Unlocking the entrepreneurial potential of

the informal sectorDr. Christoph Stork

researchICTafrica

researchICTafrica

Research network of universities and think tanks in 20 African countries

Year Research titleNo African countries Sample

2005 2006 SME e-Access & e-Usage Survey 14 4,000

2007 2008

Household e-Access & e-Usage Survey (with focus poverty and demand

elasticities)17 23,000

Average number of individuals deriving a livelihood from the business

( employees & owners)

Access to capital remains biggest obstacle for SMEs

• Access to capital mostly through family and friends

• Micro finance only works on peer pressure (eg village banks, not suitable in urban areas)

• Informal money lenders very very expensive

• Even formal banking for the informal sector is: Bank in Kenya provides daily loans to market women at 20% a day eg

• The ability to repay loans is unknown to banks due to lack transaction history. It is hence risky for banks to serve them

• No collateral to access formal credit

• Lack of skills to run the business professionally (bookkeeping, inventory systems, business plans)

SMEs from 15 African countries: Out of 10 Transactions, how many are in cash?

Informal Semi-formal Formal

SMEs want M-Commerce

Interested in cell-phone banking if cheaper and equally safePrepared to change bank or apply for a bank account if this bank offers cell-phone banking!

Problems with current M-Commerce solutions

• Useful to the currently banked but unlikely to draw in the unbanked into the financial system

• Mobile phone added a channel for the banked to do their banking

• Systems MPESA mainly for “larger” (not for buying milk or bread) transfers not full banking

• Cost asymmetries: • Cash expensive for banks but cheap for informal SMEs

• Manpower is expensive for banks but micro-credit is very manpower intensive

Solution- Airtime instead of cash

• Electronic alternative to cash, based on technologies that are already being used by SMEs

• SMEs build up a transaction history by transacting electronically rather than in cash

• Mobile phone based bookkeeping and inventory system can be based on this transaction history

• Giving SMEs more control over their businesses and allowing them access to formal financial services

Airtime as alternative to the current payment system?

• Airtime is a transfer solution at zero transaction costs

• However, airtime does not equal cash for several reasons:

• The retail channels takes 10% of the airtime value

• Airtime is being taxed VAT at the source

• If it were - cell-phone operators would be required to have a bank license since selling airtime would equal accepting deposits

• Airtime is hence not backwards-convertible into cash

Option 1: Airtime = Cash • Bank / VNO / Mobile operator becomes provider of airtime and

converts it back into cash

• Problem of taxation can be resolved by negotiating that airtime is not generally taxed but only used airtime (called or SMS time) is being taxed VAT. Alternatively Operators buying back airtime could claim input VAT

• Problem of value loss in distribution channel:

• selling airtime via ATMs and mobile banking

• creating other incentive structures for retailers (cash in businesses such as super markets and petrol stations)

• additional liquidity is generate through trade, between SMEs e.g.

• Each mobile number can be translated into bank account by default (VNO status = access to all mobile numbers by default)

VAT issue

Option 1: Airtime=Cash

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• Working examples can be found around Africa- evolved due to a lack of alternatives

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Option 3: Airtime as alternative clearing mechanism

• Sending money involves costs

• Alternative to Western Union and Money Gram that does not require bank account or cellphone

• Alternative to the Automatic Clearing Bureau used by conventional banking

• transactions are handled by agents

• Examples: Mpesa, Worldbank disarmament in the DRC

Household sending money to another household Channel

OverallTo another village/city Abroad

Bank account

Western Union etc.

Benin 36.6% 96% 4% 0.6% 0.9%Botswana 23.8% 94% 6% 13.8% 3.0%Burkina Faso 10.6% 91% 8% 0.7% 5.3%Cameroon 29.9% 96% 2% 0.0% 6.6%Cote d Ivoire 41.5% 83% 14% 2.3% 8.5%Ethiopia 8.0% 97% 0% 16.3% 1.0%Ghana 29.0% 93% 1% 4.0% 0.0%Kenya 28.2% 94% 3% 10.4% 8.1%Mozambique 2.8% 56% 20% 33.4% 2.1%Namibia 11.0% 94% 6% 48.6% 0.0%Nigeria 22.3% 88% 1% 39.1% 0.6%Rwanda 1.9% 85% 4% 1.2% 2.4%Senegal 19.5% 85% 10% 0.7% 5.6%South Africa 18.6% 79% 16% 49.9% 4.9%Tanzania 13.0% 85% 1% 15.5% 2.2%Uganda 26.9% 96% 2% 3.3% 0.4%Zambia 8.3% 97% 0% 13.2% 15.1%

Household receiving money from another household Channel

OverallFrom another

village/city AbroadBank

account Western Union

etc.Benin 8.5% 68% 31% 7.5% 18.3%Botswana 20.7% 88% 10% 19.1% 4.2%Burkina Faso 15.2% 44% 54% 3.3% 21.1%Cameroon 23.2% 76% 22% 1.1% 24.4%Cote d Ivoire 17.1% 69% 23% 0.9% 20.9%Ethiopia 5.0% 46% 46% 18.7% 27.1%Ghana 26.5% 63% 31% 11.1% 17.3%Kenya 11.0% 80% 17% 10.7% 19.2%Mozambique 6.4% 52% 38% 16.2% 1.9%Namibia 22.6% 87% 8% 39.9% 0.3%Nigeria 23.5% 84% 14% 33.3% 7.9%Rwanda 4.2% 87% 7% 5.9% 3.9%Senegal 39.0% 57% 41% 0.5% 25.1%South Africa 16.1% 94% 3% 36.1% 1.7%Tanzania 10.2% 71% 8% 9.3% 3.1%Uganda 16.8% 86% 8% 16.5% 5.6%Zambia 19.7% 93% 6% 6.4% 6.2%

MPESA vs Western Union

Amounts in Kenya shilling 100 500 1,000 5,000 10,000 20,000 35,000 Fee for sending money to a registered M-PESA user

30 30 30 30 30 30 30Fee for sending money to a non M-PESA user

75 75 75 100 175 350 400Domestic Transfer Fee Western Union

500 500 500 500 600 700 1,200 Transaction cost in % to a registered M-PESA user

30.0% 6.0% 3.0% 0.6% 0.3% 0.2% 0.1%Transaction cost in % to a non M-PESA user

75.0% 15.0% 7.5% 2.0% 1.8% 1.8% 1.1%Transaction cost in % for Domestic Transfer Western Union 500.0% 100.0% 50.0% 10.0% 6.0% 3.5% 3.4%

Regulatory convergence

• Dealing with complex risks

• Protecting savings against technical failure and bankruptcy

• Controlling money in circulation M1, M2, M3 all change

Mobile Wallets

• Java based, Secure & Scaleable

• Allows SMEs and individuals to build up transaction histories

• SME POS, bookkeeping and Inventory systems

• Individual and household financial management

• Mini Venture capital / Stokvel Admin / Micro Finance Tools

Different business model for operators and banks

• Income from banking not transaction fees

• Interest rate spread

• Cheap way of raising capital - savings (much more effective than development banks)

• Money balance at no interest or a very low interest rate is much cheaper than raising money through bonds or from the central bank

The informal sector can be served profitably!

What is wrong with serving your country and making lots of

money in the process?