Posts Tagged ‘informal economy’

How the African movable assets bill can unleash innovation opportunities for the rural economy

Somewhere in Kenya, 4th June 2012 (Photo: Niti Bhan)

As Kenya joins Zambia and Zimbabwe in ratifying a Movable Property Security Rights Act, there’s a sense that the floodgates to innovation in access to finance might be taking place in rural Africa, south of the Sahara and north of South Africa.

Kenya’s law also goes beyond the cows and goats and allows a borrower to collateralise future receivables arising from contractual relationships.

How it ends up being implemented will set the stage for the next big disruption in financial inclusion. In the meantime, let’s take a closer look at the opportunity space for innovation in the informal and rural economy that dominates these operating environments.

 

1. A whole new bank, designed to meet the needs of rural Africa

Last night, a tweet by Charles Onyango-Obbo struck me forcibly, and reminded me of our Banking the Unbanked proposal crafted for ICICI back in January of 2007.

The very fact that contemporary thoughtleaders in the Kenyan banking industry are unable to take the concept of livestock as collateral for loans seriously, taken together with the deeply embedded assumptions of the formal economy’s financial structure leaves the door wide open to disruption.

It would not be too difficult to conceptualize a rural, co-operative bank custom designed for the local operating environment. In Kenya, where the mobile platform provides clear evidence of the viability, feasibility, and desirability of innovative financial tools and services that work for irregular income streams and provide the flexibility, reciprocity, and negotiability inherent in the cooperative local economies, such a bank could change the social and economic development landscape overnight.

In fact, one could conceivably foresee this “bank for rural Africa” scaling far beyond Kenya’s borders.

 

2. Insurance sector must respond to banking disruption

The domino effect of disruption in the banking sector should kickstart the stagnant insurance industry that has been ineffectually attempting to scale outside of the formal economy’s neatly defined boundaries. Bankers willing to take livestock as collateral for loans will therefore require insurance on their movable asset as a surety against the risk of disease, or drought.

Current products tend to emerge from the international aid industry, seeking to insure smallholder farmers against the shock of losing their livestock to climate related disasters such as prolonged drought, or an epidemic of illness. There is a dearth of relevant and appropriately designed insurance products from the private sector targeting the needs of the rural economy. For all the talk of African urbanization, even the most optimistic projections show that East Africa’s rural population will continue to dominate.

Thus, this an opportunity ripe for the plucking, given the right mix of product, pricing, and promotional messaging.

 

3. Disrupting assumptions of Poverty and Purchasing Power

Whether it is Kenya’s significant non profit sector or the nascent consumer oriented markets, the redrawn lines defining assets, collateral, and the floodgates of access to finance will require a complete overhaul in the way the population is segmented and measured.

Once these hundreds of movable assets have been valued, insured, and registered officially, even the most reluctant banker must now count the pastoralist among his wealthiest local clientele, able to draw a line of credit against his true wealth to the tune of thousands of dollars without feeling the pinch.

 

4. Triggering a rural investment and consumption boom

From mabati for a new roof and simti for the backyard wall, to the latest model smartphone or pickup truck, the concurrent boom in investments and consumption provides an ample playing ground for new products and services tailored for the contextual needs upcountry. Finally, Farmer Joe can install that solar powered irrigation pump for his orange groves in time to reap the next big harvest. And Mama Mercy can think of building up a nest egg of investments faster from the income provided by her farmyard animals.

Kagio Produce Market, Kenya, April 2013 (photo: Niti Bhan)

This might turn out to mean upgrading to a breed of high yield milch cows or being able to provide them with better quality feeds and medicines, but the financial bridge that a well designed strategy leveraging this movable assets bill and it’s timely implementation could mean the difference between the brass ring or treading water.

 

5. Trade and Commerce will open new markets

Given that the Kenyan Movable Property Security Rights Act 2017 goes beyond livestock to include other stores of wealth and value creation, there will be an undeniable impact on regional and cross border trade. No trader will give up the opportunity to leverage their existing inventory if it qualifies for additional credit that can be plowed back into the business.

