informal Economy

bridging economiesThere is a lot to be unpacked here – I made a mindmap of the urban African entrepreneur who is the backbone of the visible emergence of a consumer class. I’m drawing from my experience of the Kenyan context. I started this in response to Michael Kimani’s Storify recently on the mythical “middle class” and the African consumer market.

We know that this demographic, regardless of the efforts to label it “middle class”, is quite unlike the traditional bourgeoisie that built the developed world a century ago. We can call them the informal bourgeoisie – solid members of society who nonetheless break stereotypes of the white collar, university educated, salaryman.

More often than not, they are entrepreneurs and businesswomen, traders and makers, and workshop owners, who bootstrap their lines of business through the traditional means available amongst what is still called the informal economy. If they’re lucky they might have finished high school, or even graduated from university, but a degree is not a prerequisite as it might be in a private sector job.

In this post, I’m only going to write about something that struck me last night when I was staring at the mindmap. The line that links business to entrepreneur can also be considered a bridge between the informal economy and it’s business practices, and the upcoming formal markets of urban population centers.

The successful workshop owner or regional trader rapidly acquires the signals of his or her business success in the form of consumer goods and increased expenditure on staples and necessities, including upgrades to choice of schools and church. I believe that formal financial services and products such as bank accounts, credit cards, and various apps on a smartphone are part and parcel of this.

In effect, the entrepreneur is the link between the informal economy which provides employment and income to the vast majority, and the burgeoning formal sector in consumer facing services and products.

The formal economy is more likely to be dependent upon the health of the informal sectors than the reverse.

This interdependency, and relationship, is important. I will be coming back to this diagram again to unpack more of what I’m seeing here. For now, it’s enough to have figured out that initiatives meant to eradicate the “pesky” informal trade might have greater implications than initially assumed.

Economic ecosystems tie the fortunes of informal sector to health of formal business

The story of Ghana’s “pillow city”, Juapong – a small town in the North Tongu District in the Volta region, offers us insight on the inter-relationship between formal industries and the ecosystem of informal businesses that spring up around them.

Juapong is said to be losing its identity as the pillow capital of Ghana.

A few years ago, a common feature on the main road leading to Juapong from the Adomi Bridge was the display of beautiful assorted pillows. Local women depended on waste cotton or materials from the textile factories to produce pillows and mattresses. Today, cheap imports from China have affected Ghana’s textile production.

The Chief Executive of Margico Enterprise, Auntie Margaret Okyere, who sells pillows on wholesale, lamented that the pillow business has collapsed. Madam Okyere took over the trade from her mother in 1991 and had trained several women to make pillows.

She revealed that the business was one of the lucrative ventures in Ghana and recounted how in the glory days of the business, traders from Tema, Accra, Kumasi, Koforidua, Tamale and Togo travelled to Juapong to buy pillows in large quantities. That, she said, enabled them to make a lot of income to support their families.

Madam Okyere, who was making a few pillows to feed her shelf with the help of one of her workers, said fortunes in the trade had dropped because the raw materials were no longer available.

“Previously, if you came to this town, you would find pillows arranged beautifully all over and it created a lot of jobs for the youth. We even supplied some hospitals as well. I did not make less than GH¢300 profit a day,” she said.

And its not just the women who make and trade in pillows feeling the effects, the young men who helped load and distribute the pillows are leaving town in droves to look for work. An entire ecosystem has felt the impact of that butterfly’s wing out flapping on the other side of the world. Industries benefit far more people than just those employed at the factory directly.

Customer-Centric Business Model Design for Financial Inclusion


The Challenge

Digital financial services (DFS) seek to bridge the chasm between the structures, policies and institutions of the formal economy, and the cash intensive informal and rural economy. Current day approaches tend to take the perspective of the service providers when assessing the market opportunity and the needs of the intended customers. And so the research to inform the design of products and services focuses on the behaviour of the end users apart from their context, and isolates their unmet needs within the narrow bounds of a specific project or purpose.

