Search Results for ‘volatility’

Lessons from African Fintech for the Gig Economy

Earlier this week, I had the opportunity to share my research on the past decade of mobile ecosystem development across the African continent with Dr. Antti Saarnio, founder of Zippie; co-founder of Jolla (developers of the Sailfish OS, among other things).

“We want to test our product first and foremost in Africa because there is an extensive and established informal economy,” he said.

That captured my attention immediately, since few think of the Africa’s vast “informal” commercial operating environment as a strength to be leveraged for competitive advantage, preferring to hope against hope that it will disappear into thin air to be replaced by the more familiar structures of the formal and organized sectors.

And, it got me thinking about the African fintech space, and the lessons it may hold for the rapidly proliferating gig economy in the ‘developed’ world. And, since at this point of time, all I know of Zippie, Dr. Saarnio’s latest venture, is that it’s a blockchain based mobile OS – not the kind of thing that you’d expect to be piloting in Africa – I asked him to elaborate on his thinking a little further.

Easy, he said. Not only does the informal economy dominate, with established norms and coping mechanisms, but its a mobile first and mobile only environment where people are already comfortable with the exchange of value in digital form, be it airtime or currency. People are already incentivized to think about boosting their productivity through newfangled digital tools on their smartphones. More often than not, the younger urban population is educated and tech-savvy, and in places like Kenya, ready to try something new.

I couldn’t argue with his assessment. In fact, I’d take it a step further, based on my own decade’s worth of research into the informal sector’s financial behaviour and cash flow management practices. The developed world economy is beginning to show signs of convergence, in pattern and in the types of challenges faced when attempting to manage in highly uncertain situations, on irregular and unpredictable income streams, often with the very same elements of seasonality – time of abundance and scarcity – as seen in rural Phillipines or India or Malawi.

For instance, Finnish farmers are being driven to use high interest payday loans to tide over the lean times because few other coping mechanisms exist in Finland’s highly formal commercial operating environment. Wedded to the land, they face the same challenges as a farmer in India, Kenya, or The Philippines. Yet no microfinance institutions catering to farmer needs would dream of showing up in rural Finland. Similarly, in the UK, lower income workers, dependant heavily on gig economy apps to generate revenue, can face significant differences in their cash flows from month to month, but again have no recourse but to use their credit cards or high interest payday loans to tide them over. The systems in their operating environment are designed for the past generations’ periodic and regular wages and paychecks, and cannot cope with the irregular cash flow patterns, as prevalent in the informal economy.

That is, the characteristics of the gig economy and the informal economy, when seen from the perspective of the end-user, are more or less the same. Ironically, however, those in the developing world have numerous solutions available to them – albeit informal, social, local – available to them to cope with shocks and volatility. These coping mechanisms have developed over decades (and centuries, in the case of India), hence the well known resilience of the local rural or informal economy.

As uncertainty increases globally, there are numerous lessons to be learnt from the mostly ignored informal economies of the developing countries which have provided incomes and employment for the vast majority of their populations, in times of conflict or peace, making sure that food reaches the urban table from the farms out in the countryside, regardless of the adequacy and availability of either systems or infrastructure. This is one situation where the formal economy’s inbuilt rigidity and dependence on predictability and periodicity are its embedded weak spot at a time when flexibility and negotiability are required to ride the shocks and volatility.

Lessons from the Informal Economy: Managing on Irregular Payments in the Gig Economy

Last week, an unusual report was released in Great Britain. Lloyds Banking Group (LBG), together with the Resolution Foundation, addressed the question of earnings volatility in the UK, a first for a developed country with a formal economy. Their research and analysis made use of anonymised transaction data from over seven million LBG accounts. That is, technically speaking, the financially included in the erstwhile first world.

To their surprise, accustomed as they were to only considering income changes on an annual basis, three-quarters of all workers did not receive the same paycheck from month to month – the problem being most acute for low-paid workers in the gig economy or on zero-hours contracts.

As the Guardian, when reporting on the household financial management behaviour of gig economy workers discovers:

The Resolution Foundation found that for those on the lowest annual incomes, the average monthly fluctuation in pay was £180 – which can make the difference between paying the rent or feeding the family.

As my research over the past decade, on the financial management behaviour of the lower income demographic (also known in older publications as the Bottom or Base of the Pyramid) in the informal and rural economies of developing countries has found, irregular and unpredictable cash flows from a variety of sources is the norm.

