By Charles Dhewa
The notion of financial inclusion being promoted across Africa assumes financial institutions like banks and the stock market are excluding the majority of people including SMEs from financial systems. On the contrary, having been subjected to rigid financial systems and policies for decades, SMEs and local people have developed their own financial systems that shut out formal financial institutions. In countries like Zimbabwe that explains why cash is found in streets and homes.
The value of money is in its circulation
Following the collapse of the formal financial sector a few years back, SMEs and ordinary people have directed their investments to movable assets like vehicles, household property like furniture and fridges as well as livestock. People’s confidence in the formal financial system has been eroded so much that education has become another preferred investment option than putting money in the bank. All these emerging and strengthening competing uses are rendering banks and other financial systems redundant. People are realizing that the value of money is in its circulation. One would rather buy agricultural commodities and sell as part of keeping the money in circulation instead of losing by putting money in the bank.
Can the stock market compete in the SMEs economy?
Efforts to introduce the stock market among SMEs in Africa are happening at a time, the mass market or informal market has become a comfortable and viable landscape for many small and growing entrepreneurs. Banks and MFIs that want to enter or work with the SMEs economy are being forced to provide cash or other dynamic services equivalent to the informal market in terms of appropriate returns on investment. In the informal market, a dollar can generate ten times its value by end of day. Does the formal system or capital markets have a competitive system that can out-bid the SMEs economy? If the stock market cannot do that it will not attract SMEs or traders in the mass market.
Absence of data gathering systems
African economies still lack efficient systems for gathering fluid socio-economic data. Without a system for capturing data, you cannot develop a commodity exchange or grow the stock market. Volumes and stocks could be available in diverse forms but the absence of systems means there is no way of capturing and expressing those assets properly.
Failure to invest in data and evidence collection is a major reason why the financial sector continues to lag behind in understanding market operations of the new SMEs-driven economy. For instance, financial institutions do not realize that SMEs do not exist in isolation but are part of supply chains. As long as there is no system that can capture the whole supply chain there are no avenues for introducing the stock market.
You cannot have one supply chain node transacting in bank transfers and the other insisting on cash. In as much as the money market may be a good idea, farmers and other actors are still licking their economic wounds from losses incurred when money lost value while stuck in banks in 2008-2009. The first important step for the financial sector is rebuilding people’s confidence in financial systems. It is also about setting up reliable systems that can run through supply chains connecting all nodes or actors especially SMEs.
The Informal market and SME sector deals with diverse actors of different sizes. This is different from the past when processing companies dealt with large scale farmers in ways that integrated payment systems.
Currently, a trader can deal with large scale farmer or estates and with medium-scale farmers and sell to individuals, wholesalers, and corporates with different policies that make it difficult to harmonize payment systems. It is interesting to note that the informal and SME sectors have adopted a system that suits everyone.
For instance, after discovering that everybody ultimately needs cash, they have insisted on cash. Just like other sectors that set rules for transacting, the informal and SMEs sector has set cash as its rule.
Need for a thorough study of the new economy
Each African country should conduct thorough studies to map the whole SMEs ecosystem in terms of actors, commodities traded, and levels of literacy. This will create an entry point in the form of creating awareness and buy-in. The stock market remains a field that was reserved for the elite and formal institutions. It should have been promoted from primary school to tertiary level, the way ordinary people understand the meaning of money as a medium of exchange.
Many people are still in the dark regarding financial issues and they are not even sure about whether storing the value in foreign currency is a good idea. Seeking information is limited to what one wants to know and there is no time to look for what one is not sure about. That is why creating awareness is critical. Governments and financial authorities should simplify policies into economic growth-oriented initiatives among SMEs, mass markets, and other economic ecosystems who are supposed to be the targeted audiences for development efforts.