Given that the user researchers, the concept developers and the service providers, are mostly from the formal operating environment and/or first world contexts, they tend to consider consumer behaviour without the explicit acknowledgement that these user responses to the introduction of digital financial services (DFS) are emerging from the context of very different conditions than they themselves are immersed in. That is, there are implicit assumptions tacitly being made regarding the market and its opportunities, which, if left unquestioned, may obscure the underlying causes of the problem. And, thus, may inadvertently act as intangible barriers themselves.


A Framework for Approaching this Challenge – Pasteur’s Quadrant

The cash intensive informal and rural economies of the African continent are a very different operating environment from the formal, structured economy of banks, service providers and institutions. This chasm in context, and thus customer worldview, is particularly wide for the vast majority who tend to be defined as financially excluded. They manage their household expenses on irregular income streams from a variety of sources, not regular and predictable paychecks.

This means that many of the market assessment frameworks and tools anchored in the characteristics of the formal, calender based economy may not apply directly to a wholly different context with entirely different conditions and criteria, and their use without adaptation or acknowledgement may skew the resulting insights and concepts. Most of the available research tends to fall into either pure social science or design driven user research. As we have seen, when it comes to making markets work for the poor, neither approach alone is enough to make sense of the opportunity.


We are inspired by what is known as Pasteur’s Quadrant – a hybrid approach that integrates the need to understand the context with the pragmatic goal of immediately useful and relevant information.  Our objective is identify strategies that lower the barriers to adoption, whilst minimizing the dropout rate. That is, our goal is to craft sustainable concepts that work for the target audience within the contexts and conditions of their own operating environment and daily life. This approach increases the success rate of a business model. We have been inspired by the way the prepaid airtime model bridges this same chasm for telecommunication giants around the world.


Grounding Insights in the context of Informal and Rural Ecosystems

Taking a systemic view of the untapped market for digital financial services, thus, would ground the market observations and the customer insights within the frame of reference of the target audience’s own operating environment. Among the financially excluded, particularly on the African continent, this can safely be said to be the informal sector which contributes a significant proportion of each nation’s GDP and employment, regardless of industry.

Framing the essence of the challenge in the form of these critical questions,

  • What are the barriers to adoption of DFS ?
  • What can be done to lower these barriers to adoption?

permits us to take a systemic approach to identifying barriers to DFS adoption, balancing the need for understanding the unknown with the insights required for conceptual design.

The following questions demonstrate the way we can drill down for comprehensive understanding for a particular customer segment or region in a viable manner:

1. What are the common characteristics of the cash intensive informal economy in which this population resides?
2. What are their current means to manage their household expenses – urban vs rural
2a. What are their current options for financial services – which all do they have access to and which all do they actually use – informal AND formal
2b. Why do they use what they use? And why don’t they use what they’re not using but have access to?
3. What are the market forces acting upon the existing DFS market in their region – regulatory, policy, prices, interoperability, tech of the solution, type of phone etc
4.  What are the assumptions these DFS are making wrt their target audience needs, behaviour, usage patterns and capabilities? How do these assumptions fall short of the real world context and usage behaviour in the context of their cash intensive operating environment?

And thus, the starting point for business model design are the answers we are able to synthesize from the insights gathered above, in order to answer the following question:

What is necessary in order to bridge the gap between the DFS and the intended target audience?


Our approach offers a pragmatic diagnosis of the situation, from the perspective of the informal economy and the poor, within the conditions and constraints of the current day regulatory and policy environment. It clearly identifies the gaps in the existing system and describes the opportunity space for new business models that would offer value and resonate with the target audience’s needs and context.

We recommend giving technology a backseat and approaching the solution development process from a more holistic perspective of people, their operating environment and their existing financial behaviour.

Read more on these interdisciplinary lenses for innovating for the informal economies of the developing world’s emerging consumer markets.