Informal sector more financially innovative

Sometime back I stopped at Kisii Town market to buy onions. As I prepared to pay, a woman arrived and my vendor promptly removed money from her bra and handed it to the woman.

The interruption prompted my curiosity. I watched the woman count the money. “Is that okay?”, the vendor asked. “Yes, five thousand five hundred,” the other woman replied.

“What was that all about?,” I asked the vendor. “Oh, I was repaying the money I borrowed in the morning. You see,” she continued, “there are many poor women, even men, who come early in the morning to borrow from these financiers.

They buy goods from wholesalers then they try to dispose of the goods through retail or supply to other retailers.”

“Today I picked up Sh5,000 from her and I have refunded her Sh5,500,” she said. “And what do you remain with?” I asked.

“Oh, on a bad day I take home around Sh300 but when the business is booming I can make anywhere between Sh500 and Sh800. Sometimes, I also remain with some inventory.”

I have since talked to other vendors and concluded that on average, the lender takes between 50 and 60 per cent of the 20 per cent gross profit earned each day.

In the absence of any alternative, the vendors aren’t complaining but when they factor in their costs, they virtually make nothing and this is what has kept them in a state of perpetual poverty.

This phenomenon is widely practised throughout the country not just by mama mbogas (female vegetable vendors) but also by other traders. There are informal micro lenders in virtually every sector.

There are those who discount invoices, and there are those who finance small assets.

In effect, the hustler economy is well served albeit expensively. One could say that financial innovations at the bottom of the pyramid are thriving. Large corporations have noted this phenomenon.

Safaricom, Kenya Commercial Bank and Equity Bank are some of the early players in a market where annualised interest rates range from 48 per cent to 144 per cent (at four to 12 per cent per month) to possibly a maximum of 3,650 per cent (10 per cent daily interest for the vendor in Kisii).

When I discussed these observation with a few people, there was agreement that the government should intervene with some policy measures.

This is a peculiar market and we must ask ourselves how we got into such a mess while operating under conditions of perfect competition and a fairly stable regulator.

The answer to this question is largely the mindset of most bankers in this country. They are what we call in technology laggards or foot-draggers. Their focus on the so-called corporate lending is their undoing.

They have failed to see value in micro, small and medium enterprises – the engine of economic growth in this country.

Formal micro-lenders aren’t going to their real customers. Instead, they train their eyes on upgrading into commercial banking.

The much touted women fund isn’t relieving the pain of these women. Chances are that managers of this fund also do not understand the mindset of a micro entrepreneur.
If the bankers were awake, we could not be seeing such distorted interest rates. As a free market evangelist, I still think that it is competition that would bring down the rates.
If the banking sector is unwilling to play, then very soon technology might disrupt them. The worst that can happen is if the government intervenes, is what economists refer to as market distortion characterised by inefficiency that can ultimately lead to market failures and obscure innovation.

At the moment it is an opportunity that, in my view, is a tech innovator’s paradise.

As I toyed with idea of writing this article , I decided to conduct a quick survey. I focused on informal micro lenders to establish if there were any defaulters.

After interviewing some 60 respondents, I discovered that an overwhelming majority repays their loans, which indeed validates many other similar but systematic research findings in the region.

With such findings, it is difficult to understand why competition in this space is low. It may not be the fact that banking industry is slow in adapting to technology.
I suspect that our affinity for following old, established ways may be compromising our prosperity.

The writer is an associate professor at University of Nairobi’s Business School