What is different here, however, are the coping mechanisms.

Many are forced to turn to crippling payday loans or high-cost credit cards to make it through to the end of the month

In the developed country context such as the UK, gig economy and lower income workers have no recourse to customary and established coping mechanisms that can be seen across the developed world, from rural Philippines to upcountry Kenya.

Seasonality in rural regions, closely intertwined with the natural year and its direct impact on farming activities is a recognized and known fact of life. Incomes are seen to change by as much as 50% between the high and the low seasons. And, among urban traders and merchants, festivals and harvests mean peak consumer activity, and everyone prepares for the rush.

Knowing this, the informal economic ecosystem leverages social networks and trusted relationships to carry them through hard times and the low seasons; looking forward to the peak sales periods and the harvests to cover the difference. Numerous risk mitigation behaviours and coping mechanisms are established within households, customized to rural and urban contexts, as well as the context of the primary income source. These were the same coping mechanisms heard to be in use among India’s informal sector when hit by the liquidity crunch of the demonetization of 2016.

Just the way you can purchase one single cigarette or a 100 grams of shredded cabbage, depending on what you have in your pocket, you can find ways to adapt your daily lifestyle to your income in the flexible, negotiable, and reciprocal people’s economy of the Global South. The informal economy’s commercial operating environment is designed to maintain the dignity of their customer base.

These options are not available in the UK, or other developed and advanced nations of the Global North. Thus, gig economy workers forced to manage on unpredictable and irregular income streams from a variety of sources in the formal economy struggle to afford their groceries and expenses. In fact, I’d be curious to know if prepaid mobile subscribers (pay as you go) are increasing in proportion to the precariousness of employment and volatility of income discovered by the analysts at Lloyds.

If, as the researchers at the Centre for Global Development have found, the gig economy and the informal economy are the present, and the future of work in Africa, then there are lessons from the established customs and coping mechanisms which can inform beneficial solutions and tools for the developed world, for the UK, and for the Global North.

It’s time we recognized the truth about the future of work in Africa: it isn’t in the growth of full-time formal sector jobs. The future of work will be people working multiple gigs with “somewhat formal” entities. This is already true, and it will be for the foreseeable future.

This is true for the whole world now, not just Africa. And, it will change the way we think of platform design, payment plans, as well as policy frameworks, for our near and emerging future.

Financial Patterns at the Last Mile of the Farm to Fork Value Chain

Source: http://library.wur.nl/WebQuery/wurpubs/454661

This value web illustrates the last mile of the farm to fork agricultural value chain in the state of Maharashtra, India. We’d mapped it during our project/s for the Dutch government back in mid 2013, where we’d introduced human centered design thinking for sustainable agricultural value chain development. Subsequently, I led a multidisciplinary team conducting fieldwork in rural Kenya, in order to compare and contrast the last mile in the African context.

As mentioned previously, while the details of seasonality and crops may change due to geography, the essential foundation and framework of the farm’s financial management behaviour remained the same. And, while the actors and roles in the value web may shift and change between rural India and rural Kenya, the essence, here, too, remains the same. There are intermediaries and brokers, transporters and aggregators, and wholesalers and retailers, along with agrovets and extension agents. Everyone has a part to play in the interdependent web of value exchange, based on trusted relationships for the most part.

Therefore, their cash flows and income streams too, are closely linked to the harvest seasons and the crops, just like the farmers‘. In fact, Indian business magazines go as far as to assess the health of each year’s monsoon season in order to attempt forecasts on the annual peak of consumer activity – the post harvest festival season in the October-November period. They recognize the linkages and networks that connect the rural and urban markets, and the ripple effects of the quality of the year’s harvest. It would not be inaccurate to say that the degree of impact and influence is proportional to two related factors – the proportion of GDP from agriculture and related activities; and, the percentage of the country’s population dependent on agriculture and related activities.

Market town finances

In addition to the linkage, we have observed financial management behaviours among traders, and not just those dealing in agricultural commodities or fresh produce, that resemble those on the farm.

