Africa’s informal economy: The role of digitalisation and fintech in promoting financial and economic inclusion

By Chipo Maziva

Analysis in brief: Africa’s largely informal economy is digitalising. Given the growth of the informal sector, forward-thinking businesses and startups tapping into this space are establishing digital systems and platforms to innovatively address product and service gaps, such as financial inclusion and sustainable business models for informal businesses and workers. Businesses are progressively finding success when financial services are tailored to the informal sector – undoubtedly the driving force in developing economies.

The prevalence of women and the youth in Africa’s growing informal sector

Informality has not diminished. Rather, it is rapidly increasing in many developing and emerging economies. About 50% of Sub-Saharan Africa’s GDP and 85% of its jobs1 come from the informal sector, making it a crucial source of employment and the backbone of economic activity. The majority of informal workers are women (92.1%) and youths (95.8%)2 who have no alternative to the informal economy for their survival and livelihood, stemming from a lack of inclusion and lack of access to formal financial services. Providing previously marginalised people with access to basic financial services and networks is integral for financial security and growth for their businesses.

The informal sector in Africa is driven by a number of factors, including the marginalisation of women, economic hardship, lack of government support and increasing demand for cheap goods and services. Furthermore, as formal employment continues to remain elusive for many African youths, their livelihoods are characterised by low-wage informal work, self-employment and agricultural activities. Although informal workers are an important source of income and employment in Africa, they often lack access to markets, financing, training, infrastructure and technology. In this context, digital tools can alleviate problems by promoting the financial inclusion of informal workers, thereby contributing to economic growth and poverty alleviation.

Botswana, Ghana and Uganda were highly ranked as the countries with the most women business owners
globally by the 2020 MasterCard Index of Women Entrepreneurs
Image courtesy of Icodacci

Leveraging digitalisation to confront Africa’s challenges 

With the aid of technology, forward-thinking businesses are confronting Africa’s challenges and capitalising on opportunities for innovation and unmet needs. Digitalisation is a key driver for better financial inclusion, from electronic retail payment systems to insurance, savings and credit services. Though this evolution has been impactful for small businesses and previously unbanked low-and medium-income households, the present digital divide will, however, widen due to infrastructure and skills gaps. Nonetheless, female-led digital businesses are unlocking great opportunities for social impact by nurturing the skills and interests of African women to bridge this gap. For example, the collaboration between AfChix and Internet Society promises to increase internet access for African women that is vital to attaining digital inclusion and network growth. Relatedly, theWomen Farmers Programmehas helped develop the digital skills of more than 1,300 female farmers since its pilot in 2018 in rural KwaZulu-Natal and Limpopo in South Africa.

Spurred by the COVID-19 pandemic, Africa’s online gig economy is growing exponentially. Comprising of short-term jobs and freelance work, digital platforms could be key in alleviating youth unemployment in Africa. Although this may entail erratic income and lack of job security, the benefits outweigh the drawbacks with most jobs in the region being gigs3 in Sub-Saharan Africa. There are multiple examples of the positive impact that the digital gig economy has made across the continent. For instance, Airbnb, Alibaba and Uber have been instrumental in creating jobs for informal workers across Sub-Saharan Africa. Moreover, Kenya-based Fundis app and Nigeria-based tech start-up Gokada afford users different forms of training based on the services offered4. The digital gig economy offers great opportunities and highlights the need for businesses to invest in skills programmes that support youth employment in non-traditional and atypical jobs.

The current wave of start-ups digitalising the informal retail sector in Africa are offering alternative methods of doing business. For example, Wasoko and TradeDepot provide tech-enabled solutions to informal retailers by linking them with manufacturers through apps and other digital platforms.  Using a network of retail supply chains, Omnibiz allows retailers to place their orders and have their goods delivered to their doorstep5. These business models have been successful due to their use of digitalisation to penetrate informal supply chains found across African economies.

