Unlocking the entrepreneurial potential of the informal sector

1. Unlocking the
entrepreneurial potential of
the informal sector
Dr. Christoph Stork
researchICTafrica

2. researchICTafrica
Research network of universities and think
tanks in 20 African countries
No African
Year Research title Sample
countries
2005
4,000
SME e-Access & e-Usage Survey 14
2006
Household e-Access & e-Usage Survey
2007
23,000
(with focus poverty and demand 17
2008
elasticities)

3. Average number of individuals deriving
a livelihood from the business
( employees & owners)

7. 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)

8. SMEs from 15 African countries: Out of 10
Transactions, how many are in cash?
Informal Semi-formal Formal

9. SMEs want M-Commerce
Interested in cell-phone banking if cheaper and equally safe
Prepared to change bank or apply for a bank account if this bank offers cell-phone banking!

10. 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

11. 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

12. 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

14. 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)

15. VAT issue

16. Option 1: Airtime=Cash
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17. Option 2: Airtime similar to cash
What makes people prefer
airtime transfer over cash?
• Network Effects: Convertibility can only
be achieved if many (“all”) are using it!
• Working examples can be found around
Africa- evolved due to a lack of alternatives

18. Individuals receiving airtime
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19. Individuals sending airtime
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20. What factors would make you prefer sending airtime
rather than paying cash or transferring money via banks?
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21. What factors would make you prefer
receiving airtime rather than cash?
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22. 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

23. Household sending money to
another household Channel
To another Bank Western Union
Overall village/city Abroad account 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%

24. Household receiving money from
another household Channel
From another Bank Western Union
Overall village/city Abroad account 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%

25. 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 30
Fee for sending money to a
non M-PESA user
75 75 75 100 175 350 400
Domestic 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
500.0% 100.0% 50.0% 10.0% 6.0% 3.5% 3.4%
Western Union

26. Regulatory convergence
• Dealing with complex risks
• Protecting savings against technical failure and
bankruptcy
• Controlling money in circulation M1, M2, M3 all
change

27. 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

28. 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

29. The informal sector can
be served profitably!
What is wrong with
serving your country
and making lots of
money in the process?