A study on the informal sector which was undertaken by the Bankers Association of Zimbabwe and the Zimbabwe Economic Policy Analysis and Research Unit in 2015 produced some interesting insights into the inner workings of the informal sector.
The study established that although the informal sector players have limited resources in isolation, they could become a formidable source of resources when considered as a combined group.
The study recommended the need for developing facilities that can tap into this resource pool for the sector’s development.The informal sector plays an important role in most developing economies. It provides jobs and reduces unemployment and underemployment, but in many cases the jobs are low-paid and the job security is poor.
It bolsters entrepreneurial activity, but at the detriment of state regulations compliance, particularly regarding tax and labour regulations. It helps alleviate poverty, but in many cases informal sector jobs are low-paid and the job security is poor.
The size of the informal labour market varies from the estimated 4 to 6 percent in the high-income countries to over 50 percent in the low-income countries.Its size and role in the economy increases during economic downturns and periods of economic adjustment and transition.
Given the findings from the BAZ and Zeparu study, banks should thus engage the informal sector players and embrace the idea of fostering partnerships and clusters.
Under this arrangement informal sector players, through the assistance of banks, pool their resources by bringing their capital and expertise together to make a meaningful investment. This also allows them to gain knowledge further and skills from their partners than when operating as individuals.
If the small traders come together to work as a group, they should also be encouraged to register their associations to assist in easily identifying their location, assessing their challenges and also make banks aware of their existence.
The study further established that banks should also try to exploit the relationship between the formal sector and the informal sector.
Given that one way or the other, the informal sector buys its raw materials from the formal sector or sells its finished wares to the formal sector, banks can use the linkages formed to get resources.
For example in well-established linkages banks are able to lend money to the formal sector establishment who then onward lend the resources to the counterpart informal sector player. The formal player, because of the well-established relationship with the informal sector, can easily collect the repayments. These results shows that the informal sector has a central role to play if it is well nurtured.
The results for the Banker Association of Zimbabwe and Zimbabwe Economic Policy Analysis and Research Unit is not in isolation.
According to the African economic Development Bank, organising the informal sector and recognising its role as a profitable activity may contribute to economic development.
This can also improve the capacity of informal workers to meet their basic needs by increasing their incomes and strengthening their legal status.
This could be achieved by raising government awareness, allowing better access to financing, and fostering the availability of information on the sector.
Authorities’ awareness: Policy-makers should recognise the important role informal sector companies play in the economy. Associating the informal economy to criminal endeavours or tax evasion is not a good way to formalise the sector. What is actually required is that the governments should put in place effective regulatory framework, good governance, better government services, improved business environment, and improving access to financing, technology and infrastructure.
Policy-makers should be aware of the heterogeneity of the informal sector. This means governments should adopt specific policies to bring large informal firms under formal regulation.
A systematic approach should be adopted in order to enforce a comprehensive regulatory regime including, for instance, registration for a formal tax regime.Better access to financing: Limited access to funds is one of the major factors explaining the development of the informal economy.
Facilitating access to formal financing channels such as micro-credit could be an overriding step to encourage informal entrepreneurs to shift toward more formal economic activities. However, raising the awareness of large conventional commercial banks of the potential of the informal sector is also essential.
Improving access to information: The fact that the informal sector has for a long time been neglected by policy-makers has not helped in generating knowledge on this sector.
For instance, informal activities are often invisible in official statistics. In order to analyse the contribution of the informal sector in the economy, it is important to collect and maintain relevant information.
This includes a wide range of information, such as the characteristics of actors, tax collection, impact on employment, working conditions, and productivity of informal companies.Improving financial literacy: A major barrier to the growth of a sustainable informal sector is a generally inadequate level of financial literacy.
This gap in financial education and practice, largely due to a lack of comprehensive management training, hampers the prosperity of business through a variety of adverse knock-on effects.
It is important that a financial literacy programme should be rolled out for the sector. Improving the financial literacy will have a beneficial flow-on effect to the broader economy, increasing levels of enterprising financial behaviour and greater participation in financial services and markets by confident and informed informal sector players.
Dr Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on firstname.lastname@example.org or on numbers 04-744686 and 0772463008.