Banking Act ‘hostile to informal industry’ Minister Patrick Chinamasa
Minister Patrick Chinamasa

Minister Patrick Chinamasa

Harare Bureau
THE Bankers Association of Zimbabwe has proposed amendments of provisions of the Banking Act to enable banks to provide loans to informal sector citing prudential banking regulations as part of constraints to the banks’ flexibility to design products.According to a study on the informal market done in collaboration with the Zimbabwe Economic Policy Analysis Research Unit, deficiencies in policy position and banking regulations among a cocktail of issues made it difficult for banks to come up with financial products targeted at the informal sector.

According to the study, other constraints included the notion among banks that informal sector activities were of an illegal nature, that the players were criminals, lack of proper record keeping, lack of collateral, high risk of borrowers and lack of skills.

The study was undertaken at the request of banks to understand the nature of the ever growing informal sector, with banks seeking to tap into the sector’s pool of liquidity after an earlier study revealed that as much as $7,2 billion circulates informally.

According to the 2011 Labour Force Survey, 84 percent of the currently employed population aged 15 years and above were in informal employment, signalling growing importance of the sector to the economy.

This comes against a backdrop where, faced with falling prospects for formal employment and increasing poverty, a majority of Zimbabweans turned to the informal sector, selling a wide range of goods from vegetables to backyard manufacturing.

In his maiden budget statement, Finance and Economic Development Minister Patrick Chinamasa said the old economy was dead and a new one, characterised by a thriving informal sector, was emerging.

While government now recognises the informal sector’s central importance to the domestic economy, funding continues to elude most of the players in the sector due to several factors, hindering potential for growth and employment creation.

“Although banks could be willing to develop tailor-made products for the informal sector, prudential regulation policies by the central bank might only allow some limited flexibility for the banks,” an excerpt from the study released by BAZ this week says.

It was also noted that most policies governing the domestic financial sector were not friendly to the informal sector players. This was because to open bank accounts, the banks required too much documentation, which informal sector players may fail to produce, even if they might have the money to bank.

The study established that access to banking services for the informal sector could require changes in bank regulations and standards governing loan collateral, approval and documentation, especially considering that the central bank might not allow too much flexibility.

According to the findings of the study, policies that try to formalise the informal sector by collecting taxes or forcing them to register have been found to have negative impact on access of financial services for the sector.

Many policies that attempted to formalise the sector also failed due to failure to recognise that informalisation was part of economic development process.

It was also noted that taxation systems served as a policy constraint for mobilising resources from the informal sector, as the systems in many countries were multi-step, complex and put discretionary powers on tax authorities.

The fear of taxation is mostly a result of lack of knowledge about the tax process; earnings of majority of informal sector players enjoy would not earn prohibitive levels of tax. It was thus key, the informal sector study concluded, that policy targets awareness about the taxation by the informal sector more than compliance.

The sector has grown exponentially since deregulation policies after independence and economic stagnation and decline, with the informal sector’s share of employment growing to 20 percent by 1986 to 1987 and further up to 27 percent by 1991 due to the government’s policy interventions in post independent Zimbabwe.

During the first decade of independence between 1980 to 1990, the government encouraged and promoted the establishment of growth points in the rural areas and home industries in the urban areas to encourage entrepreneurship, aiding growth of the informal sector.
In the 1990s, Zimbabwe introduced Economic Structural Adjustment Programme, which also demanded the relaxation of labour market regulations in order to achieve labour market flexibility and employment flexibility.

Thus, labour market regulation entailed the repealing of the 1985 Labour Relations Act making it easy for firms to hire and fire workers and as firms restructured their work processes, resulting in thousands of mostly unskilled workers losing their jobs.

 

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