The factors that impact the management of working capital and income streams – uncertainty of amount and the timing of its arrival – remain the same, as do the majority of the characteristics of the operating environment, such as infrastructure and systems. A trader dealing in new clothes also sees seasonal differences in her sales, and, unlike a trader in foodstuffs, is also more likely to see greater impact of a low season as people go without the discretionary purchase of a new shirt. Thus, traders must also manage the volatility, uncertainty, and seasonality of their addressable market, and their customer base, and their cash flows and income streams accordingly. We see the impact of this in their business development strategies, and that will be the subject of the next post.

Furthermore, in market towns and border markets, unlike urban metros with a myriad of occupations, the health of the agricultural season will impact everyone in the ecosystem not just the traders themselves. The internetworked last mile of the farm to fork value web closely links the health of the harvests with that of the rural and peri-urban economies.

 

Collected Works
Work in Progress: An Introduction to the Informal Economy’s Commercial Environment – Links to organized series of articles on the topic

Rural Household Financial Management on Irregular Incomes

While all farms are not alike, and scale and variety and geography differs, the pattern of household financial management holds its fundamental logic across continents.

click to expand image

As we saw previously, an experienced farmer tends to fall somewhere in between a salaried employee and an odd job labourer in their ability to predict with any reasonable degree of accuracy when they might expect cash income to arrive and approximately how much. They are able to estimate the quantum of the crop, and when it will be ready to harvest. They may already have buyers or a market.

However, in practice, farmers rarely rely solely on these infrequent lump sums for managing their household finances – a big harvest once or twice a year, maybe three times depending on the crops and the local geography. Instead, they manage on sophisticated portfolio of investments, each maturing over different periods of time, as a way to mitigate risk, as well as smoothen out cash flows over the course of the natural year, and minimize the impact of uncertainty or shock. The drivers for these goals are the foundation for the variety of business practices observed across sectors in the informal economies of the developing world.

You will find even the humblest farmer, as long as he owns the patch of land on which his homestead is built, even if his fields may be further away, doing some or all of a combination of these activities to manage his income stream over the course of the natural year. I will explain the basics, and then give examples from different regions.

Managing A Portfolio of Investments based on “Time and Money”

The illustration above captures our attempt to map the various cash flow patterns from the farmer’s portfolio of investments. Consider each cluster of elements as a “deposit” with varying times of maturity for cashing out, as the need may be. For example, cows give milk which can be sold for almost daily cash returns, as can the eggs from chickens. The fresh produce from the kitchen garden matures far more quickly than staples such as maize or beans. And, if there is a cash crop such as tea or coffee, this may taken an entire year for the harvest to be monetized. At the same time, various farmyard animals are invested into when young, maturing over time for sale, as an emergency cushion or for earmarked expenses such as annual school fees.

Thus, over the course of the year, cash arrives in hand with varying degrees of frequency, and periodicity, thus ensuring the farm’s ability to manage regular household expenditure on a more or less regular basis, even though there are no predictable wages. Nor, is the farmer burdened with credit and debt over the time whilst waiting for her 2 or 3 major harvest seasons.

Variance in regional seasonality influences coping mechanisms

While the foundational framework of the farmstead’s domestic financial managment remains the same, regional differences due to geography, and thus seasonality, influence crop choices, number of harvests, and the details of the coping mechanisms selected by the farmer to manage her financial portfolio.

For instance, in rural Philippines, in the rice growing Visayas islands, only well situated farms benefit from three rain fed rice harvests a year whilst the majority must manage on two. Thus, farmers invest in piglets, calves, or even cull chicks for nurturing into fighting cockerels which sell for more than 10 times the price of a regular chicken. They stock firewood, coconut husk, and supplement their cash money needs through petty retail during the low season.

In rural Malawi, outside of Blantyre, the farmwife who is a member of beekeeper’s cooperative, distills traditional wine for sales 2 to 3 times a week, boosting her cash flow frequency instead of waiting for the annual honey harvest.

Minimizing volatility to enable financial planning

Thus, we can see that even under conditions of uncertainty, farmers have established the means to manage their household expenses, including periodic ones such as school fees or loan repayments, on irregular and unpredictable cash flows from a variety of sources. Their sophisticated portfolio of investments contain “deposits” that mature over varying times, for different amounts, and their planning, thus, goes into ensuring that the volatility between income and outgoing expenses is kept to a minimum.

Next, we will see how less agriculturally dependent sectors of the informal economy base their financial management patterns on the rural economy’s foundation of portfolio management.

