The Informal Sector Revolutionizing Africa’s Economy
Cross-border trade is an essential, but under-studied, part of life on the African continent. Informal networks of trade have existed on the continent for centuries, beginning when communities would exchange goods through bartering with neighboring communities until the present moment, in which we use legal tender to purchase goods.
Composition of Traders & Goods
Internally, the East African Community (EAC) market is made up of approximately 145 million consumers.¹ Small-scale, cross-border trade provides income to 43% of the population on the African continent and, in Uganda, is responsible for 25–40% of formal intraregional trade.² Informal economies are essential for livelihoods — and life — on the continent. The informal sector makes up as much as 38.4% of the economy of Sub-Saharan African countries.³ Trade is particularly important for low-income families, and is also a primary contributor to the movement of food and goods on the continent.
What does it mean to speak of informal trade or informal cross-border trade (ICBT)? While it is a broad topic with loose edges, there are two primary types of informal trade. The first group includes informal traders who function entirely outside of the formal economy. The second group includes formal, registered traders who avoid crossing at main border points and utilize other, potentially evasive, tactics to avoid taxes and regulations, etc.⁴ For the purpose of this discussion, we will focus on the former.
The main commodities traded in East Africa are white maize grain (27%), dry beans (16%), wheat and flour (13%), rice (11%), sorghum (10%), sugar (8%), maize flour (8%), and sesame seed. Studies on ICBT in EAC show that virtually all types of goods, from commodity foods to fake drugs, are traded on the informal market.⁵
Notably, 80% of small-scale, cross-border traders in East Africa are women.⁶ For many of these, trade is their primary or only source of income. However, traders are not a homogenous group and the landscape of trader identities is becoming more complex. More traders than ever before have completed higher levels of education: 44.2 percent have completed secondary education, 25.8 percent have professional/semi‐professional diploma or certificate, and 10 percent have a degree, numbers that are quickly rising.⁷
On average, traders are between 20-40 years of age, the period of time in which marriage and familial responsibilities become more urgent. Lacking substantive options to enter the formal economy, they look for creative — and often informal — ways to make money.
Transport across the border, too, is not homogenous. Modes of transport include vehicles, bicycles, walking while carrying goods on the head or in hands, motorcycles, wheelchairs, animals (donkeys), pushcarts, boats/canoe, etc. Often, goods are moved in small amounts to avoid drawing attention or hitting taxable thresholds. They are sourced in one country, carried across the border, and stored in the new country until the trader, or a new vendor is ready to sell.⁸
The Common Market for Eastern and Southern Africa (COMESA), representing 19 Member States — with a population of over 390 million people — including Burundi, Kenya, Uganda, and Rwanda, also supports substantial small-scale trade through advocacy and policy initiatives. Small-scale, cross-border trade between Uganda and Rwanda was worth $549 million USD and $103 million USD respectively in 2017.⁹ All together, informal trade among COMESA states is estimated to be worth billions. The lack of reporting and intentional efforts to undervalue goods make estimating the value of trade and the overall number of traders notoriously difficult across the continent.
The informal economy also includes micro, small, and medium-scale enterprises that are largely unregulated and lack formal organization. In Kenya, enterprises like these employ 7.5 million people (80 percent of the country’s total employment outside small‐scale agriculture).¹⁰ While informal economies are inherently difficult to measure, according to research by the International Labor Organization, this sector has increased annually by one percent over the last decade in Africa.¹¹ Informal trade is clearly an integral component of local and national economies on the continent.
History and Policy
Approximately 43% of Africa’s total GDP is from small-scale, informal trade. Informal cross border traders, especially women, encounter many challenges when purchasing and selling their goods across the border. The actual journey itself can include its own danger. Crossing through formal border points leads traders to confront actors such as police, border customs officials, revenue authorities, agricultural plant inspectors, and standards bureau personnel. This can expose traders to exploitation on many fronts. Beyond being forced to pay small bribes to cross, female traders are particularly vulnerable to physical attacks, bodily searches, and theft of goods. Many traders cross the same border checkpoint several times per week, making them known to authorities as people often carrying significant amounts of cash and with little political or professional protection. A history of bad actors has led to the creation of policies, promoted by COMESA and other advocacy groups, to help formalize cross-border trade and eliminate further exploitation from additional parties such as money changers, security personnel, transporters, and brokers at border points.
