eBusiness Weekly
Kenneth Gandawa
At the crux of each nation’s GDP, there is always the question of what economic activities contribute more to its growth. While most gain from their economically active members of the population who pay taxes, most African countries are bombarded by a large populace operating within the informal sector.
The most activity is within the informal sector and this means that no taxes are directly advanced onto the GDP which generally means a very poor country in terms of GDP but rich in active and money in circulation.
For instance, in 2017, Zimbabwe recorded over $5,7 billion worth of money in circulation within the informal sector.
Sadly, none of that money could be realised in terms of country development and financial standing. The informal sector is where cash circulates the most as all transactions are non-bankable and each small transaction is multiplied hundreds of times over within that same informal economic group.
The cycle is that Mrs C a vendor, sells goods from her stall and can only accept cash, and Ecocash because she does not have a swipe machine as she is non-bankable.
With the money she gets, she goes to Mr N and purchases groceries for her family, and has to use either cash or Ecocash because, like her, Mr N is also a non-bankable member of the system.
Mr N, needs to purchase car parts but cannot go purchase from an actual shop because good are slightly expensive there and he cannot swipe so he buys from Mr P who is also informal and non-bankable.
Mr C then has to buy certain consumables for his family and so buys from Mrs C who is cheaper, readily available, and accepts only cash as well.
The challenge
Informal businesses are simply those businesses that are not registered as a legit company and have no legal structures. This means they are non-tax payers in the real sense of business trade tax payments, although they would eventually pay tax in various forms such as VAT.
The reasons most businesses opt to operate informally are a myriad of explanations ranging from the high administration costs that come with formal trade, labour laws and the obvious one on tax evasion.
However, it becomes peremptory to also consider how the Government is losing out by not offering incentives for the formalisation of these businesses. As I mentioned, GDP would most likely triple should there be an inclusion of the informal sector.
Not only that, there would also be a higher rate of cash in circulation across the board in the economy.
There is a need for micro-finance institutions that work with the non-bankable to, however, encourage formalisation of their clients in order to help map the spine of the country’s economy.
This can really be possible if there are also systems and structures in place that would lend security to the now informal sector should they conform to the requirements of formalisation. In a bid to encourage formalisation, Zimra introduced a tax holiday in 2017 and it covered a period of 6 months in which newly registered companies would be exempt from paying tax.
Additionally, other incentives could include a more efficient company registration process that would not make clients wait for weeks on end to the completion of a company registration process to be concluded.
Costs and fees payable are another factor and ultimately, there may yet be hope for the Zimbabwean economy should MFIs work with their clients towards financial inclusion through formalisation.
Premier Service Microfinance