On the road to Bungoma, Western Kenya, February 2016 (Photo: Niti Bhan)

Trader’s mindset and the documented biashara growth strategies already in evidence point clearly to the productive economic use of this access to finance rather than passive consumption alone. As their business grows, they will require a whole slew of tools and services tailored to their needs. This could be as simple as a basic book keeping app or as complex as customized commodity (assets, livestock, non perishable foodstuffs, grains and cereals) exchange platforms that integrate the disruptive new services percolating through the entire ecosystem.

 

In conclusion

These few steps outlined above are only the beginning of laying the foundation for disrupting the current social and economic development trajectory of small town and rural Kenya. I see immense potential for both direct to consumer as well as business to business segments for forward looking organizations seeking a foothold in the burgeoning East African markets.

We, at Emerging Futures Lab, would be pleased to offer you customized white papers on the opportunities for new products, services, and even business models, based on this emerging financial environment recently signed into law by President Kenyatta. Contact us for an exploratory conversation on the scope and scale of your particular industry’s needs. Our experienced team can help you maximize these opportunities from concept design and prototyping all the way through to path to market strategies.

It’s way past the time to consider the Informal Economy as a distinct commercial environment

Brand stickers on avocados displayed for sale on a highway, Kenya. April 2013

Regardless of continent, it is now high time we accepted the informal economy (unformal or unrecognised or unorganized sectors) as a commercial operating environment in its own right.

The continued oversight is rapidly coalescing into a gaping void of hiccups and failures, by large companies, non profit institutions, and startups, alike. This issue goes far beyond “understanding the informal” or recognizing the fulltime professional status of the service providers that I’ve written about before.

It’s about the problems created by continuing to assume every individual is poverty stricken and struggling to make a livelihood simply because a significant portion of their commercial activity operates outside what is rarely defined but is assumed to be the formal, structured economy held up as the pinnacle of economic development.

It’s why academics can barely conceal their flabbergasted surprise that a person has a better quality of life, and a reasonably viable revenue stream in [gasp] informal market trading, or even agricultural work.

It’s why @pesa_africa questions the continued transplantation of e-commerce business models directly from Seattle to subSahara given that they’ve tended to wither on the vines.

It’s why market women and traders pay the price of daily harassment and abuse by those given authority over their peace of mind.

And, it’s also why the freshest produce gets to you first thing in the morning in Nairobi or Cotonou or Kinshasa.

This is not meant to be a paean to the hardworking women and men who keep the engines of commerce and trade humming in the harshest of environments with scarce resources and inadequate infrastructure.

It’s the first step in acknowledging yet another holdover from a colonial past that decades later still hampers and hinders the social and economic development that should have happened by now, by all rights.

It’s also the necessary counterpart to the recognition of agency required for design interventions to succeed once donor funding ends.

This theme is consistently covered in this blog in the category Biashara Economics and hashtag #biasharaeconomics

The importance of user agency for good design in the humanitarian and development context

humancenteredThis is a topic that has come up so often on Twitter that I thought to write it out once and for all. A link would be ever so much easier to argue with than to make the case for recognizing the agency of the end user – whether an intended customer or beneficiary – of an innovation.

At some point, I’ll get around to writing a much longer version with citations and links to contemporary research in iterative programming for complex, adaptive systems i.e. the ecosystem intended as the target recipient for the implementation of a socio-economic development program or project. For now, this short version will do.

The late John Heskett, professor in Design Planning and Market Forces at the Institute of Design, IIT, Chicago, once said in the classroom (notes, Spring 2003) that an invention could not be considered to be an innovation until it had been embraced by the end user. Witness the difference in adoption between Apple’s iPod and the Segway human transporter.