 

Collected Works
Work in Progress: An Introduction to the Informal Economy’s Commercial Environment – Links to organized series of articles on the topic

Why does the prepaid model work so well and what are the lessons for business model innovation?

Increasingly, employment is becoming ad hoc and flexible. The gig economy and the informal sector share a common characteristic of incomes which are irregular and unpredictable, unlike the timely wages characteristic of formal employment. Both budgeting and planning thus become a challenge when there’s no predictable paycheck to rely on. Expenses are managed against cash flows to minimize volatility, and payments with calender deadlines become a challenge in planning.

It is in this scenario that the prepaid or pay as you go model works so well for the customer, one of the reasons why its ubiquity across the developing world drives the growth of mobile phones. It puts control over timing and amount of money spent in the hands of the user, allowing them juggle voice and data purchases against available cash in hand.

Here are the lessons for business model innovation applicable for a plethora of products and services, drawn from our decade of research into the financial frameworks underlying the operating environment characterized by unpredictability and volatility, and the success of the prepaid model.

Flexibility

The prepaid model is flexible. There is no rigid requirement on the amount that can be spent, beyond the voucher values of each telcom operator, nor are there periodic calender based deadlines such as those in a monthly bill. In Nigeria, traders have been found to top up their phones multiple times a week or even the same day, yet purchasing the smallest denomination of vouchers. High frequency of small amounts is a purchasing pattern that resembles their own cash flow while trading in the informal market. They don’t want to tie up their liquidity in airtime in case cash on hand is required for business, yet their trade is clearly dependent on mobile communication hence the frequent recharges.

This flexibility built into the business model clearly puts control over timing and amounts spent in the hands of the end-user who must manage a volatile cash flow situation.

Seasonality

In addition to the daily or weekly fluctuations in cash flow experienced by gig economy workers or those active in the developing country informal sectors, there are larger variations in income level over the course of the natural year. Unlike the regularity of a monthly salary, irregular incomes rise during peak seasons, such as festivals and holidays, and plunge during low seasons. Developing country economies are more closely linked to the seasonality of agriculture, given the greater proportion of the population’s dependence on farming. Incomes can vary as much as 300% for instance, for tea farmers in western Kenya’s Kisii region. Climatic effects also have greater impact on cash flows, and the current drought in East Africa is expected to depress livestock prices in the coming half year. On the upside, seasonal peaks in consumer durable sales are predictable as the regional harvest timings are a known factor. North India’s post harvest season in late October/November kickstarts an orgy of consumer spending during the festivals and the weddings which take place during this period.

Business models designed to take expected seasonal changes into account can minimize the dropout rate of customers when their income changes.

Liquidity

One of the biggest challenges we have wrapping our heads around when considering more rural or cash intensive economies is that liquidity is not equivalent to wealth, or even purchasing power. While this factor can apply to anyone relying on multiple income streams from a variety of sources, I’ll use the example of a small farmer to explain its importance to the design of business models.

The homestead is managed like an investment portfolio, with different sources of income maturing over different durations of time over the course of the natural year. This is also why control over Timing – frequency, periodicity – of payments, such as possible in the prepaid model, is so critical for the success of payment plans. A smartphone might be purchased after the major harvest of the annual cash crop, but its the daily cash from the sale of milk that would be used for recharges (and other basic necessities). Similarly, a calf may be purchased to fatten against the following year’s school fees.

Negotiability

This leads directly to a factor more relevant to heavily informal economies where variance in systems and structures means transactions are more human centered, depending on face to face communication, trusted references, and mutual compacts rather than legal contracts to enforce agreements. Negotiability of your business model, and its close relation, reciprocity – “the give and take” – is an element missing from faceless institutions that seek to serve this demographic.

This is one reason many prefer to seek solutions outside of formal banking institutions, for example, as their opening hours might not suit the trader’s business hours. In Busia, Uganda, most women traders had established trusted relationships with a mobile money agent, many of whom would show up at the end of the work day to assist the trader in transferring the cash earning safely onto the digital wallet. And, unlike the bank, the telco’s prepaid model allows customers to “negotiate” when and how much they’ll pay within the constraints of far more flexible terms and conditions than most other models.

A farmer has “purchased” this solar panel after coming to an agreement with the shopkeeper. He will pay off the total, over time, as and when he has spare cash, and collect the panel when payment is complete. There is no interest charge. The shopkeeper has put the farmer’s name on the panel but will keep hold of the item.

