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The Post-2015 Development Debate

Domestic Resource Mobilisation and Bringing the Informal Sector on Board

April 2013

Nyandoro, P. 2013. The post-2015 development debate: domestic resource mobilisation and bringing the informal sector on board. GREAT Insights, Volume 2, Issue 3. April 2013. Maastricht: ECDPM

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The post2015 development agenda should promote sustainability and inclusiveness through innovation of effective financing options, the preservation of the environment, and the inclusion of the informal sector.

The post2015 development agenda is premised on sustainable development which, according to the World Commission on Environment and Development (1) meets the needs of the present without compromising the ability of the future generations to meet their own needs. For this to happen, the development process must ensure that resources are used sustainably, i.e. meeting human needs while also preserving the environment. 

The sustainable development agenda must tackle myriad challenges that face Africa today. These include rapid population growth, which is straining resource use in Africa; man-made and natural disasters, for which most countries are ill-prepared; ineffective policies for addressing the crises in Africa, exacerbated by outmoded laws and lack of capacity in enforcing laws for environmental protection; high dependency on primary commodities, exacerbated by declining (or volatile) commodity prices and unfair trade practices; and very poor financial resource mobilisation. This article focuses on this latter aspect.

Financing the development process in Africa

Given that African financial systems are among the smallest in the world as measured by private credit to GDP, for example, the continent must look beyond traditional financing arrangements. Domestic resources are usually not adequate to meet the development requirements of a continent that is playing catch-up in a highly competitive global village. Yet, as Africa keeps growing, it is important that African Governments mobilise and allocate more resources towards development.

Financial innovation is helping Africa expand the coverage of financial services. Mobile banking is a good example of how African financial systems are providing access to basic payment services through mobile phones, even without a bank account. Another example of financial innovation is tailor-making the credit assessment process to the circumstances of Africa entrepreneurs through the use of psychometric assessments as a low-cost, automated screening tool to identify high-potential entrepreneurs. The Standard Bank Group for instance has been very successful with their product – “SME Quick Loans” which makes the use of psychometric testing as opposed to financial analysis. With agriculture being a significant subsistence and commercial activity on the continent, farmers’ fortunes are being supported by the creation of suitable agricultural insurance products. 

Africa is making efforts to reach out to previously unbanked parts of the population. Successes have been realized through the cell phone-based M-Pesa in Kenya. Ecocash in Zimbabwe and the basic transaction accounts, such as Mzansi accounts in South Africa.

With improvements in the business environment, the private sector is growing in confidence to do business in Africa, representing an important opportunity for private sector driven development. Africa has immense opportunities to ride on successful implementation of private public sector partnerships in the areas of infrastructure development and social services provision. This option has been tried and tested in some parts of the continent, with success stories in the water supply systems in West Africa and transportation projects in Southern Africa.

Africa still needs to deepen the financial systems through the development and expansion of local and regional pension funds and life insurance markets; as well as local and regional bond trading markets. This will enable mobilisation of medium to long-term finance which is seriously scarce at the moment. 

Bringing in the informal sector into the development process

There is an argument that since the developed economies are not driven by informal sector activities it is flawed to attempt to drive economic progress through the informal sector activities. This argument does not recognise that in some parts of Africa this sector contributes more than 60% of employment and income. As such there is no better development process that includes the majority of economic players. 

Financial institutions often find the risk of doing business in the informal sector as higher than with formal businesses. The problem is exacerbated by the lack of information for traditional credit rating tools. Innovations using alternative assessment tools such as psychometric evaluation of borrowers represent workable options to promote access to financial resources in this sector. Training programmes tailor made for the requirements of the informal sector entrepreneurs are not readily available and affordable. This would require those who design educations systems to be responsive to this growing need. Small traders, hawkers and backyard industries are often not properly regulated leading to harassment, frequent arrest of traders, and confiscation of their goods and punitive fines. In most cases these traders need assistance, for example by designating specific zones for their activities. There are potential fiscal revenue benefits to be achieved by legalising and properly catering for the development needs of the informal sector.

In conclusion, the challenge of developing the financial sector in most underdeveloped countries can be summarized using one word: “costs”. This refers to costs of putting up infrastructure to service the majority of people previously excluded from the formal financial sector, i.e. buildings, telecommunications, systems, or costs related to educating the masses about formal banking structures i.e. requirements for minimum deposit , credit issues, KYC and anti money laundering issues inter alia This is a cost banks should not shy away from as in the long run the survival of the banks specifically as well as the development of the countries in general will depend on successful implementation of Financial Inclusion.

Pindie Nyandoro is the Chief Executive for Southern and Central Africa Standard Bank Africa

Footnote
1. Our Common Future, 1987 [3 Mar. 2011], World Commission on Environment and Development.

This article was published in Great Insights Volume 2, Issue 3 (April 2013)

EU Development Policy and PracticePost-2015 Global Development AgendaDomestic resource mobilisationHuman rightsMillennium Development Goals (MDGs)Post 2015Africa