The formalization of the African Market
When Western cultures describe Africa, they often label it as largely informal due to an apparent “infrastructure deficit” upon which their formalization was built. This perspective, while not entirely inaccurate, fails to capture the nuanced reality of Africa’s economic landscape. While it’s true that there exists an infrastructure gap compared to more developed regions, the assertion that Africa is predominantly informal oversimplifies a complex situation. In fact, Africa’s economic structure is far more formal than one might initially assume, albeit in a way that diverges from traditional Western models.
Our challenge in understanding Africa’s formalization lies not in the absence of formal structures, but in the lens through which we view them. The Western world typically associates formalization with institutions such as banks, mobile operators, and high-tech distribution chains. However, Africa’s approach to formalization is uniquely centered on communities rather than large-scale institutions. This community-centric model has evolved as a response to the challenges posed by the existing infrastructure setup, which makes it difficult for conventional formal institutions to scale rapidly enough to meet the diverse needs of the population.
So, what exactly happened in Africa’s journey towards formalization? The continent developed its own model, one that differs significantly from what you’ll observe in developed countries. This unique approach to formalization is what I’ve begun referring to as “communities as an institution” or “community formalization.” This concept recognizes the pivotal role that community structures play in facilitating economic activities, social support, and resource distribution across the continent.
The Formal Africa
African culture has always been deeply rooted in communal values and practices. This communal ethos is evident in various aspects of daily life, from the simple joys of childhood to significant life milestones. Growing up, children often play together on the streets, fostering a sense of shared experience and mutual understanding from an early age. During holidays, it’s common for families to stay with cousins and grandparents, reinforcing intergenerational bonds and collective responsibility. The tradition of gathering under trees for moonlit storytelling sessions serves not just as entertainment, but as a means of transmitting cultural values and wisdom across generations.
At the heart of these communal practices lies a fundamental goal: to ensure that everyone within the community is looked after, regardless of their individual circumstances. This principle of collective care and support is deeply ingrained in African societies and forms the foundation of many social and economic interactions. It’s a system where the success of one is celebrated as the success of all, exemplified by the way entire communities come together to celebrate when someone becomes the first university graduate among them.
This communal approach to life and progress is not limited to social interactions but extends into economic systems as well. Consider, for instance, the Igbo trade system, a prime example of community-based economic formalization. In this system, influential businessmen take young apprentices under their wing, providing them with practical training and mentorship. These apprentices serve under their mentors until they reach a point of “freedom,” at which time they are set up to establish their own businesses. This cycle of mentorship and empowerment continues as these newly established businesspeople take on apprentices from their own communities, perpetuating a self-sustaining model of economic growth and skill transfer.
Another illustration of community-based economic formalization is the ajo/circle/sarco system. This traditional rotating savings and credit association (ROSCA) involves community members contributing money to a common pot, which is then distributed to participants on a rotating basis, either weekly or monthly. This system not only provides a means of saving and accessing lump sums of money but also strengthens community ties and fosters financial discipline among participants.
These examples demonstrate how Africa’s formalization has been built around its inherent community nature. This unique approach to formalization is reflected in the success of some of the fastest-growing companies on the continent. These businesses have thrived because they have understood and leveraged the power of African community formalization, tailoring their business models to align with this cultural and economic reality.
Let’s examine some notable examples of companies that have successfully tapped into this model of community formalization:
- Moniepoint: This fintech company processes billions of dollars monthly in Nigeria, leveraging a network of agents and community-based transactions.
- M-Kopa: Having deployed over $1 billion worth of credit to individuals often labeled as “underbanked” by Western standards, M-Kopa has made significant strides in financial inclusion. Notably, 42% of their customers are first-time smartphone users, highlighting the company’s role in bridging the digital divide.
- OPay: In less than three years, OPay amassed a customer base of 10 million, surpassing the size of many “formalized” tier 2 banks. This rapid growth demonstrates the effectiveness of their community-centric approach.
- M-Pesa: This mobile money service processed an astounding 66.5% of Kenya’s GDP in 2022, showcasing the immense impact of community-based financial solutions.
- Bet9ja: By commercializing sports betting, Bet9ja tapped into community networks to rapidly expand its user base.