The greater the span of control over timing and amounts, the greater the success of the payment plan

The prepaid model bridges the critical gap between the predictable formal structures of the large institution and the dynamic challenges of the informal. The bottomline is that the flexibility, negotiability, and reciprocity of the model are more important factors for its success than the conventional understanding of permitting micropayments in advance. Numerous consumer product marketers entering emerging markets experienced this challenge when their micropayment hire purchase models failed customers who might have to miss one or two week’s payments due to illness or other emergencies – their products were repossessed without any recourse to adjustment. Its the rigid calender schedule embedded in a payment plan that is often the barrier to a high ticket purchase than the actual price itself.

None of these factors are insurmountable with today’s technology, and the field for business model innovation for irregular income streams such as those in the gig economy or the informal sector is still wide open for disruption.

Fundamental Elements of Informal Sector Commercial Activity

There are two key elements which underpin the dynamics of any business or commercial enterprise in the informal sector. These are Time and Money.

A generalized framework can be diagrammed, as shown above, where the dotted line denotes the degree of uncertainty and volatility of an individual’s cash flow patterns – whether from a variety of informal economic activities – such as for the farmer or trader; or from the salary received for a white collar job. The X axis – Time – denotes the increasing accuracy of estimating the Arrival date of a cash payment (from some revenue source), and the Y axis – Amount – denotes the increasing accuracy of estimating the Amount that will arrive. Their relative ability to estimate Arrival and Amount with any degree of accuracy is indicative of their ability to forecast and plan for expenditure.

Thus, at one end of the continuum, one can position an odd jobs labourer who may or may not get paid work on any given day, and is unable to predict with any degree of certainty what type of job he’ll get selected for, nor for how many days it will last. It could be as basic as loading a truck for half a day’s pay, which in turn might even be in kind, and not cash. And, at the other end of this continuum, one can position a the typical white collar salaried professional or civil servant who knows with certainty exactly on which day they will receive the salary and exactly how much will arrive.

 

Positioning and Location

Now, we can frame these two elements of the commercial operating environment in the form of a position map, as shown above, that maps the ability to plan expenditures against the stability of the cash flow. The red arrow is the continuum of certainty and stability of Timing and Amount of an income stream, anchored by the most vulnerable odd jobs labourer at one end and the relatively most secure salaried professional at the other.

Where it gets interesting is the relatively liminal space in the middle where the various economic actors in the informal economy constantly shift position as they seek to mitigate the volatility of their income streams, through a variety of mechanisms. Much of their decision making is related to their own perception of uncertainty and ability to forecast.

For the purpose of this explanatory diagram, I have selected 4 typical examples drawn from different sectors of the informal economy common in the developing country context. Each are at the more vulnerable end of their own segments i.e. a subsistence farmer, rather than one with an established cash crop; or a small roadside kiosk rather than an established general merchandise store in a market town; since they have not yet achieved the goal of their business development strategies to move their own entrepreneural ventures towards relative stability, and thus provide more insight on the relationship between cash flow patterns and investment and expenditure planning.

The hawker of goods at a traffic light or junction is in a comparatively more fragile situation than the kiosk owner with a fixed location who works to develop relationships with passing customers in order to convert them to regulars at her store. Unlike the kiosk, which might be located near a busy bus stop, or outside a densely populated gated community; the hawker cannot predict which cars will pause at the red light as he darts through traffic shouting his wares. However, compared to the odd jobs labourer, the hawker has comparatively more control over his income generation since his is not a passive function of waiting to be picked from the labour pool in a truckyard or construction site.

The smallholder farmer might actually be better off economically in many ways than his urban brethren involved in informal retail, being able to live off the land more cheaply than in the city. Experienced farmers, for the most part, are able to predict with reasonable accuracy, more or less the quantity of their crop, and the estimated timing of the harvest. However, his sense of uncertainty is often perceptually greater due to the unmitigatable impact of adverse weather conditions, or the sudden infestation of a pest or blight, any of which could at any time completely destroy his harvest, and thus, his expectations. This sense of insecurity in turn influences his decisions on expense commitments to far ahead in time, or too large a lumpsum at some point outside of his regional harvest season. The farmer’s income streams are relatively more out of his control than the disposable income in the pockets of the kiosk’s customer base.

