Informal economy, is the diversified set of economic activities, enterprises, jobs, and workers that are not regulated or protected by the state. This sector of the economy is quite large in emergent economies. Unfortunately, according to development and transition theories, the informal economy can create vicious cycles that are extremely harmful to the communities. Workers in the informal sector typically earn less money for the same jobs of regulated workers, thus they have to deal with an unstable income, and do not have access to basic protections and services.
According to the African Development Bank Group, the informal sector is extremely strong, contributes about 55 per cent of Sub-Saharan Africa’s GDP and 80 per cent of the labour force. Nine in 10 rural and urban workers have informal jobs in Africa and most are women and young people. The prominence of the informal sector in African and other emergent economies stems from what might seem on a first impression, as the opportunities it offers to vulnerable sectors of the populations such as the poorest, women and young people. The informal sector thus enable people to
generate some income, but unfortunately informal workers are without secure income, employments benefits and social protection. The informal economy often overlaps with poverty and in countries where informality is decreasing, the number of working poor is also decreasing and vice versa.
Countries with high rates of informal economy are the ones where large segments of the population lack any access to financial services. Over 2 billion of the world’s population does not have any access to a basic bank account. Of this number, over 70% of this segment of the population survives on a daily basis with less than $2. This is not because the poor do not require any financial services. In fact, studies have shown the poor require basic financial services as much as the rest of the population. However what differentiates the poor from the rest of the financial included population is that they rely on the informal financial system to meet their financial needs.
Studies have shown that if the poor had access to the right financial tools at critical points of their lives, they would be better positioned to weather financial shocks or capture an opportunity which could possibly uplift them out of poverty.
Although there have been numerous attempts to resolve the issue of financial exclusion by fine-tuning existing financial structures, expanding microfinance and with government mandates, the core problem of financial exclusion of the poor still remains inadequately resolved. This is largely due to the fact that the poor deal mostly in cases which are expensive for banks and utility companies to deal with. The banks would have to remain contented with the issue of storage and transportation of the cash while operating with razor thin margins. In other words, until attempts to tackle the issue of financial inclusion for the poor become a profitable endeavor for commercial players, we will not be able to see any aggressive commercial initiatives to expand financial inclusion at scale such as the M-Pesa mobile payment solution initiative.
Fortunately emerging technologies have shown promise in helping to strip down as much as 90% of current transaction costs. Microfinance platforms, such as Kiva, has enabled people to lend money via the Internet to low-income entrepreneurs and students in over 80 countries. In addition, open source technologies such as blockchain technology are revolutionizing the way which digital money can be transferred from one party to another. The massive potential in capturing new streams of revenue for the financial sector using emerging technologies have certainly spurred new players to develop and generate new services and products that can cater to the specific needs of lower income segment of the population.
However we need to bear in mind that despite the potential which emerging technologies can play in expanding financial inclusion to the poor, it is only one part of the equation. Being able to connect the poor to the digital financial system doesn’t guarantee that the system will be a success. Instead, there must be coordinated efforts between the various stakeholders to ensure that the digital financial system can be successfully implemented. In this article, we outline some of the necessary conditions for success:
What are the Conditions for the Success of A Digital Economy Which Includes the Unbanked?
Before any new payment solution can be successfully implemented, developers must ensure that the system has the support of the government.
Regulatory Framework which supports interoperability
There must be a regulatory framework which adequately protects consumers as well as preventing the private sector from implementing a closed loop system which will effectively exclude new market entrants.
Consumer Merchant Education Programs
By conducting educational programs together with the rollout of the digital financial system assist with the adoption of the new system by the target group.
Government Adoption of the System
For a new system to be fully embraced, the government must be one of the first part to adopt the system rather than waiting for the private sector to adopt it first. To get a new system going, there needs to be bilateral adoption in order to create critical mass transaction volume. For example at the early stage of the Automated Clearing House (ACH) system implementation in the 1980s, it was the U.S treasury move to disburse social security benefits using the ACH system that prompted the banks and their customers to adopt the system.
While technology may be able to provide a particular product or distribution channel that can cater to the specific needs of the financial excluded, it is only through tackling the core problem in a holistic manner that we can achieve the results aimed for. The technologies can only resolve the demand side of the equation. To get the target group to fully embrace the solutions, there must also be support from policymakers who can develop policies and regulatory framework which will facilitate financial inclusion.
Paula Newton is a business writer, editor and management consultant with extensive experience writing and consulting for both start-ups and long established companies. She has ten years management and leadership experience gained at BSkyB in London and Viva Travel Guides in Quito, Ecuador, giving her a depth of insight into innovation in international business. With an MBA from the University of Hull and many years of experience running her own business consultancy, Paula’s background allows her to connect with a diverse range of clients, including cutting edge technology and web-based start-ups but also multinationals in need of assistance. Paula has played a defining role in shaping organizational strategy for a wide range of different organizations, including for-profit, NGOs and charities. Paula has also served on the Board of Directors for the South American Explorers Club in Quito, Ecuador.