Banks are central in the economy as financial intermediaries and providers of finance. The rapid informalisation of the economy in recent years has opened up a discussion on how the formal sectors of the economy can influence and benefit from this structural change in the economy.
By Clive Mphambela
The promotion of business linkages between formal and informal sectors is thus a key challenge that must be addressed in the economy if resources currently circulating in the informal economy will be harnessed for economic development. Harnessing the informal economy and transforming players in this economy into SMEs and then gradually turning them into larger business requires a typically holistic, multi-sectoral and multi-stakeholder partnership approach involving government, development partners and the private sector.
Such partnerships should be 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. Why is it important to embrace MSMEs as key players in the economy?
Now estimated to be comprising over 65% of Zimbabwe’s private sector, the MSMEs can be considered to be critical in contributing to economic growth and can thus be harnessed for the expansion of productive jobs, the growth of tax revenues and the creation of niche export opportunities, and can also eventually lead to the reduction of the country’s import bill by substituting imports through increasing the local production of goods and services.
However, most of Zimbabwe’s MSMEs are currently 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 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?
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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 that have been launched by one bank in Zimbabwe already.
These bonds enable deserving SMEs 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.
Thus 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 benefitting and such knowledge sharing helps the overall financial sector in understanding the SMEs better, enabling future innovations.
The multi-sectoral, multi-stakeholder 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.
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 organisations.
What is the role of 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 the 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.
How will the economy benefit from formalising MSME operations?
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;
lImproved competitiveness of MSMEs through facilitating technological, knowledge and management skills transfer and capital injection.
lBehavioural transformation as entrepreneurs display much higher commitment to the fulfilment of contracts.
lImprovement in revenue turnover and employment numbers.
lIncreased domestic sourcing by transnational corporations and large local companies leading to import substitution.
lThe creation of higher quality jobs created and or their preservation.
lThe increased ability of commercial banks and other financial service providers to provide credit and other financial products to MSMEs due to improved attractiveness.
lStrong, deep-rooted local supply chains emanating from the MSME sector to the formal corporate.
lA more dynamic private sector.
lAn increased capacity to attract foreign direct investment as the informal sector becomes more organised and accountable.
lIncreased contribution of the informal sector to direct and indirect taxes will enhance overall economic performance.
lThe 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.
What role can technology play in this effort?
With the advent of mobile and internet based delivery systems, banks should:-
l Create mutually beneficial payment platforms and systems that enable them to mobilize from and to lend money to informal sectors whilst meeting all regulatory requirements which are presently a challenge specifically for the informal sector.
l 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.
l Improve access to information and research on the MSME sector. Informal sector activities are not very visible in official statistics.
lClive Mphambela is a banker. He writes in his capacity as Advocacy Officer for the Bankers’ Association of Zimbabwe (BAZ). For your valuable comments and feedback related to this article, he can be reached on 04-744686, 0772206913, or [email protected].