The success of these companies is not coincidental. Their very naming conventions often reflect a deep understanding of community formalization. Take Moniepoint, for example. The name “Money point” suggests a focus on accessible points for financial transactions within communities. This naming choice likely came after realizing that their previous name, TeamApt, didn’t fully capture the essence of their business model, which revolves around money distribution via communities (agents, businesses, retail outlets), eventually leading to their retail banking services.
Similarly, M-Kopa’s name is a clever blend of “mobile” (in English) and “kopa” (meaning “to borrow” in Kiswahili). This naming choice reflects their business model of distributing both physical and digital assets through a network of community-based agents. By incorporating a local language element, M-Kopa signals its understanding of and commitment to serving local communities.
What are the fundamentals?
Community formalization, at its core, mirrors the dynamics of a local community. It’s a model where businesses create symbiotic relationships among people who share similar characteristics and geographic proximity. These business ecosystems are built on a foundation of trust, shared goals, and pre-existing networks of people who interact with each other regularly. This approach represents a significant shift from traditional business models that relied heavily on physical infrastructure.
In the past, establishing a presence in a new market often meant setting up physical branches in various locations. However, the community formalization model has changed this paradigm. Now, the key to market penetration and growth lies in cultivating communities of agents and distributors who are already embedded in local social structures.
Companies that have successfully adopted this model recognize the critical importance of having a presence within communities. To achieve this, they invest heavily in recruiting and educating local agents. These agents become the first point of contact and the face of the business within their respective communities. Their roles are multifaceted and crucial:
- Customer Onboarding: Agents introduce community members to the company’s products or services, explaining their benefits in a way that resonates with local needs and contexts.
- Transaction Facilitation: They handle day-to-day transactions, making services accessible even in areas where traditional banking infrastructure might be limited.
- Customer Service: Agents provide front-line customer support, addressing queries and resolving issues promptly.
- Agent Network Expansion: Successful agents often recruit and train new agents, organically growing the company’s presence.
- Brand Legitimacy: By being respected members of their communities, agents lend credibility and trust to the brands they represent.
This model creates a unique dynamic where the customer’s relationship with the company is primarily through their local agent. For instance, an M-Kopa or Moniepoint customer doesn’t necessarily need to know the location or details of the company’s head office; their trust and interaction are centered on their local agent. This localized trust then extends to the brand as a whole, fostering a strong symbiotic relationship between the organization and the communities it serves.
The beauty of this system lies in its efficiency and scalability. By leveraging existing community structures and relationships, companies can rapidly expand their reach without the need for extensive physical infrastructure. This approach not only reduces operational costs but also allows for a more organic and culturally sensitive integration into new markets.
Changing the narrative
As stakeholders in Africa’s economic future, it’s imperative that we begin to shift the narrative surrounding our markets. Instead of perpetuating the notion of an “informal” economy, we should advocate for recognition of our “community-formalized” systems. This shift in perspective is not merely semantic; it has profound implications for how our markets are perceived, valued, and engaged with on a global scale.
However, embracing community formalization doesn’t negate the importance of traditional formal institutions as defined by Western standards. What Africa needs is a hybrid model that seamlessly integrates community-based systems with more conventional institutional structures. This approach should leverage technology to strengthen the connections between these two models, creating a comprehensive framework that truly defines what formalization looks like in the African context.
For local investors, founders, and operators, it’s crucial to move away from characterizing these markets as “informal.” This label often carries negative connotations, suggesting high risk, high interest rates, and expensive development costs. In reality, when understood and approached correctly, these markets can be both accessible and profitable.
The real cost lies not in building businesses within these markets, but in the missed opportunities and misallocations that occur when the global community fails to understand the unique nature of African formalization. By continuing to view African markets through a Western lens, we risk overlooking the innovative and effective systems that have evolved to meet local needs.
As we move forward, it’s essential to educate global partners, investors, and policymakers about the strengths and opportunities inherent in Africa’s community-formalized systems. This understanding can pave the way for more appropriate investment strategies, policy frameworks, and business models that are truly aligned with the realities of African markets.
In conclusion, recognizing and embracing Africa’s unique path to formalization is not just about changing terminology; it’s about unlocking the full potential of a continent rich in resources, innovation, and human capital. By acknowledging the power of community formalization, we can build more resilient, inclusive, and prosperous economies that benefit both local communities and global stakeholders alike.
