ONE of the key economic questions of our present day is how the formal financial system can harness resources that are circulating outside the ambit of formal banking. Various studies have been carried out and estimates ranging from $2 billion to $7,4 billion have been proffered as the quantum of resources circulating in the informal sector.
By Clive Mphambela
However, it would not be productive to sit and debate whether the figure is, in fact, $2 billion or $7,4 billion as there is generally agreement and broad consensus that the economy has to somehow tap into this resource so that some of the economy’s liquidity challenges may be ameliorated.
Banks have been identified as having a key economic role in promoting and driving informal sector growth and development. The promotion of business linkages between formal and informal sectors becomes a key challenge that must be addressed.
In this regard, a holistic, multi-sectoral and multi-stakeholder partnership approach involving the government, development partners and the private sector is required in order to come up with a framework for driving the competitiveness of the informal sector.
Such a partnership should promote 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 are now considered to be critical in accelerating economic growth through the expansion of productive jobs, potential for tax revenue and export growth, 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.
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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.
What are the possible interventions by the banking sector?
One of the ways in which 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. These have been launched by one bank in Zimbabwe already.
These bonds enable deserving SMEs which 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 by 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, multi-stakeholder approach is 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.
However, it is important to note that for banks and investors to participate in the SME sector, there is need for SMEs to have a robust, disciplined and focused membership driven organisation.
How can value chain finance be instituted?
The banking sector can 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 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 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 have a significant presence in the informal sector as most of their sales are conducted by informal traders.
However, there is need to carry out further research in the other sectors such as real estate development, manufacturing and distribution.
What are the main benefits of strengthening formal-informal sector linkages?
Overall, strengthening linkages between informal and formal sectors will result in tremendous improvement in operations of MSMEs which can be observed in various areas such as:
lCompetitiveness of MSMEs through facilitating technological, knowledge and management skills transfer and capital injection, l Behavioural transformation as entrepreneurs display much higher commitment to the fulfilment of contracts, l Growth in revenue and employment numbers,
l Increased domestic sourcing by transnational corporations and large local companies, leading to import substitution, l The creation of higher quality jobs and/or their preservation,
l The increased ability of commercial banks and other financial service providers to provide credit and other financial products to MSMEs due to improved attractiveness,
l Strong and deeply rooted local supply chains emanating from the MSME sector to the formal corporate, l A more dynamic private sector,
l An increased capacity to attract foreign direct investment as the informal sector becomes more organised and accountable, l Increased contribution of the informal sector to direct and indirect taxes will enhance overall economic performance and l 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.
lClive 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 [email protected].
