THE promotion of business linkages between formal and informal sectors is a key challenge that must be addressed in many economies.
Typically a holistic, multi-sectoral and multi-stakeholder partnership approach involving the government, development partners and the private sector is required.
Such partnerships are usually aimed at promoting the growth and survival of micro, small-and-medium enterprise businesses (MSMEs) through capacity and capability enhancement on one hand, while improving the policy environment for larger formal businesses to flourish on the other.
Comprising over 65% of Zimbabwe’s private sector, the MSMEs can be considered to be critical in accelerating economic growth through the expansion of productive jobs, tax revenue and export revenues, as well as through the reduction of the country’s import bill by substituting imports.
However, most of Zimbabwe’s MSMEs are generally not only unable to meet business standards required to deal with formal businesses on such crucial competitive issues as price, quality and volumes, but are also found wanting in basic governance standards.
In spite of such limitations however, the larger formal businesses, particularly, banks are found to be ready to upgrade business relationships with MSMEs into long-term relationships, provided the MSMEs commit themselves to remedy identified shortcomings.
Such linkages with formal business can be facilitated in a number of ways.
- Possible interventions by the banking sector
One of the ways in which the banking sector can become a vehicle for fast-tracking the creation of dynamic linkages between the formal and informal sectors is through the structuring of innovative financing tools such as SME bonds that have been launched by one bank in Zimbabwe already.
These bonds enable deserving MSMEs who have a formal structure with a dedicated membership to raise money from the formal sector, ie pension funds and insurance companies, something that the SMEs would not be able to do themselves.
So banks, in creatively carrying out their intermediation role, can play a big part in “connecting” the formal financial markets to the informal sector players in a mutually beneficial fashion.
The institutional investors in the Bonds also have an opportunity to evaluate the MSMEs who are benefiting and such sharing of knowledge helps the over the financial sector in understanding the MSMEs better, enabling future innovations. The multi-sectoral, multi-stakeholder approach is also demonstrated in this instance as the government has accorded these SME Bonds both prescribed asset status and liquid asset status to enhance their investment appeal.
- Value chain finance
The banking sector can also facilitate linkages between formal and informal sector businesses by designing appropriate value chain financing mechanisms for the various subsectors of the economy. Experience has shown that countries that facilitate the development of sustainable formal–informal sector linkages can upgrade their local productive capacities and enhance their industrial performance by integrating their MSMEs into local and global supply chains of large firms.
Value chain finance is particularly important to MSMEs, but is not limited to order financing and invoice discounting products traditionally offered by banks. The domestic value chain finance model can be formulated to nature local MSMEs to meet international business standards and encourage large local and foreign businesses to source from the local MSMEs instead of sourcing from foreign firms. Large firms in the telecoms and beverage distribution sector also have a significant presence in the informal sector as most of their sales are conducted by informal traders. There is need to carry out researches in the other sectors such as real estate development, manufacturing and distribution. Overall, strengthening linkages between informal and the formal sector will result in tremendous improvement in operations of MSMEs which can be observed in various areas such as:
- Improved competitiveness of MSMEs through facilitating technological, knowledge and management skills transfer and capital injection,
- Behavioural transformation as entrepreneurs display much higher commitment to the fulfilment of contracts,
- Improvement in revenue turnover and employment numbers,
- Increased domestic sourcing by transnational corporations and large local companies leading to import substitution,
- The creation of higher quality jobs created and or their preservation,
- The increased ability of commercial banks and other financial service providers to provide credit and other financial products to MSMEs due to improved attractiveness,
- Strong, deeply rooted local supply chains emanating from the MSME sector to the formal corporate,
- A more dynamic private sector,
- An increased capacity to attract foreign direct investment as the informal sector becomes more organised and accountable,
- Increased contribution of the informal sector to direct and indirect taxes will enhance overall economic performance, The economy will become easier to measure and there will be better policy responses to policy as the size and extent of the informal sector players can be more easily ascertained or more accurately estimated.
- The role of technology
In playing their role as integrators of the formal and informal sectors, technology obviously plays a very critical role. With the advent of mobile and Internet-based delivery systems, banks should:
- Create mutually beneficial payment platforms and systems that enable them to mobilise from and to lend money to informal sectors while meeting all regulatory requirements which are presently a challenge specifically for the informal sector,
- Provide better access to funding which will enable the informal sector players to transform into formal sector players. Funding could be in the form of micro-credit,
- Improving access to information. Informal sector activities are not visible in official statistics. Banks can play a crucial role in aggregating and providing research on the informal sector within the limits of confidentiality disclosure constraints faced by banks.
Clive Mphambela is a Banker. He writes in his capacity as advocacy officer for the Bankers’ Association of Zimbabwe. For your valuable comments and feedback related to this article, he can be reached on 04-744686, 0772206913, or firstname.lastname@example.org.