THE rapid informalisation of the economy during the hyperinflation years as the country de industrialised and formal jobs were lost has necessitated a major transformation of how business in Zimbabwe should be done going forward.
According to a government Prices Incomes, Consumption and Expenditure Survey (Pices) 2012 report, while unemployment by conventional definitions was estimated at about 80%, the Pices report put those “gainfully engaged”, not necessarily employed at over 90%.
For many economists, the seemingly discordant figures told a story of an economy that has become highly informal in structure and that Zimbabwe has in fact, developed a significant grey or unrecorded economy.
One just has to see the level of financial activity at Road Port — the cross-border bus terminal — or at the Gulf complex at Market Square. Huge amounts of money change hands between traders everyday, but where does this money go?
The Finscope survey on financial inclusion estimated that the informal sector has as much as $7,4 billion circulating outside the formal financial system.
This for bankers presents both an opportunity and a challenge, especially if we consider the same survey highlighted the extent of financial exclusion in the economy. There is a significant 54% of the adult economically active population that is unbanked or unserved by the formal financial system.
These statistics, after being thrown about, ignited boardroom discussions in banks, but also suggested at least that the informal economy is at least as big as the measured economy. That presents opportunities.
The Bankers’ Association of Zimbabwe (BAZ) and its member bank commissioned an in-depth study that is being carried out, to further understand the inner workings of the Informal sector and how banks should respond to this “new norm”.
While banks need to attract fresh investment capital to shore up their reserves, the informal sector will play a big role as banks transform this sector into a significant customer base.
This can only be done through ongoing efforts at pushing financial inclusion in the economy.
Fortunately, there is already a significant multi-stakeholder approach of which the banks are playing an anchor role. We have seen efforts of various government departments and arms now talking about formalising or harnessing the power of the informal economy.
This can only be done through an appropriate mix of policy interventions, chief among which is a financial inclusion strategy the government can champion through the banking system. Informal enterprises must first be encouraged to open and run bank accounts. The owner managers must be endowed with financial skills through financial education.
The resources of the informal sector, once harnessed into the formal financial system should impact positively on overall liquidity in the economy as the deposit base rises. This, combined with financial history of some good MSMEs (micro small medium scale enterprises) will enable them to access credit from the formal system.
It is a chicken and egg scenario, but in this case, the chicken has to come first. Most of our banks now have active MSME units.
The challenge remains that for the informal sector players to become remotely bankable, they must at least partially formalise their operations.
While banks have seized financial inclusion as a business imperative for all classes of unbanked citizens, government efforts at formalising the informal sector can only be achieved by first ensuring that the MSME sector becomes banked as a first step.
As already alluded to earlier, the money multiplier effects of a growing deposit base — if everyone now transacts through formal channels — will be immense. But what is the role of the government?
Leadership: First, we must cultivate a broad-based government commitment to financial inclusion.
Diversity: It must implement policy approaches that promote competition and provides market-based incentives for delivery of sustainable financial access and usage of a broad range of affordable services.
Innovation: It must promote technological and institutional innovation as a means to expand financial system access and usage, including by addressing current infrastructure weaknesses.
Consumer protection: It must encourage a comprehensive approach to consumer protection that recognises the roles of the government, financial services providers and consumers.
Empowerment: It must develop and engender financial literacy and financial capability amongst the citizenry. We must start financial education at an early age and where possible, financial education and entrepreneurship must be made a part of the national education curriculum.
Co-operation: It should create an institutional environment with clear lines of accountability and co-ordination within itself and also encourage partnerships and direct consultation across multiple stakeholders.
Knowledge sharing: We should utilise modern research tools and the improved data provided to make evidence based policy, measure progress, and consider an incremental “test and learn” approach acceptable to both regulators and service providers.
This allows for regulators to allow products into the market on a test basis and then craft regulations around the product as issues arise and emerge. Such an approach promotes innovation and speeds up the process of financial inclusion.
Proportionality: The government should build a policy and regulatory framework that is proportionate with the risks and benefits involved in such innovative products and services and is based on an understanding of the gaps and barriers in existing regulation.
In simpler terms let us not fit first world regulatory frameworks on a developing financial sector which may stifle growth.
Regulatory framework: It should adopt a regulatory framework that reflects international standards, being sensitive to national circumstances and balance the need to support a local development agenda while maintaining a sufficiently healthy, but competitive landscape.
Therefore, an appropriate, flexible, risk-based know-your-customer regime for the MSME sector that takes into account the nature of the small businesses and their needs is paramount.
In conclusion therefore, only a well structured financial inclusion policy framework led by the government, but driven by the private sector, is the surest way of harnessing the economic power of the informal sector.
Clive Mphambela is a banker. He writes in his capacity as advocacy officer for the BAZ.
BAZ expressly invites other stakeholders to give their valuable feedback related to this article on email@example.com or on numbers (04) 744686, 0772 206 913