Where TRUST is more than collateral!

A few financial institutions and policymakers are beginning to see what farmers and traders working in the people’s market have known for decades. That TRUST is a key enabler of successful agriculture development. On the other hand, academics are also waking up to the fact that without TRUST you cannot build a successful knowledge organisation. The notion of TRUST is what makes the people’s market (informal market) much more efficient than the formal economy where everything has to be written down. If every farming or marketing process was to go through documentation, farmers and traders would spend much of their time buried in paper work. TRUST absorbs many of the time-consuming steps that are typical of the formal sector.

In the formal sector, a business enterprise has to be registered. Transactions have to go through a lot of paper work – quotations, orders, invoices, delivery notes and receipts, among others. Payments take 7 to 30 days. No serious farmer can wait for that long. If it is a bank transfer the payment has to go through a lot of authorization. Most formal institutions, especially banks, consider formal businesses as a legal entity merely because such businesses are registered. These businesses enjoy benefits from banks in spite of poor performance. High cases of Non-Performing Loans in Zimbabwe have been incurred by businesses which hide behind registration certificates when they have no clue about delivering value.

In the informal sector, employment creation is directly linked to business performance. People are employed as per demand for their services, which is why there can be hourly, daily or weekly jobs. It is in such situations where TRUST is built and sustained. One can work for a few hours and get paid according to his/her contribution as verbally agreed. No receipts or any form of bureaucracy. The rate at which services are delivered or transactions are done in the informal sector will certainly be constrained if paper work was the order of the day. Informal sector players avoid banks because the nature of their business transactions cannot stand the red tape in formal transactions systems.

On the other hand, banks do not separate the informal business owner from his or her business, the way they treat formal businesses. Instead of considering the potential of the business in its own right (e.g. Mbare market as an institution), banks categorise traders and give them names – an indication of lack of TRUST. Additionally, in formal contexts registration is used as collateral. In informal businesses where commodities like bananas can actually be seen in physical form, banks look the other way preferring to see papers not the size of the business or commodities.

Why TRUST is very important

Without TRUST we can’t build a sustainable economy. The flexible nature of informal businesses is fuelled by TRUST along value chains. It doesn’t make sense to formalize a small section of agriculture value chains, for instance, traders. Again, if banks or policy makers were to insist on formalizing the entire agriculture value chain such a move would mean farmers, traders, transporters and other actors being registered as businesses. Can you imagine the amount of paperwork, queues and lost opportunities?

The informal agriculture market is more efficient because it has eliminated paper work and documentation which are over-rated processes. In the informal agriculture market, TRUST is extended through short-term loans in the form of tradable commodities. Of the close to US$12 million generated by 19 products in Mbare-Harare’s wholesale agriculture market in 2014, US$6 million worth of commodities traveled on the value chain based on TRUST up to the final consumer. Imagine farmers handing over to traders commodities worth such a value without any money exchanging hands until consumers pay and then value migrates in reverse direction.

The following table shows the estimated revenue per commodity in Mbare’s wholesale agriculture market from January to December 2014.

a

b

Potatoes and carrots are some of the commodities that have dominated the wholesale market

In case formalization becomes the only option
Formalization has to match the rate at which business transactions take place in the informal market and take into account: activities on the auction floor; long distance supplies where there is no room for paper work; traders who want to switch from bananas to tomatoes in pursuit of opportunities; transactions that take place with clients in transit; the perishable nature of commodities; and, adjustments to market trends like shortages and gluts.

Mobile technology to the rescue
eMkambo has seen how mobile technologies are helping in cementing TRUST and lowering boundaries between formal and informal marketing activities. A number of formal process such as getting quotations, orders and payment receipts (confirmation) can all happen on a mobile phone within the context of TRUST. In fact TRUST comes after RELATIONSHIPS have been cultivated. Informal traders and farmers keep mobile contacts for business purposes. Mobile phones are also surmounting literacy barriers because you can’t tell people’s level of education by their phone calls. On the other hand, paper work would actually show that someone is not formally educated. Through mobile technology, relationships are quickly transformed into TRUST based on continuous interaction.

ICTs and banking services should also be tailor-made to suit the rate at which transactions take place, also taking into consideration transaction costs. At the moment it costs 50c to transfer $5. If a trader is going to do 200 transactions within an hour, the cost of transfers will be $10. This is quite expensive and traders now know it.

c

ICTs are increasingly enhancing TRUST in agriculture marketing

The informal market tends to show free market forces at play. There is no collusion like what happens in manufacturing or bread making where players connive to fix the price of a loaf of bread at $1 irrespective of different production costs. If there was no collusion in this case, we should see bread prices ranging from 87c to $1per loaf.

Where two formal companies try to get into business paperwork and bureaucracy is involved unlike in the informal market where TRUST rules. We are increasingly seeing some private and formal companies now working with the informal market for easy penetration and business deals. Should it become unavoidable, formalization of SMEs should be needs-based and tailor-made for various business sectors, sizes and commodities. It can’t be a one-size-fits-all. Formalization should not just target taxation. Farmers and traders do not TRUST formalization processes which they are convinced will kill innovation.

The terms formal and informal should be revisited taking into account a number of factors such as number of years in business. Those who have operated for 5 to 10 years in informal business arrangements should be considered formal since they have been in business long enough to shape a professional identity. You can’t refer to someone who has been in business for 25 years informal when some so-called formal business fail to live beyond 5 years. Besides business lifespan, other considerations should include: employment creation levels, business size and consistency.

Through TRUST, some traders are already providing inputs to farmers based on long-term relationships. Input providers can ride on such demand-driven relationships unlike providing inputs when farmers have no clue how the market will behave by the time agriculture commodities are harvested.

More information:

Charles@knowledgetransafrica.com / charles@emkambo.co.zw

Clever@knowledgetransafrica.com / clever@emkambo.co.zw

tafadzwa@knowledgetransafrica.com / tafadzwa@emkambo.co.zw

tenjiwe@knowledgetransafrica.com / tenjiwe@emkambo.co.zw

farai@knowledgetransafrica.com / farai@emkambo.co.zw

zvifadzo@knowledgetransafrica.com / zvifadzo@emkambo.co.zw

tariromk@knowledgetransafrica.com / tariro@emkambo.co.zw

Laizah@knowledgetransafrica.com / laizah@emkambo.co.zw

Website: www.emkambo.co.zw / www.knowledgetransafrica.com

eMkambo Call Centre:

0771 859000-5

0716 331140-5

0739866343-6

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