Major Policy Actors
While the following list is hardly exhaustive, many groups and organizations have contributed to the advancement of trade across Africa through policy and advocacy initiatives. At the multinational level, two major actors are the World Bank and the United Nations (particularly UNDP and UNCTAD). Through World Bank ASA (Advisory Services and Analytics) activities, the World Bank is working together with other regional stakeholders to create better systems and strategies to help correctly monitor and support cross border traders. On April 27th, 2021, the World Bank approved $380 million USD to help support regional trade between Malawi and Mozambique. This was under the World Bank’s International Development Association (IDA), established in the year 1960 with the goal of helping struggling countries. The funds will be used to facilitate projects aimed at improving regional infrastructure developments.
Within East Africa, the Custom Union, EAC, COMESA, and TradeMark East Africa have brought forth a simplified trade regime. National-level policy actors include: Kenya — Ministry of Trade and Cooperatives and KenTrade; Rwanda — MINICOM; Tanzania — TanTrade; Uganda — Ministry of Trade Industry, and Cooperatives. Other players include border control, customs offices at the border, police officers assigned to border points, and trade associations. One of the most recognized trade associations in Africa is the Cross Border Traders Association (CBTA), which serves cross-border traders in Kenya, Zambia, Burundi, Congo, and Uganda. This membership-based association has more than 37,000 registered cross border traders who can enjoy tax exemptions for commodities listed under country agreements. The CBTA also works to ensure fair trade within the region. Research and technology companies like Sauti East Africa seek to lessen the information gap by directly equipping traders with tools and reports to help them trade more effectively and efficiently.
Policy Gap Analysis
Many gaps remain in the formulated patchwork of local, national, and regional policies, which has led to poor implementation at the grassroots level. These gaps include:
- Many policies are designed to reduce barriers to traders but only benefit formal traders.
- Solutions to streamline and make information more accessible to women are successful but grievance redressal processes and data to substantiate harassment are weak.
- Policy changes and updates are often delayed and experience limited dissemination.
- Market information, including transparency in pricing and exchange rates, is inadequate.
- Cross-border traders have limited access to technology and other information dissemination venues (especially those that require internet connection/data).
- Policies are often gender-neutral and do not fully benefit female traders, who make up 80% of the cross-border trader population. Women’s unique needs and challenges must be considered when designing policies for cross-border trade.
Trader Journey & Challenges
Many cross-border traders in Africa cross borders through informal paths to buy or sell their commodities. All traders are faced with challenges when running their businesses. These could include harassment from corrupt officials, high currency exchange rates, lack of access to financial support, and poor infrastructure. The trader journey typically starts with the trader crossing from their home country with cash, exchanging currency, and buying commodities in their neighboring countries such as maize, beans, and fruits. The trader then has to transport these commodities back to their country to sell at a profit. The trader is usually required to pay importation fees at the border point as well as exchange their currency (with a markup) when crossing the border to purchase the products. These costs reduce the trader’s profit margins, which are usually below 20% before fees and the cost of the exchange. Traders engage with a number of different parties in their day-to-day journeys. While they have options, none are perfectly sufficient or convenient.
Banks and Forex Bureaus
The East Africa member states — Kenya, Uganda, Tanzania, Rwanda, South Sudan, and Burundi — have established formal and structured institutions to facilitate cross border trade. Banks and forex bureaus located at the border enable traders to exchange currencies or deposit money into their accounts. It is important to note that these structured entities tend to serve only a small portion of the cross-border traders; many traders report it difficult to use these institutions. Issues such as high/predatory exchange rates, the perceived cost of having a bank account, inadequate identity documentation, desire to avoid formal institutions because of a lack of trust or attempts to evade taxes, and physical distance contribute to the barriers faced by traders in accessing formal institutions.
Currency Exchange Agents
Also known as ‘money changers,’ currency exchange agents have successfully managed to ingratiate themselves in cross border trade by offering traders accessible currency exchange services. Agents often provide an affordable rate when compared to the banks and forex bureaus. These money agents strategically place themselves in select, open points along border areas and are therefore able to serve traders without the traders having to interrupt operations by traveling to a bank or bureau. The locations are strategically selected by the money agents as those with the largest number of cross-border traders. Although the use of money agents is one of the preferred currency exchange methods by traders, it is still marred by challenges such as high exchange rates, lack of security in carrying/exchanging large amounts of physical cash, and corruption.
