How dark side of economy is slowing down Kenya’s growth

African Economic Research Consortium executive director Prof Lemma Senbet. Illustration/Joseph Barasa  Nation Media Group

By Aamera Jiwaji

In Summary

• There is a growing realisation that lack of financial inclusion has pushed some entrepreneurs to apply their ingenuity on the other side of the track—spurring the emergence of a dark economy.
• AERC’s executive director Prof Lemma Senbet spoke to the Business Daily on the subject of financial inclusion and its impact on economic growth.

Kenya’s nascent entrepreneurial economy as defined by successful private initiatives such as M-Pesa and microlenders such as Equity Bank—has drawn its fair share of attention, putting Africa on the path to becoming the investment destination of choice.

There is a growing realisation that lack of financial inclusion has pushed some entrepreneurs to apply their ingenuity on the other side of the track—spurring the emergence of a dark economy.

This dark economy was the subject of a recent African Economic Research Consortium (AERC) conference in Nairobi where policy makers and researchers explored the link between the lack of financial inclusion and increased levels of crime.

AERC’s executive director Prof Lemma Senbet was in attendance and spoke to the Business Daily on the subject of financial inclusion and its impact on economic growth.

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How is Africa’s economic outlook from a researcher’s point of view?

There are very strong signs of what has been referred to as the African growth syndrome—now with us for 10 years. It is the outcome of extensive financial and economic reforms and some intangibles, one of which is better and more informed policy making. Africa is growing but the jury is still out on whether this growth is inclusive.

At AERC, we believe that finance is at the centre of economic performance, and that inclusive finance should have inclusive growth. In the next 10 years, Africa needs to put more emphasis on the quality of growth. I mean, growth has to benefit a wider community.

Why is inclusive growth important in an economy like Kenya’s?

Inclusiveness is important because heavy concentration of wealth with a wide income gap eventually poses the challenge of discontentment. When prosperity is not shared there is high potential of turmoil.

Some of the capable and creative entrepreneurs who have been left out of the prosperity will venture into the dark side of the economy. I have the feeling that this phenomenon partly explains Nairobi’s rising wave of crime.

Some members of the excluded groups have gone to the dark side and are in the business of forcing inclusiveness of growth that formal systems have failed to do.

What options does Africa have to better manage its economic agenda in the next 10 years?

The options are many, but the key thing is greater empowerment of private initiative. I think Kenya is already at it especially through the activities of entities like Equity Bank. 

Kenya used to be the seat of the British empire and has had a large presence of post-colonial banks such as Barclays that have been hesitant venturing into rural or arid areas.

inShare

Equity woke up one day and realised it could make money in unchartered areas and barely a decade later it has become one of Kenya’s largest banks traded on the Nairobi Securities Exchange.

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How does this tie into the subject of inclusive growth?

In the fact that it offers a clear case of microfinance getting integrated into formal finance and on to the stock market. People always talk about microfinance as a panacea to mass poverty. It is not.

This is because it is not an end, but a means that must be integrated into formal finance. That is what is meant by inclusion. It would help if more African countries followed in the footsteps of Kenya on this issue.

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What explains Kenya’s apparent success among African peers in this area?

Kenya is one of the few African economies that have stayed market oriented for many years—entrepreneurial and private initiative driven. It would have, however, moved even faster had it paid attention to the dark side of the economy.

Policy makers need to create opportunities for creative entrepreneurs who are working on the dark side of the economy to move to the formal.

Moving a large proportion of those in the dark side of the economy into the formal side will move Kenya into middle income status in 10 or 15 years.

What would you say is the reason many creative entrepreneurs might find the informal or dark side of the economy more attractive?

One of the reasons is rampant corruption. Corruption in the police force, for example, means that formal sector operators are intertwined with the informal sector on informally negotiated terms.

Then there is another group that is motivated by the fact that what is happening in the formal sector is not trickling down to them, forcing them to go for alternative avenues (of wealth distribution).

There may be more but working on these politically sensitive but difficult issues will move Kenya much further.

What characterises the lack of financial inclusion?

It is a multi-dimensional issue. One has to do with the quality of the underlying contract in the credit market. For instance, if you (as a lending institution) are not sure that you can get your money back then you are likely to charge a high interest.

Then there is risk management. If you don’t have the capacity to manage risk, you pass on that problem to borrowers. The third is competition. If you don’t have a competitive banking or financial system then you have privileged access and are more likely to charge a higher interest rate.

I am in favour of an environment where non-banking finance is encouraged—through private equity and increased development of stock markets— to bring pressure on traditional forms of finance.

Kenya already has 42 commercial banks. How many such institutions are necessary for optimal competition?

It’s not just the names but the concentration. In many African countries, you have a large number of banks but there is a three or four bank syndrome.

Some countries went through privatisation by allowing entry of other banks but these other banks are pretty small and without any significant market impact.