This metric of success for the novel – be it a product or a service, or even a business model such as the prepaid/pay as you go means of using mobile phones – requires that the customer (the end user or the beneficiary, as the case may be) be given the opportunity to choose, that is, to make a decision on whether to adopt, adapt, or reject the innovation in question.

In order to choose, and to decide, the user for whom such systems are designed must then be imbued with agency, rather than be considered passive recipients of the innovation.

This respect and recognition of the recipient’s agency forms the core of our work in innovation planning and concept design inspired by primary research in the informal markets of rural and urban sub Saharan Africa, South Asia, and the ASEAN. It has been informed by more than a decade of practical knowledge from experience in the field.

And it is this recognition of agency, which is that which empowers, that provides the foundation for our processes and systems, our methods and tools, and thus, our learning and teaching of how to think differently across the bridge of disparity, and inspires conceptual design of holistic solutions.

Without explicit acknowledgement of the individual’s agency or recognition of the diversity of circumstances, abilities, and aspirations in a community, any designs meant to effect positive change will remain lifeless attempts to intervene from the outside. Witness the number of pilots that fail to scale, or programmes that remain unsustained once external funding ends.

Launching Our Digital Documentation Project: Ibadan’s Tailors, Traders, and Textiles by Nigerian/British artist Folake Shoga

finalcopyAfter months of hard work, I am very honoured and proud to announced our new digital documentation project by my friend Folake Shoga, a Nigerian/British multidisciplinary artist with more than three decades of experience.

She went on a journey of discovery through the twists and turns of the informal value web that holds together West Africa’s famed textiles and fashionably styled culture.

Her window to this world is centered around Ibadan, Nigeria, and she takes us through an illustrated, personally narrated documentary that spans the experience of getting a new dress, from choosing the right fabric, all the way through building a fashion brand.

Come and join us for this fascinating peek behind the scenes! You can also find this unique photo-documentary again on my portfolio page.

Not Disaggregating the Informal Economy Properly Hinders Development Efforts

Michael Kimani (@pesa_africa) brought this prize winning essay on the importance of understanding the informal economy to my attention, together with a snippet of text from our last inception report highlighting a major oversight that we believe is of critical importance.

Mike took issue on Twitter with the author’s very first sentence introducing his work as a PhD candidate in The Department of International Development, LSE, viz.,

I research smuggling, or ‘informal cross-border trade’.

and I offered to flesh out our concerns in a blogpost. Here’s the snippet Mike extracted from the tralac website:

C8oeVQ8XgAAnc-fNow, I won’t go into the full scale literature review on the challenge posed by the conflation of illicit activities such as smuggling with the licit yet unrecorded daily commerce in border markets as it’s clearly framed here on page 5 through 7 since the author is already in academia.

However, what I will do is just pull out Kanbur and Keen‘s specifically worded framing of the challenge of not unpacking the various elements of the informal economy as the first step towards understanding it better.

We think this is the wrong way to look at things. The key to policymaking towards informality is twofold. First, to specify more basic objectives, such as efficiency and equity, which transcend informality – informality and its persistence in itself is neither good nor bad. Second, to disaggregate informality into policy-relevant categories, rather than take it as an undifferentiated lump and then gauge policies by their impact on its magnitude.

Let’s take the problem of conflating smuggling with cross border trade in the context of Kanbur and Keen on Rethinking Informality:

In so far as any precise meaning is given to the term in discussions of taxation, informality is usually taken simply to mean non-remittance of tax due – failure to pay. But there are all kinds of reasons why a firm or individual might pay no tax. Maybe they are simply below the threshold above which they are legally obliged to; or maybe they are evading. Might not why no tax is paid matter for policy making at least as much as the fact of it not being paid? And how should tax systems be structured when it is recognised that their design may affect not only how much tax is paid, but the different ways in which it is not paid?

These questions lead, in our view, to a more useful strand of analysis than generalities about reducing informality.

or, in the case of this essay, to generalities about the need to understand the informal without distinguishing within it the various categories of trade that occurs across borders, both biashara and magendo.