The market woman with her display of fresh produce, at the entry level of inventory investment capacity, might only have one or two different varieties of vegetables or fruit to sell, and may not yet have established a permanent structure – a table, a kiosk – in the market. She might start off with only a tarpaulin on the ground with some tomatoes and onions for sale. Unlike the traffic intersection hawker, however, she is more likely to begin by assuming a regular placement and location as this establishes the foundation for her future business development, through the factors of discoverability and predictability among the customers in that locale.

That is, in addition to Timing and Amount of Income – the cash flow patterns and sources – we begin to see the role played by location – Place1, as a supporting element of the commercial activity in the informal economy. While farmers are least likely to have much control over the location of the land they may inherit, their risk mitigation strategies to minimize volatility of their income streams and maximize their ability to plan for the future and manage emergencies will be discussed in depth in the section2 on rural household financial management. These practices are the foundation of business development strategies commonly observed in the informal economy in developing countries which tend to be less urbanized, and as is often the case, more dependent on agriculture as a component of national GDP.

 

Appendix
1 People, Pesa, Place: A Multidisciplinary Lens on Innovating in Emerging Markets
2 Rural Household Financial Behaviour on Irregular Income Streams at the Base of the Pyramid

Frame Insights: Going back to first principles in the Innovation Planning Process

After conducting research, we need to bring structure to what has been found and learned. We sort, cluster, and organize the data gathered and begin to find important patterns. We analyze contextual data and view patterns that point to untapped market opportunities or niches. Finding insights and patterns that repeatedly emerge from multiple analyses of data is beneficial. ~ Vijay Kumar, 101 Design Methods

“It’s what happens after the research that’s important” is something I found myself saying three times to three different people in three different contexts over the past couple of days. Anyone can go out and interview users and beneficiaries. What’s important is what happens during the Analysis phase.

To ponder this in detail, I wanted to go back to first principles, and drill down into the post research stage where we are expected to frame our insights.

Vijay’s slide pops out 5 key outcomes from this phase, and these are critical for solution development in the subsequent phase. These 5 outcomes from analysis of the data collected during the research phase are:

  1. Looking for patterns
  2. Exploring systems
  3. Identifying opportunities
  4. Developing guiding principles
  5. Constructing overviews

It is this stage that distinguishes the quality of the outcome. Now, in the case of our work in the informal economy operating environment, we have built up an overview of the landscape over the past several years, primarily through immersion and thick data collection using design ethnography methods.

Starting from the purchasing patterns and buyer behaviour of low income consumers, back in early 2008, all the way through to the development of guiding principles such as flexibility, we have explored and mapped the ecosystem from numerous vantage points.

Today, our synthesis of user research does not happen in isolation from the body of work – intellectual property – that has been developed over time, through experiential and practical knowledge.

This, then, is what underlay my conviction when I spoke about the importance of the quality of interpretation of the data, and the transmutation of these interpretations into implemented insights in the form of new product features, service design elements, or nuances of the payment plan in the business model.

Increasingly, the Frame Insights phase of our work has led to the evolution of our understanding of the commercial landscape in rural and informal markets where incomes tend to be irregular and volatile, and infrastructure is inadequate or missing. It is this that I’ve been attempting to capture under the category of Biashara Economics.

It’s not Africa specific. The patterns hold, give or take ~30% margin for historical/cultural/social differences, across continents. That is because these patterns are the natural response to the common characteristics of seasonality, volatility, uncertainty, and unpredictability. And this is why one can see the success of the prepaid business model around the world.

It strikes me here that this in fact validates the methodology and approach to exploration and discovery in unknown contexts, something I had framed as the starting point for the very first such project almost a decade ago. Over time, I discovered how much the methods, as delineated by Vijay in Chicago, had to be adapted for the context but that is a topic for another time.

As global firms (MNC) pull back from emerging markets, what does this mean for Africa?

tumblr_nwsbz0ytDw1qghc1jo1_500Last week’s issue of The Economist drilled down deeper to cover the retreat of globalization – at least in the most visible form, that of the multinational brands dotting cityscapes around the world. The retreat of the global company, they trumpet, the end of Theodore Levitt’s vision.

