The Informal Economy as Scaling Substrate

The framing problem The single most consequential framing decision in African scaling analysis is how to treat the informal economy. The dominant analytical treatment frames informality as a problem to be solved. Informality is associated with low productivity, regulatory non-compliance, worker vulnerability, and restricted access to formal financial services. The aspirational direction is formalisation. This framing is not wrong. The vulnerabilities of informal workers and enterprises are real. The correlation between informality and poverty is real. The link between formalisation and productivity improvement is real.

But it is incomplete. The informal economy is not a pre-formal state waiting to be upgraded. It is a functioning economic system with its own institutions, capital flows, knowledge systems, and scaling mechanisms - one that has persisted and grown because it serves genuine economic needs the formal system does not meet. Understanding the informal economy as a system, rather than as a deficit, reveals a different picture of where African scaling ventures come from, what makes them durable, and what institutional logic they need to navigate. Recent fieldwork on micro-entrepreneurs in Ghana found that approximately 75 percent of informal entrepreneurs who start their ventures purely for necessity reasons eventually develop opportunity-driven orientations. Necessity motives are fluid, not fixed. The binary framing of necessity versus opportunity entrepreneurship describes a snapshot, not a stable population division

Nearly 83 percent of employment in Africa and 85 percent in sub-Saharan Africa is informal, absorbing the majority of the continent's working-age population, per the ILO's Women and Men in the Informal Economy: A Statistical Update (2023). The formal scaling venture ecosystem - the ventures this publication has primarily analysed - operates on top of this substrate, not instead of it. The most successful African scaling ventures are frequently those that have found ways to serve, extend, or formalise the informal economy rather than bypass it.

The informal economy has its own capital flows. They are large, institutionalised, and almost entirely invisible to formal ecosystem analysis.

Rotating savings and credit associations - stokvels in South Africa, chamas in Kenya, ikibina in Rwanda, iqub in Ethiopia - collectively manage billions of dollars annually across sub-Saharan Africa. The stokvel ecosystem in South Africa alone manages an estimated R50 billion ($2.7 billion) annually, involving 11 million participants across more than 810,000 groups, per a 2024 Ipsos/NASASA study. These are sophisticated financial institutions with their own governance structures, default management mechanisms, and investment decision processes.

The significance for scaling ventures is direct. Informal capital provides a resilience mechanism for ventures navigating periods when formal capital contracts - as it did during the 2023–24 funding winter. M-PESA's annual transaction value reached 7.2 trillion shillings by 2023 - most of it representing informal sector economic activity given a digital channel. The infrastructure that makes informal capital flows visible and digital is precisely the infrastructure that enables ventures to serve the informal economy at scale.

The World Bank's Global Findex 2025 documents the scale of progress: account ownership in sub-Saharan Africa has risen from 34 percent of adults in 2014 to 58 percent in 2024, driven overwhelmingly by mobile money. But 42 percent remain financially excluded, with country variation from 90 percent ownership in Kenya and Mauritius to 14 percent in Niger. The ventures closing this gap are building on the informal capital infrastructure that already exists, not replacing it. The constraint at the frontier is not account ownership but cross-border payment interoperability - traders in the Ethiopia-Somalia border region maintain accounts in multiple countries or exploit cellular network spillovers to access foreign mobile money systems, workarounds that illustrate both the demand for regional integration and the distance still to travel

The informal economy has its own knowledge infrastructure - accumulated practical knowledge about how to source, price, distribute, and sell in specific markets, held in the tacit expertise of market participants built through years of practice rather than in databases or formal research.

A kiosk operator in Kampala who has served the same neighbourhood for a decade holds knowledge about consumer behaviour, creditworthiness, supply chain reliability, and seasonal demand patterns that no market research firm has systematically captured. A jua kali metalworker in Nairobi holds knowledge about product specifications, quality standards, and delivery expectations that no formal manufacturer has codified. A market trader in Lagos who has navigated informal West African trade routes for fifteen years holds logistical and regulatory knowledge that no formal logistics company has documented.