The use of informal currency exchange agents at border points has been the standard and still is, for many cross-border traders. They are typically preferred over the forex bureaus available in border regions, though both are utilized by traders to exchange currencies.
Challenges
Cross-border traders experience many challenges while doing business. For one, operating in the informal economy is expensive. In Malawi and Zambia, small traders pay 62 percent more per unit for border costs such as commodity importation fees than large formal traders, showing that sometimes border policies can be punitive for small businesses and traders.¹²
Expensive border fees, in addition to “time-consuming, inefficient, or unclear” border policies, force many traders into informal channels.¹³ Informal traders may not have the resources to effectively navigate constantly changing policies, leaving them more susceptible to theft and being forced to pay bribes. Hostility from border guards is a ubiquitous problem that also incentivizes utilizing informal routes. For many women, this hostility can include sexual harassment and physical or sexual violence.
According to results shared by COMESA, these are the main challenges faced by informal cross-border traders:
- A lack of proper channels to make transactions across borders. At the moment most traders experience delayed transactions due to the absence of platforms that offer them the chance to make real-time transactions
- Lack of market intelligence to help them make sound business decisions
- Lack of political will, which has brought about the formation of policies that do not really serve the cross-border traders
- Women, in particular, face harassment at the border
- Poor infrastructure hinders the traders from transporting their commodities across the border with ease
- Lack of updated industry information
Impact of COVID-19
COVID-19 has been particularly challenging for traders as their business is largely informal and mostly in-person. Many countries implemented border lockdowns in March 2020, severely limiting the number of traders and merchants able to work and dramatically impacting business.
COVID-related lockdowns and travel restrictions frequently only allowed cargo vehicles to pass for most of 2020, which disproportionately harmed informal, female traders who travel by foot or motorcycle across the border. Traders in border towns were forced to combine their goods so that they could transport them across the border collectively in large trucks. The trucks encountered issues at the border points because the limit on goods per truck is typically $10,000 USD. This system also introduced the risk of truck drivers stealing the goods in transit, unknown to the trader who could not cross to inspect whether their goods were delivered safely. The continuation of lockdowns and throttled border crossings could potentially push trade into even more informal channels and border crossings. This puts traders at increased risk for theft, violence, accidents, and crackdowns by border guards enforcing COVID measures.¹⁴
In addition to COVID-19 lockdowns and travel bans, the ensuing economic depression has hurt traders by straining the staple food/commodity supply and lowering demand because of increased unemployment. East Africa was already dealing with a “resurgence of one of the largest outbreaks of locusts in decades in the region” in 2020, which increased food prices.¹⁵ Many governments were forced to provide food and assistance to groups who could no longer afford food.¹⁶
Products and services like Leaf Global Fintech serve those most affected by COVID-19 by offering a convenient and affordable way to make payments, even under stay-at-home orders or while borders are still throttled. The digital wallet is accessible from a basic phone and without advanced functions or an internet connection. The ability to utilize Leaf’s full functionality in areas of low connectivity is especially important during times of COVID for those isolated due to the virus. As the backbone of local and national economies, traders are in dire need of accessible, cross-border, digital payment systems, for the impact of trade truly touches everyone on the African continent.
The Role of Technology
Traders still have very few ways to digitize their business. Many companies are beginning to address the challenges of SME financing and digital payments but most focus on domestic-only businesses that operate primarily in the formal economy. There is still a lack of payment options available to cross-border traders that fully embrace technology, despite significant leaps in mobile adoption. Over the last 15 years, the expansion of mobile technology into Sub-Saharan Africa (SSA) has skyrocketed. Recent data from the International Telecommunication Union (ITU) shows that cellular telephone subscriptions are now almost eight times higher across the African continent than in the year 2000, reaching about 700 million subscribers. This has made the Eastern part of Africa one of the fastest-growing information and communication technology (ICT) markets.
Cross-border traders in East Africa have started to embrace the use of technology like mobile money in their businesses where possible. There has, however, been a gap in the market for a platform with all the components required for traders to transact.
