Harnessing Africa’s informal savings

“the commercial landscape of Africa is littered with mosaics of these unregulated enterprises which slowly but firmly support the economy of member countries with the dexterity and flexibility of an octopus. It is a sector whose activitism has crystallized into an indispensable partner which is increasingly referred to as the underground Economy”

The large percentage of people employed by the informal economy (estimated at 70%) have historically limited the size of traditional pension funds, which has partially resulted in the continent’s low level of pension coverage. Formal pension funds are unable to cater for very low incomes, which are irregular as many workers are seasonal and migrant. Considering this, there appears to be merit in policy-makers, pension practitioners, development finance institutions and other stakeholders in the African pensions system, to embrace this reality and enable savings for this group, rather than spurn them. These workers include young adults, a demographic that is being economically excluded world-wide. They may still be living at home and are, by definition, “unemployed”, however economically active. They contribute to the household income and have aspirations, which include saving for their future.

Saving is happening – just outside the traditional definition. Most recent data from the 2017 Global Findex database for sub-Saharan Africa speaks to the fact that saving semi-formally is a common method of saving. On average across sub-Saharan Africa:

• 26%

  of adults reported having saved in the past year using a savings club or a person outside the family

• 19%

  of adults who reported having saved money semi-formally but not formally

Adults saving in the past year (%) 2017

• Saved formally
  
• Saved semi-formally
  

Source: Global Findex Database
Note: Data are displayed only for economies in sub-Saharan Africa

The pension systems of Nigeria and Kenya serve as examples of systems that are trying to embrace alternative forms of savings. In Nigeria, the Micro Pension Plan is designed to cover small-to-medium sized enterprises, self- employed Nigerians and the broader informal sector. It is estimated that the informal sector constitutes 70% of Nigeria’s total workforce. As at the end of 2016, there were an estimated 38 million potential contributors to Nigeria’s Micro Pension Plan. The Nigerian pension industry’s strategic objective is to cover 30% of the country’s working population by 2024, which will only be achievable by reaching out to the informal sector.

The Mboa Pension Plan of Kenya equally targets workers in the informal sector who run micro, small and medium sized enterprises in Kenya. Under Mbao, members must make a daily minimum KES. 20 (US$0,20) contribution using their mobile phones. They use the mobile money transfer services offered by the two leading mobile phone networks in Kenya, namely, Safaricom and Airtel. They can, therefore, make their payments through M-PESA and Airtel Money transfer services in real-time, 24 hours a day, and from anywhere within the mobile phone network coverage. These plans clearly show the considerable leverage that mobile phone penetration offers in the enhanced delivery of pensions. With mobile penetration rates in both countries above 80%, the handset and mobile phone coverage present immediate solutions to limitations that would otherwise preclude this constituency from more formal pension arrangements.

These schemes are reflective of international trends, where digitally integrated payment, administration and investment functions allow greater flexibility in participation as well as lower costs, as illustrated below.

Creating a new value chain for digital pension inclusion