By Sulita Levaux, Senior Policy Analyst, AFI and Dieter De Smet, Policy Manager, Financial Inclusion Strategy, AFI
Informal workers and micro, small and medium-sized enterprises (MSMEs) continue to face many unique challenges in accessing and using financial services, stifling growth in a sector among the worst hit by COVID-19-related restrictions.
AFI’s recently published guideline note and toolkit on “Bringing the Informal Sector Onboard” shares practical, tried-and-tested solutions from financial inclusion and informal sector experts globally, further enhancing knowledge sharing and collaboration among stakeholders to unlock the vast potential of the informal economy.
Over two billion people work in the informal economy globally, spanning almost all industries from sole traders to MSMEs. While there are no definitive statistics, there is considerable overlap between the informal sector and the world’s remaining unbanked.
Potential customers often face barriers in opening bank accounts due to a lack of requisite identification or financial records that are compounded by limited awareness on how to use financial products. For MSMEs, the main reason for constrained business growth is a lack of available credit. Bringing the informal sector onboard is, therefore, a policy issue of paramount importance in financial inclusion, a process that plays a crucial role in improving conditions in the informal sector by contributing to poverty reduction, inclusive growth and sustainable development.
AFI’s latest publications offer cutting-edge knowledge and lessons in six major policy areas on onboarding the informal sector: data, inclusion, coordination, digital, financial cooperatives and tailored solutions.
“We should take inspiration from policies unfolding elsewhere. We can learn from different countries’ experience with taxes, e-wallets, payments, infrastructure, the role of cooperatives, e-money providers and others, and then look at how to put together unique solutions for not only including the informal sector, but also improving the formal economy” – Clemente Blanco, Banco Central de Reserva de El Salvador.
Among the key recommendations is that informal sector data supports policymakers in their understanding, strategic thinking and programmatic practice. Ecuadorian financial inclusion authorities, for example, used data from financial cooperatives to track trends in financial inclusion indicators. These financial cooperatives cater to large populations employed in the informal economy and have contributed to major increases in memberships, deposits and loans.
By offering a more efficient structure to meet the needs of people from different backgrounds and enhance their financial inclusion, financial cooperatives have also become a growing success in other AFI member jurisdictions, such as saving groups in Zambia, Egypt, Rwanda and Ecuador. They offer alternatives to formal financial service providers, which may neglect this market due to low profit margins.
Financial products tailored specifically to the informal sector are gaining traction globally. In the Solomon Islands, a micro-pension program called YouSave, designed specifically for people working in the informal sector, is rapidly expanding. Its digital version was also created as part of digital initiatives coordinated by Central Bank of Solomon Islands under the country’s second national financial inclusion strategy.
Policies and programs are much more likely to be effective and successful if they cater to the diversity of the informal sector, such as women, migrants, disabled people and youth. In India, the Rural Financial Institutions Program found that when female members of a local self-help group received training and started to work as banking agents, the number of new female financial customers increased.
Digital tools, technological and policy innovations are helping to address this demand and tap into the immense potential of the informal sector. In 2011, Banco Nacional de Angola signed an agreement with nine commercial banks to provide a simplified accounts program called Bankita. This program enables informal workers to access and use tailored financial services and mobile money, bringing in liquidity that would otherwise remain outside the financial system.
“Bankita has the potential to bring people from the informal into the formal sector. This starts with having an account. People then start saving more, and this will lead to more money and more people finding their way into the formal financial system” – Teresa Pascoal, Banco Nacional de Angola.
Finally, bringing the informal sector onboard also requires stakeholder buy-in and multi-stakeholder coordinationacross governmental organizations and institutions, the private sector, developmental agencies and civil society. Banco Central de Reserva de El Salvador described coordination as a puzzle with pieces from the Ministry of Finance, the Regulatory Agency for the Financial System and Congress.
Individuals and enterprises in the informal sector face critical financial service needs, making it imperative that financial inclusion experts share their valuable experiences and lessons learnt with their peers. Knowledge sharing among financial regulators is an important step to better policy design, with the potential to enhance financial inclusion and transform the global informal economy. More insight can be gleaned from the newly published guideline note and toolkit on “Bringing the Informal Sector Onboard”.