Development Opportunities in Africa’s Informal Sector

Businesses in Africa are broadly organized into formal and informal sectors. Businesses in the formal sector are typically large corporations like banks and insurance companies, telecommunication operators, agribusinesses, and oil and mining companies. Small or medium-sized businesses from the formal sector are fairly limited in size and number, especially in Sub-Saharan Africa. In general, African businesses are smaller than other businesses in developing regions, by more than 20% on average. Businesses in the informal sector are typically small, often run by fewer than 5 employees. Examples include retailers, artisans, drivers in urban areas, and smallholder farmers in rural areas.

In most African countries, the informal sector hosts a major portion of economic activity. In Sub-Saharan Africa, the share of economic output from the informal sector ranges from 26% in South Africa, 33% in Kenya, 46% in the Democratic Republic of the Congo, to 57% in Nigeria with the average in 2015 being 40% of GDP. In North Africa, 34% of GDP comes from the informal sector, with a similar share in Egypt. Informal employment in urban areas makes up close to 80% of the total in the average Sub-Saharan Africa country, outside of South Africa at 35%. In Egypt, 54% of non-agricultural workers are employed in the informal sector. In Africa, retailers in the informal sector produce approximately 80% of all household consumer goods. Informal businesses represent 92% of firms in Nigeria and 99% in Ethiopia.

The Internet economy offers leapfrog opportunities to address challenges faced by informal businesses and workers. Businesses in Africa’s informal sector have less access to finance and limited use of modern business practices, especially in accounting. They also face higher costs in dealing with suppliers or clients due to poor logistics, multiplicity of middlemen, and the prevalence of cash transactions. In the informal sector, access to electricity is less certain, especially in rural areas, and the overall business environment is unstable. However, the vast majority of workers in the informal sector own a mobile phone, often used for both private and business purposes. Mobile phone ownership in the informal sector is broadly correlated with access to digital connectivity at the national level. There are 1.2 million informal retailers in Sub-Saharan Africa already engaged in the distribution of mobile services.

To date, most successful ventures in the African Internet economy address challenges faced by businesses or workers in the informal sector; this large pool of potential customers helps companies reach scale and become commercially sustainable.

The large-scale diffusion of mobile money in several African countries, such as Kenya, Ivory Coast, and Mali, is a case in point. However, the centrality of the informal sector goes beyond digital financial services and encompasses an increasing number of economic sectors such as e-Commerce, delivery services, and employment. In the informal retail distribution sector, productivity is generally low and is exacerbated by poor logistics infrastructure and transportation networks. These challenges inflate the cost of retail distribution and eliminate the ability of businesses to scale efficiently.

COVID-19 has emphasized how digital platforms addressing the informal sector can support societal resilience. In several markets, digital platforms were critical in supporting government responses to the outbreak, particularly in reaching the underserved, as they were able to quickly reengineer their platforms. For instance, Twiga Foods has partnered with Jumia to deliver agricultural produce to consumers.120 The government of Nigeria is relying on payment service providers to provide cash transfers to 3.6 million impoverished households by August 2020.