Credit Suisse takes a concise yet comprehensive look at these weak signals in their well-written report that frames the situation as a transitional tug of war between globalization and multipolarity – an inflection point, rather than a retreat. They make it sound like missing the turn at an intersection and having to come back to the traffic lights to figure out which way to go.

Duncan Green of Oxfam captured the essence well:

But the deeper explanation is that both the advantages of scale and those of arbitrage have worn away. Global firms have big overheads; complex supply chains tie up inventory; sprawling organisations are hard to run. Some arbitrage opportunities have been exhausted; wages have risen in China; and most firms have massaged their tax bills as low as they can go. The free flow of information means that competitors can catch up with leads in technology and know-how more easily than they used to. As a result firms with a domestic focus are winning market share.

In the “headquarters countries”, the mood changed after the financial crisis. Multinational firms started to be seen as agents of inequality. They created jobs abroad, but not at home. The profits from their hoards of intellectual property were pocketed by a wealthy shareholder elite. Political willingness to help multinationals duly lapsed.

Of all those involved in the spread of global businesses, the “host countries” that receive investment by multinationals remain the most enthusiastic.

The first thing to note is that the global MNCs being considered by The Economist are primarily the legacy ones  – fast food chains like McDonalds and KFC (Yum Brands) – whose shiny logos used to represent the liberalization of the closed markets of India and China.

Even at powerhouses such as Unilever, General Electric (GE), PepsiCo and Procter & Gamble, foreign profits are down by a quarter or more from their peak.

or the few examples of emerging market brands that have gone global such as China’s Lenovo which purchased IBM’s Thinkpad and India’s Airtel which bought into the African market.

What’s being touted as their competition are regional brands, who aren’t as stretch out globally in terms of their supply chains, and less vulnerable to currency volatility. Further, the majority of these global brands are heavily dependent on their B2C marketing and sales – the question of whether they ever managed to understand their new markets is a topic for another post.

And so, we ask, what will this mean for the emerging economies of Africa, who are only now seeing the first fruits of FDI? Who will come and develop their consumer markets?

India and China apparently. And strategically – through unbranded affordable commodities and the acquisition of successful regional consumer brands – rather than the legacy MNC approach influenced by Levitt. Even Japan recognizes this, as they seek to piggyback on the Indian experience.The economics of scale that propelled the first rounds of growth for the manufacturers of washing machines and the automobiles never did make sense infrastructurally for the majority of the African consumer markets.

Instead, the patterns pointed out by The Economist and Credit Suisse imply that opportunities will lie among regional stars – Equity Bank of Kenya, for instance, whose regional footprint is surely but steadily creeping outwards across the East African Community and trading partners – or, the telcom brands such as Tigo (Millicom) who innovate for each of their local markets.

The jobs and exports that can be attributed to multinationals are already a diminishing part of the story. In 2000 every billion dollars of the stock of worldwide foreign investment represented 7,000 jobs and $600m of annual exports. Today $1bn supports 3,000 jobs and $300m of exports.

Godrej, for instance would be considered a regional Indian giant rather than a multinational in the conventional sense of a Unilever or P&G.

Where [MNCs] get constrained is, they are driven by lot of processes that are global. For a smaller organisation like us, we are completely empowered; decision-making is quick and we can initiate changes very fast. We are more agile and have an advantage over them.

Yet their expansion outside India shows a “pick and choose” strategy of markets they’re comfortable entering.

The group’s acquisition strategy hinges on identifying unlisted companies built by entrepreneurs looking for capital, picking up stakes and working with them to scale up their businesses.

At least two homegrown Kenyan FMCG brands – skincare by a global giant and cosmetics by private equity – have been acquired. As have snack foods, spices, dairy products, and other products that cater to local tastes. The best known being Fan Milk of West Africa. Private equity such as Abraaj make no bones about going after consumer driven opportunities.

Given these choices, sustainable African businesses who understand their consumer markets have an opportunity to establish their brands and grow – with the financial help that’s strategically becoming available.While Chinese imports make the market highly competitive and price conscious, fish and tyres are substitutable goods in a way skincare and cosmetics are not.

African consumer companies – formal, informal, or semi-almost there-formal – need to hustle right now.

The retreat of the MNCs offers a chance to exhale, and expand, and grow, but the advent of the East implies waking up to the need for serious strategic thinking about domestic comparative and competitive advantage – one of which is incomparable knowledge of local consumers, culture, and needs, and critically, experience of their vast informal sectors and cash intensive economies.