Predictability is a business investment in the informal sector

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New Delhi, India (Photo taken March 2017 by Niti Bhan)

Street vendors are often assumed to be livelihood actors, eking out a precarious living while darting in and out of traffic at the lights hawking their wares out of a basket or bucket. Not so in the south side of New Delhi where this trader in household linen and fine textiles has staked out his pavement storefront.

He’s not there everyday, unlike the fresh veg lady across the street, who has been there for the past thirty years, but he does show up every Saturday late in the afternoon, along with the housewares guys and stays until late in the evening. These vendors have been so predictable that they’re now known as the “Saturday market” although there are only three “shops” that one can see.

nightlightsHowever, each storefront is a joint effort by a number of vendors cooperating with each other to offer a larger, more attractive display and lights.

This predictability insures his reputation in the neighbourhood.

The dangerous assumption that there’s no competition from the informal sector

In addition, the informal economy of open street markets still dominates 90% of retail in large countries like Nigeria and Kenya, meaning it’s a near safe bet there’s plenty of room to grow. ~ Quartz Africa, Jan 2017

Failure is a risk, and an inescapable function of the amount of resources invested, not just money. Time, effort, and managerial ambitions are also losses that destroy value for companies. Danger, then, lies in leaping to assumptions that turn out to be wrong. This is one of them.

First, a bit of history. Just over a decade ago, the Indian market was opening up to world’s investment flows in the retail sector, and estimates of the potential were as rosy and glowing as Africa’s today. From The Economist in April 2006:

Most Indian shops belong to what is known, quite accurately, as the “unorganised” sector—small, family-owned shops surviving on unpaid labour and, often, free land for a small stall. “Organised” retailing accounts for only 2-3% of the total, and of that, 96% is in the ten biggest cities, and 86% in the biggest six. However, organised retailing is growing at 18-20% a year and inspiring a rush of property development. Shopping malls are springing up in every big town: some 450 are at various stages of development.

By 2015, it was clear that these ambitious potentials were never going to materialize, though many malls did spring up in cities across the country. Last year, I covered this topic looking back at the growth projections and the subsequent real numbers achieved from the perspective of the resilience shown by the informal retail sector. I noted, in August 2016:

Yet if you look at the data from 2015, you’ll see that the forecasts were far too ambitious – formal retail has only reached 8% penetration in the past 10 years. Nowhere close to the 25% expected by 2010. Mind you, these were all the management consultancy reports bandying the numbers around.

I bring this up because I’m seeing the same kinds of projections happening right now for the African consumer market by the very same firms.

Second, this time it’s not just a management consultancy report with all the research and analysis efforts they pour into making their case. It’s not been distilled into one single yet dangerous sentence:

meaning it’s a near safe bet there’s plenty of room

Yeebo_Market_08

“Plenty of room” (Photo Credit: Yepeka Yeebo in Accra, Ghana)

There’s an inherent assumption within the assumption that the myriads of little stands, market ladies and their longstanding relationships with customers and suppliers, and the entire ecosystem which exists, such as in the photograph above, can simply be bulldozed over with a granite and marble mall development covered in shiny unreflective glass.
It didn’t happen in India, and it’s not happening in Africa. From Ghana, this news article on mall development says:

Ghana’s economic woes have translated into a variety of challenges for formal retailers who are competing for sales alongside the dominant and deep-rooted informal shopping sector. According to a recent report by African commercial property services group Broll overall sales in most modern shopping malls are well below historic averages, despite garnering sufficient foot traffic.

cth8lgkwcaauetyFurther, and more dangerously, this blithe assumption of a cakewalk where an informal sector so tangibly exists, overlooks the innate ingenuity of those who seek a dignified life even while hustling for a living. And that there’s no competition or customer service.

