Ideas & Debate

Why informal sector will produce the next growth story in Kenya

There is need to engineer the education system in such a way that it incubates job creators rather than providing the next labour suppy lot. FILE PHOTO | NMG
There is need to engineer the education system in such a way that it incubates job creators rather than providing the next labour supply lot. FILE PHOTO | NMG 

Employment statistics in Kenya continue to remain startling. In 2016, data from the Kenya National Bureau of Statistics shows employment increased by 5.3 per cent year-on-year to 15.9 million persons in both the private and public sector.

There are two major nuances to this employment figures. First, informal employment, in both the private and public sector, accounted for 83 per cent of total jobs—or 13.3 million people—while employment in the modern sector (or the so-called wage employment) stood at 2.6 million persons. These are people with regular monthly income.

Second, in the wage employment basket, only 74,293 persons earned a monthly income of above Sh100,000 per month. That is just about 3 per cent of total wage employment. The rest, 2.5 million persons, earned below that figure—with about half earning monthly incomes of between Sh30,000 and Sh50,000. This is not a typo.

And this can only mean one thing: employment is driven by the informal sector. This dire wage demographic should trigger several adjustments.

First, from this statistics, evidently Kenya’s individual income tax-base, or commonly referred to as pay-as-you-earn (or PAYE), is overstated and it is imperative that tax policy formulation should now incorporate the informal sector.

Personal Income tax accounts for a third of total tax income.

Second, the education system should be geared towards incubating entrepreneurship than labour supply since the economy doesn’t appear to be churning out enough white-collar opportunities to sustain the current labour market model.

Thirdly, you could also easily deduce that the middle-class story is overplayed-and the pool appears smaller than estimated, although anecdotally.

Consequently, products and services designed around the middle class story should factor in the fact that expansion of the middle class pool might require an economic miracle-since the economy is not churning out enough white-collar jobs to sustain the story.

This should also trigger a target-marketing and route-to-market rethink for financial services. The biggest question is, with such a wage demographic, how do you drive savings products?

Commercial banks run savings accounts products. Insurance companies sell life products, which are premised on long-term savings.

However, the thresholds of these products are continually elevated on the premise that the pool of persons with disposable income is large.

Well, with this wage demographic, the swamp appears to have been drained long time ago. These products can no longer be premiumised and must now be moved down the risk curve.

For anyone to share in the wallet of the informal sector and effectively appeal to it, products must be appropriately designed and priced to target the informal segment.

Additionally, distribution must be spot-on and efficient. Indeed, with the ubiquity of the mobile phone in Kenya, distribution must be embedded on the mobile phone platform.

Effectively, a proper business volumisation strategy does not lie in the pool of the so-called white-collar market--which appears to be stagnating and any fixation with that market will only trigger more and more price wars and eventually submerge margins.