Bridging East Africa’ formal – informal financial services divide

Kenya’s formal inclusion looks pretty, the financial inclusion industry has been has been great at talking up its achievements over the past 10 years. Here, 75.3% of Kenyans are now formally included, a 50.3% increase from 19 years ago. Official statistics on mobile phone penetration is up to 80.5% of the population and there is general consensus, the mobile phone has been central to expanding formal financial services to the – unbanked and under banked. The numbers are pretty awesome.

In February, FSD Kenya’s chart of the week featured an interesting pattern.

 

source: http://fsdkenya.org/data-visualization/chart-of-the-week-credit-in-kenya-how-big-are-loans-on-average/

source: http://fsdkenya.org/data-visualization/chart-of-the-week-credit-in-kenya-how-big-are-loans-on-average/

 

The red line marks the axis between the formal (prudential) and informal financial services alternatives. The largest source of credit for the bottom 40% populate the informal segment – SACCOs ,MFIs, Peer to peer, community groups. Dotting the top in blue are the banks and mobile banking lending products Mshwari.

So, there is more going on besides what the numbers say about formal financial inclusion.

 

Appreciating the informal sector’s financing alternatives

I got a sense of this gap between what the reports say and what was on the ground in 2015/2016 as part of 2 immersive fieldwork projects – Nyeri Mama’s Financial Diaries and later same year as part of Borderland Biashara: Mapping the cross border, national and regional trade in the East African informal economy project. I got to meet and spend time with biashara people, mama biashara, informal traders at the borderlands, boda boda guys, brokers and 65 year old Wangari – all in their natural setting – the mostly rural and cash intensive informal economies at the borderlands.

I found out that 90% of them had a basket of alternative credit, investment, insurance and savings informal financial products at their disposal – up to 8 different volatility management groups. The flavor of these alternatives ranged from extreme formal prudential to extreme informal.

Wangari, from Nyeri, for example, did not have a bank account but, was part of

  • 1 Micro-finance bank,
  • 2 Cooperatives
  • 1 ROSCA (Rotating Savings and Credit Association
  • 1 Chama (savings group)
  • a Catholic church group and
  • a modest Nokia mobile phone with Mobile wallet (Mpesa) and mobile wallet bank (Mshwari)

At the borderlands of Busia and Malaba between Kenya and Uganda, close to 96% of 100 biashara interviewees were part of at least 3 savings groups, besides their mobile phone. There was almost always one savings group that was part of their trade or craft networks.

 

Bridging the Gap

system-monster

When we look at the under banked strictly through the lenses of a bank, we miss out on the rich diversity of community bank-like products at their disposal. When their options are labelled informal, the tone becomes one of expanding the larger banking formal system, at the expense of our dear Chamas.

My suggestion for the present day efforts to push towards financial formalization, is to instead transform into a pull towards formality. Is there a middle ground? Where we can have the rich of the Chamas and savings group together with the formal financial system? Or where we can have a blend of the rich of the savings groups with technology?

Yes, we can, and there are examples from East Africa’s Kenya and West Africa’s Chad

  • Equity bank directly engages registered savings groups at the Busia Malaba border, a trader’s Chama.  A credit officer from a local branch attends weekly meetings with the group, and liaises between Equity Bank and the Chama. The bank facilitates loans guaranteed by the group as a unit. 

“Muranga county seeks to ease unemployment with cow loans”Daily Nation

  • Ng’ombe loan, by Muramati and Unaitas SACCO, was an unconventional loan product much closer to the realities of a rural Muranga. Youth in this county received high-yielding, pregnant dairy cows on credit, and were to repay the loan through milk deliveries to processors. An expectant cow as the loan principal, with repayments priced in daily milk deliveries. How cool!

“TigoPaare – People’s Banks for Communities across Africa”Balancing Act Africa

  • In Chad, Paare are the equivalent of Chama group savings plans in East Africa. TigoPaare is a group wallet that adds a ‘group layer’ on top of standard mobile money, to deal with common funds, trust and other group initiatives. The wallet helps informal cattle trades look after their income from cattle sales, with the functionality to make loans to members. The pilot attracted 19,000 users, including community mutual funds, cotton producers cooperatives, churches, market sellers and women’s groups.