This knowledge is the raw material from which the most durable African scaling ventures are built. The ventures that have most successfully addressed the informal economy have done so not by imposing formal systems on informal operators but by developing deep institutional knowledge of how informal markets actually work and designing services around that reality.

The most strategically consequential question for ventures that serve the informal economy is how to navigate the formal-informal interface - both for themselves and for the markets they serve.

Formalisation pressure is real and growing. Development finance institutions require formal legal status, audited accounts, and registered employees as conditions of investment. The AfCFTA creates incentives for formalisation by making cross-border trade more accessible for formally registered enterprises. ESG requirements imposed by international investors create pressure for formal employment contracts, tax compliance, and environmental reporting.

Formalisation is a spectrum, not a switch. The most durable African scaling ventures frequently occupy a hybrid position: formally constituted and capitalisable at the governance level; informally embedded and operationally effective at the ground level. M-PESA's trajectory is the most instructive model. It did not require unbanked populations to formalise before accessing services. It met them where they were, provided value that worked within their existing institutional context, and in doing so created the conditions under which some participants subsequently chose to engage more deeply with formal financial systems.

This publication's empirical base is East Africa - Kenya, Ethiopia, and Rwanda. West Africa, North Africa, and Southern Africa, where informality takes different and analytically important forms, remain uncharted at equivalent depth.

Informal economies range from 20 to 25 percent of GDP in Mauritius, South Africa, and Namibia, to 50 to 65 percent in Tanzania and Nigeria, per the IMF's foundational sub-Saharan Africa informality study. Nigeria's informal economy at this scale is the economy - not a segment of it. Egypt's informal sector is structurally distinct from both. The institutional logics, capital flows, and knowledge systems that characterise informality in Lagos, Accra, Casablanca, and Johannesburg are not the same as those in Nairobi, Addis Ababa, and Kigali. They have their own histories, their own community mechanisms, and their own formal-informal interfaces.

Programme designs, capital instruments, and policy frameworks developed from East African evidence are being applied - by donors, DFIs, and multilateral actors - across contexts where the informal substrate is structured differently. The Misaligned Incentive Engine produces this outcome reliably: programmes are designed where data exists, then replicated where it does not, because the institutional incentive is to deliver, not to first understand. The result is ecosystem support built on assumptions that do not hold, producing the familiar pattern of high activity and weak adoption - for reasons that the evidence base cannot diagnose because the evidence base was never built.

Building systematic knowledge of informality in West Africa, North Africa, and Southern Africa equivalent to what the EADC has begun to build for East Africa is not a research agenda item. It is a prerequisite for designing interventions that work in those contexts. Until it exists, the Capability Trap will continue to reproduce itself in the precise form the R2C Kenya report identifies: institutions designing responses to a problem they cannot see clearly enough to solve.

The Capability Trap is partly a trap of visibility: government and institutional capability is directed toward formally constituted ventures and formally measurable economic activity, leaving the majority of the economy - and the majority of the scaling opportunity - outside the frame.

The Misaligned Incentive Engine operates through a different mechanism: the programme infrastructure that deploys resources to support ventures is structurally unable to serve ventures in hybrid formal-informal positions, because the due diligence, legal, and reporting frameworks of programme delivery require formal documentation that informal-sector-embedded ventures may not possess.

The Capital Architecture Mismatch is most visible here: DFIs and international investors require formal legal status, audited accounts, and formal employment contracts as conditions of investment - precisely the characteristics that hybrid formal-informal ventures may not possess at the stage when capital access would be most transformative.

The scaling implications of this substrate are that the evidence on which African business models demonstrate genuine durability consistently points back to ventures that have built with the informal economy's institutional logic rather than against it - and where the correction-period survivors are disproportionately those that treated informality as a design parameter rather than a constraint to be overcome.