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Growing relevance of the informal market – how can financial institutions remain relevant?

Growing relevance of the informal market – how can financial institutions remain relevant?

By Frans Uusiku
Market Research Manager, FirstRand Namibia.

The economic landscape has evolved in recent times and is becoming increasingly characterised by changing consumer tastes and preferences around the consumption of goods and services, combined with heightened level of entrepreneurial spirit, especially amongst women and youth in agriculture.

These changing dynamics around value chain development across industries have an implication on the role of the banking sector as an important enabler and catalyst for economic growth. The reality is that the proliferation of informal side-line businesses in the form of hawkers, vendors, etc. has increased now more than ever as households seek alternative income sources due to worsening economic conditions that have been compounded by the impact of COVID-19 pandemic. The current economic circumstances certainly do not reflect a “business as usual” case for both households and businesses and neither does it for banks. Henceforth, as a responsible financial services provider, one of our important promises is to continuously question the status quo and interrogate how we should align our products and services in a way that continues to maximize and preserve the wealth of our stakeholders.

While this phenomenon is not unique to Namibia, the growing relevance of the informal market is often mirrored on the belief that “the informal sector exists to fill the gaps left by formal-sector economic activities”. Anecdotally, the informal market has grown more rapidly in the northern regions of Namibia as some people who have recently lost jobs due COVID-19 or could not find work in town, had to move back to rural areas. The inherent lack of tenure security that has traditionally served as a barrier for households to access financial services might have also contributed to these informal market dynamics. As we ponder on how best to capitalize on some of these emerging opportunities in the informal market, the following two strategy questions could serve as a starting point towards this conversation.

First, how can we adapt some features of informal financial institutions to improve our ability to service informal operators and ultra-low-income households?

Second, how can we forge strategic linkages with informal financial institutions to deepen our participation in the informal market ecosystem? This is particularly true for the deep rural areas where proximity to towns remain a stumbling block towards achieving financial inclusion.

Interestingly, a review of the informal market in Namibia shows that a greater proportion of informal traders in the far northern areas are trading in general enterprises such as fresh vegetables, poultry and meat. Whereas the central and coastal regions are mainly dominated by the industrial market such as auto mechanic, welding and upholstery activity. Therefore, from an informal market perspective, the northern region serves as an important jurisdiction for market penetration due to comparative advantage in the production and processing of fast-moving consumer goods along the agriculture value chain.

This implies that there is a relatively high degree of money circulation in the northern economy, especially during the wedding and festive seasons. The region also offers an immense value chain financing opportunity due to a broader market exposure – locally and by extension the neighbouring countries (Angola and Zambia). Therefore, to overcome the current concentration risk and find alternative revenue streams, a value-chain approach is recommended. Credit and lending solutions can be provided to backward linkages and transact and invest solutions can be provided to forward linkages.


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