Snapshot of the Dynamics of the Urban Informal Retail Trade in Nairobi, Kenya

Informal Economy Dynamics - Updated

Made by Latiff Cherono – click for larger image

Latiff Cherono quickly made up this diagram during a brainstorming session with Francis Hook and myself on the ways and means to further disaggregate the general category of “Informal wholesale and retail trade” that the Kenya National Statistics Board uses to lump together the second largest sector providing employment in Kenya after agriculture.

jobs2 In urban conditions, vending and hawking of this sort is the largest source of income for the formally unemployed.

As you can see in the map visualizing Latiff’s analysis of a well known location for street vendors and hawkers to operate breaks down traffic flows not only by speed but also takes in account both static and dynamic forms of informal trade.

It may look chaotic but there are principles underlying the decisions made by both pavement vendors and mobile vendors (streethawkers in traffic) for their location of choice. These relate to the speed of passersby and potential customers – both wheeled and heeled, as Francis is wont to say – and closer analysis will most likely provide evidence of attempt to drive more footfalls to the shopfront, so to speak.

An example is the way pavement vendors locate themselves on either side of the busy bus stops, while mobile vendors who vend their way through traffic focus on the bottlenecks created by the roundabout and the traffic police.

We’re still in early days yet but time and money seem to be two of the factors that describe the attributes to segment and categorize the informal retail sector in urban Africa.

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.

Top 3 Assumptions About the African Consumer Market

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Treichville Market, Abidjan, Cote D’Ivoire (Photo Credit: Niti Bhan)

Claims have been made about the Great African Market Opportunity – in retail, in real estate, in banking, and packaged consumer goods – that drive investment decisions and marketing strategies. Yet, reality has been less opportunistic than imagined – Nestle’s struggles in Kenya back in 2015 are one such example.

Here are the top 3 assumptions, if left unpacked or unquestioned, that can make or break a new market entry strategy in the African Consumer Market. For most of the continent, it’s safe to say that the majority of the mass market are primarily employed in the informal economy.

1. Price is the problem
Affordability is not a matter of price but access to payment means or method. Upfront lumpsum cash transactions will narrow potential customer base down, depending on the season, or the income source.

What this means is that there are whole categories of products that would have had a larger audience but do not due to barriers set up by their own transaction model.

Accessibility and Affordability are thus not a function of the Price itself but the lack of flexibility in the business model. Flexibility drives consumer segmentation in the African Consumer Market, as product purchase decisions get made based on cash in hand and cash flow patterns.

2. Consumer Segmentation Metrics are the Same
The factors that influence the segments of the population who have the potential to be consumers are the following:
– Urban or Rural
– Sources of Income

Factors that do not influence “poverty” (ref: textbook market segmentation)
– Education
– Location
– Employer

Example: Schoolteachers are considered part of the rural elite in Kenya, accruing community status and respect. Yet, they may be on a fixed salary within a lower pay grade, albeit teaching with a Master’s degree, with less purchasing power than a school dropout with a successful trading business.

Assumption: Demographic attributes traditionally used such as Education level or stability of Employer correlate to consumer purchasing power or disposable income.

3. Brand Loyalty is absolute and unconditional
Consumer insight reports on the African market opportunity tend to highlight the high degree of brand loyalty prevalent among customers, and leave it at that. Recommendations then emphasize first mover advantage or capturing customer loyalty, with the assumption that once locked in, this will create a committed customer for life. Why brands matter so much is rarely, if ever, asked.

The assumption is that this brand loyalty implies pricing blind consumption and status seeking behaviours. While this may certainly occur at the upper end of the income spectrum, these drivers are not likely to be as common for decision making among the mass majority audience. Demand drivers for brand loyalty more commonly noted are:

– the need to minimize risk (of loss)
– maximizing the return on the investment (in the purchase) including status signalling and reputation factors, which have a role in accrual of social capital leveraged for business activities in the informal sector.

Trade-offs are constantly being made in purchasing decisions, influenced by a variety of factors. Yes, compromises may be made on groceries in order to pay for a branded product, but simplistic interpretations of this behaviour lead to egregious errors in the design of customer experiences.