Banks key in informal sector development

The Reserve Bank of Zimbabwe. Picture: Aaron Ufumeli

THE promotion of business linkages between formal and informal sectors is a key challenge that must be addressed in many economies.

Clive Mphambela

Typically, a holistic, multi-sectoral and multi-stakeholder partnership approach involving 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 SMEs 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 SMEs who are benefiting and such knowledge-sharing helps the overall financial sector in understanding the SMEs better, enabling future innovations.

The multi-sectoral, multistakeholder approach is also demonstrated in this instance as 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 mechanism for the various subsectors of the economy.

Experience has shown that countries that facilitate the development of sustainable formal – informal sectors 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 and includes 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 nurture local MSMEs to meet international business standards and encourage large local and foreign businesses to source locally from the local MSMEs instead of sourcing from foreign firms.

Locally the value chain finance has been prominent in the priority sector of agriculture where banks and large players in the formal sector have teamed up to provide funding for the production of cotton, tobacco and sorghum.

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 sector and the formal 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 trans national corporations and large local companies – import substitution.

The creation of higher quality jobs created and or preserved.

The increased ability of commercial banks 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 andsystems that enable them to mobilise from and to lend money to informal sectors whilst meeting all regulatory requirements which are presently a challenge specifically for the informal sector. Banks are motivating for a leveling of the playing field with various regulators in order to unlock some of the key bottlenecks to financial inclusion.

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.


  1. ….includes but is not limited to Order Financing and Invoice Discounting products traditionally offered by banks…

    Zimbabwe is currently a cash economy and once someone has got an order the game is over. The project can finance itself. MSMEs require working capital to generate growth. You will be surprised that all MSMEs involved with telecommunication and Delta Products pay cash for these products and have failed to take off because of working capital constraints. Government should come up with incentives for banks that support MSMEs. It is important to understand that MSMEs contribute significantly to tax as they buy all their requirements from formal organisations and pay VAT.

    The growth of the informal sector has generated the huge import bill. All the clothes sold at almost all Flea markets are imported.

    • The issue of banks supporting economic activities is good but lacks the parameters within which to play. These banks have an agenda of enriching themselves not that of economic growth. It is evidenced by huge bank charges which they levy on ordinary account holders for a minimum transaction like cash withdrawal. There is no interest on my deposit and yet they make profit on overnight transactions. I get charged a monthly charge for account maintenance as well on withdrawal. Where is the fairness in this kind of deal? Let alone to entrust them with economic growth is tantamount to giving a thief keys to your safe. Banks have no clue on how to improve the economy except to line up their purse. They are just a bunch of clueless thieves with no ideas to transform our economy into a vibrant one. They are useless except collecting levies from customers and share proceeds. Shame on them.

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