Mobile money is a system run by the major telcos across Sub-Saharan Africa in which money can be stored in a wallet connected to a SIM card and used for payments and peer-to-peer transactions. It is the dominant local payment system in many markets in Africa, with over 1.4 million physical agent locations serving as cash in/cash out points for physical cash. However, mobile money does not easily cross borders or networks, with domestic fees as high as 6% for peer-to-peer payments and up to 25% for cross-border payments. It is not intended for the send-to-self use case most traders require between countries. Additionally, if a trader has money in a mobile money account in one country, they cannot pay a supplier in another country or access their money if they physically cross into the other country (they probably will not have service on that phone and the local agents are not equipped to help them withdraw cash, especially in a foreign currency). There is high demand for an accessible and inexpensive way to transfer money internationally.
Through Leaf Wallet, we are trying to change that. With Leaf, users can store money digitally, send and receive money, and exchange currencies automatically during transactions on a smartphone app or on a basic phone using a USSD code. Users can also purchase airtime for themselves or others, view updated exchange rates, and register friends and family for an account. Leaf Wallet offers cross-border traders an all-in-one platform that enables them to pay their suppliers and be paid by customers instantly, with a touch of a button, from the comfort of wherever they may be.
Conclusion
The informal cross-border industry supports a significant portion of families in Africa. As innovations are created to help solve facets of the challenges faced by cross-border traders, entire communities will benefit.
As a baseline, educational initiatives must be carried out across markets and stakeholder groups to increase awareness on trade regulation and procedures, the physical vulnerabilities of traveling to sell products in neighboring countries, and general market information. The presence of strong cross-border associations, trade unions, and policymakers is instrumental in the success of this small-scale, informal business category in Africa. Support received from global entities such as the UN and World Bank to improve regional trade goes a long way. Along with governments and NGOs, private sector solutions like Leaf Global Fintech that enable traders to easily transact across borders with a touch of a button represent the biggest potential for change within this industry. As everyone plays their part, cross-border, cross-sector cooperation will contribute to the success of traders in each country.
[1]https://www.eac.int/customs/regional-trade
[2]https://ace.globalintegrity.org/smallscaletraders/
[3]http://documents1.worldbank.org/curated/en/894601468346146304/pdf/894730BRI0Char0Box0385291B00PUBLIC0.pdf
[4]http://ebrary.ifpri.org/utils/getfile/collection/p15738coll2/id/133423/filename/133634.pdf
[5]https://www.wcoesarocb.org/wp-content/uploads/2018/07/Informal-Cross-Border-Trade-in-EAC-Implications-for-Regional-Intergration-Development.pdf
[6]https://ace.globalintegrity.org/smallscaletraders/
[7]https://www.wcoesarocb.org/wp-content/uploads/2018/07/Informal-Cross-Border-Trade-in-EAC-Implications-for-Regional-Intergration-Development.pdf
[8]https://www.wcoesarocb.org/wp-content/uploads/2018/07/Informal-Cross-Border-Trade-in-EAC-Implications-for-Regional-Intergration-Development.pdf
[9]https://www.imf.org/en/Data/Statistics/informal-economy-data/Reports/COMESA-Cross-Border-Initiative
[10]https://www.wcoesarocb.org/wp-content/uploads/2018/07/Informal-Cross-Border-Trade-in-EAC-Implications-for-Regional-Intergration-Development.pdf
[11]https://www.wcoesarocb.org/wp-content/uploads/2018/07/Informal-Cross-Border-Trade-in-EAC-Implications-for-Regional-Intergration-Development.pdf
[12] World Bank. 2020. Monitoring Small-Scale Cross Border Trade in Africa : Issues, Approaches, and Lessons. World Bank, Washington, DC. © World Bank. https://openknowledge.worldbank.org/handle/10986/34884 License: CC BY 3.0 IGO.
[13]http://documents1.worldbank.org/curated/en/894601468346146304/pdf/894730BRI0Char0Box0385291B00PUBLIC0.pdf
[14]http://documents1.worldbank.org/curated/en/894601468346146304/pdf/894730BRI0Char0Box0385291B00PUBLIC0.pdf
[15]https://ace.globalintegrity.org/smallscaletraders/
[16]https://ace.globalintegrity.org/smallscaletraders/
[17]https://www.icpac.net/documents/31/Quarterly_GHA_Cross_Border_Trade_Bulletin_April_2020.pdf