Bridging the gap: banking the unbanked 

The transformative power of formal financial services through mobile phones, such as M-PESA, to reach underserved populations is indubitable, bridging the gap between the banked and unbanked. Sub-Saharan Africa is experiencing the most growth of mobile money-transfer systems than any other region in the world, constituting more than half of registered mobile money customers worldwide. Established in 2007 in Kenya, M-PESA has expanded to 10 countries and boasts 30 million users6. The money-transfer service plays a fundamental role in supporting the unbanked by providing  inexpensive, accessible and diverse digital solutions. Its evolution from a basic SIM card-based money -transfer application to a financial service offering loans, savings and merchant payment services has been transformative, directly lifting approximately 2% of Kenyan households out of poverty7. Similarly, Econet’s EcoCash wallet commands 99.7 % of the total mobile money market shares and 90% of all financial transactions in Zimbabwe8. The mobile payment solution confronted Zimbabwe’s cash crisis and saw it as an opportunity to leverage the country’s high mobile penetration rate (>95 %)9. The company also has a dominant market share in the telecommunications sector. Given this context, Zimbabwe may be on the path to become Africa’s second cashless economy, with Somalia leading the way to become the first.

Data courtesy: UNCTAD, based on data from Fintech Global, 202210

If the digital platform economy is to effectively boost African livelihoods, particularly for informal workers, more collaborations with the financial sector are essential to enhance the functionality of these digital platforms. Moreover, keeping the informal sector dynamics at the heart of financial services design and regulations, coupled with inclusive gender-sensitive policies is key to meeting customer needs. 

The next wave of successful African innovators will be those that seek to reshape the informal economy from within, helping to eradicate inefficiencies. Whereas the failure to go beyond existing models of innovation may cause businesses to fall behind, African entrepreneurs that maximise digitalisation to rethink their business models will gradually thrive and gain a competitive advantage. This will make them more impactful and sustainable while also ensuring interconnectedness with other economic sectors.

The critical points:

  • In view of the fact that the informal sector accounts for the majority of economic activity in Africa, it is imperative for businesses to make their services accessible to marginalised populations through digitalisation
  • Innovative businesses have reimagined Africa’s challenges as opportunities to effectively tackle the obstacle of ensuring financial inclusion and sustainable business models

Zainab Usman, “Africa’s informal markets have far more structure and self-governance than you’d think, book shows”, 2021, https://www.washingtonpost.com/politics/2021/08/06/africas-informal-markets-have-far-more-structure-self-governance-than-youd-think-this-book-shows

Melis Guven and Raphaela Karlen, “ Supporting Africa’s urban informal sector: Coordinated policies with social protection at the core”, 2020, https://blogs.worldbank.org/africacan/supporting-africas-urban-informal-sector-coordinated-policies-social-protection-core

3 Zione Kamtambe, “Gig platforms and Gig Economy: Expanding Economic Opportunities for the Young People in Sub-Saharan Africa”, 2021, https://www.ivint.org/gig-platforms-and-gig-economy-expanding-economic-opportunities-for-the-young-people-in-sub-saharan-africa/#:~:text=The%20potential%20for%20gig%20platforms,platforms%20can%20leapfrog%20informal%20economies.&text=The%20consistent


4 Sitati Wasilwa  and George M. Maangi, “The state and the future of the Gig Economy in Africa”, 2021, https://irenkenya.com/wp-content/uploads/2021/07/The-State-of-the-Gig-Economy-in-Africa-Its-Future.pdf

5 Timon Captal, “Omnibiz: A Network of Networks for African Retail 2019, https://www.timoncapital.com/blog/omnibiz-a-network-of-networks-for-african-retail

6 The East African, “Safaricom’s M-Pesa crosses 30 million active users in Kenya”, https://www.theeastafrican.co.ke/tea/business/safaricom-m-pesa-crosses-30-million-active-users-in-kenya-3743258

7 The Borgen Project, “M-PESA app in Kenya alleviates poverty 2022, https://borgenproject.org/m-pesa-app-in-kenya/

8 Munacinga Simatele, “E-payment instruments and welfare: The case of Zimbabwe”, 2021. https://td-sa.net/index.php/td/article/view/823/1576#CIT0046_823

9 Simangele Moyo-Nyede and Stephen Ndoma, “Limited Internet access in Zimbabwe a major hurdle for remote learning during pandemic”, 2020, https://www.afrobarometer.org/wp-content/uploads/2022/02/ab_r7_dispatchno371_hurdles_for_remote_learning_during_pandemic_in_zimbabwe.pdf

10 Kingsley Ighobo, “Fintech, other knowledge-intensive services could drive Africa’s prosperity, boost inclusion”, The Africa Report, 2022, https://www.un.org/africarenewal/magazine/august-2022/fintech-other-knowledge-intensive-services-could-drive-africa%E2%80%99s-prosperity