The Informal Economy as Scaling Substrate

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.

The conceptual frame is itself African in origin. Keith Hart's 1973 paper, based on fieldwork in Accra, coined "informal sector" as a category of analysis. The ILO's 1972 Kenya Mission Report, Employment, Incomes and Equality, institutionalised the term in development economics. The concept was developed to make sense of African urban economies before it was applied anywhere else. The analytical tradition that takes informality seriously as a system - rather than as the absence of one - has its deepest roots in African scholarship and African empirical work.

The ILO's Women and Men in the Informal Economy: A Statistical Update (2023) puts the scale at approximately 83 percent of total employment in Africa and 85 percent in sub-Saharan Africa. WIEGO's definitional architecture - built on three decades of Martha Chen's work - disaggregates the headline figure: own-account workers, informal employees, employers in informal enterprises, contributing family workers, and increasingly platform-mediated workers operate under categorically different conditions and require categorically different policy responses. The headline figure obscures the diversity beneath it; the diversity is what scaling ventures actually contend with.

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. 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 corollary for scaling-venture policy is direct: many of Africa's most durable scaling firms began as necessity ventures whose founders developed opportunity orientation through operating in informal markets - a pipeline that ecosystem support architectures, segmented around a fixed necessity/opportunity binary, are structurally unable to see.

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. Stuart Rutherford's The Poor and Their Money sets out the analytical foundation: poor households accumulate, redistribute, and invest substantial sums through institutional architectures their formal-sector counterparts neither possess nor would tolerate. The instruments are different. The economic logic is not.

The financial-inclusion trajectory the World Bank's Global Findex 2025 documents - account ownership in sub-Saharan Africa rising from 34 percent of adults in 2014 to 58 percent in 2024, driven overwhelmingly by mobile money - is treated substantively in Capital Systems. The point that matters here is narrower and structural: mobile money did not replace informal capital. It gave informal capital a digital channel. That single architectural shift - from invisible cash to addressable digital flow - is the most consequential infrastructure development for African scaling ventures of the last twenty years. PAYGO models capitalise against it. Agent-banking platforms scale across it. Embedded credit products price against it. The ventures that have built durable scaling positions in financial services have done so by serving the same capital flows that already moved through chamas and stokvels and savings circles, now made visible and routable. Suri and Jack's long-term study of M-PESA's welfare effects in Kenya, published in Science, gives the empirical foundation: digitisation of informal flows produced measurable household-level economic gains over a decade-long horizon - gains attributable not to new transaction capacity but to the increased velocity, security and insurability of flows that already existed.

Informal capital's significance for scaling ventures is also a resilience mechanism. During the 2023–24 funding winter, ventures with operational architectures embedded in informal flow patterns demonstrated stronger revenue resilience than ventures that had built only against formal-sector cash flow assumptions. The structural reason: when formal capital contracts, informal capital does not. The substrate persists; it absorbs shocks the formal system propagates.

The informal economy is not an absence of institutions - it is a different set of institutions. Informal economies have property rights systems, contract enforcement mechanisms through social sanction and community reputation, credit allocation systems through rotating savings associations and informal moneylenders, and dispute resolution mechanisms. These institutions are different from formal institutions, but they are not less real.

The analytical tradition that takes this seriously is broader than any single school. Goran Hyden's "economy of affection" framework, developed across decades of East African fieldwork, characterises the moral and reciprocal obligations that govern informal-sector transactions and that formal economic models systematically misread as inefficiency.Robert Bates's Markets and States in Tropical Africa makes the political-economy case from a different methodological tradition: the institutional configuration of African economies reflects the rational responses of actors to the incentive structures their formal institutions actually produce, not deviation from a Western institutional ideal. Jean-Philippe Platteau's Institutions, Social Norms, and Economic Development provides the formal-economic theory of how informal contract enforcement, collective sanction, and reputation-based credit produce stable transaction architectures in environments where formal courts cannot.

The Africapitalism literature - developed most rigorously by Professor Kenneth Amaeshi - connects this to the contemporary African business context: capitalism in African contexts is embedded in social and community structures providing both resources and constraints invisible to analyses that model African markets on Western institutional assumptions. What looks like institutional failure from a formal perspective is frequently a different institutional logic operating, not the absence of institutional logic.

This is where the analytical traditions diverge productively. Hernando de Soto's Mystery of Capital argues that informal property rights are functioning but unrecorded - the policy implication being titling and formalisation. The empirical critique mounted across Mike Davis's Planet of Slums and Ananya Roy's work on subaltern urbanism shows that the policy implication has rarely produced the predicted welfare gains and has often dispossessed the people titling was meant to benefit. The framework - informal property rights as functioning, just unrecorded - survives the policy-prescription critique. The framework is the analytically useful part.

Sun King's PAYGO model works not just because it offers affordable energy. It works because it embeds the financial relationship in the pattern of small, frequent payments that characterise informal sector economic activity - matching the cash flow patterns of its customers rather than imposing a payment structure designed for formal sector income profiles. The Banerjee-Duflo Poor Economics synthesis of randomised-trial evidence and Collins, Morduch, Rutherford and Ruthven's Portfolios of the Poor provide the empirical microeconomic foundation: informal-sector cash flows are characterised by small amounts, high frequency, irregular timing and substantial liquidity-management complexity. Products designed against formal-sector cash-flow profiles fail at the design stage, not the deployment stage.

A category of work has emerged since the 2022 analysis that does not sit comfortably in either the formal or informal frame. Ride-hailing drivers, last-mile delivery riders, agent-banking operators, microwork annotators, content moderators - all are formally documented at the platform level (records, payments, ratings, dispute resolution) but informally structured at the worker level (no employment contract, no tenure, no benefits, no collective voice). The platform-mediated worker shows up in the digital records of the venture and is invisible in the labour-protection framework of the state.

The ILO's World Employment and Social Outlook 2021: The Role of Digital Labour Platforms is the foundational treatment. The Fairwork Foundation's African platform ratings, led by Mark Graham and colleagues across 38 countries, document the conditions: African platform workers consistently score below their counterparts in higher-income economies on fair pay, fair conditions, fair contracts, fair management, and fair representation. Mohammad Amir Anwar and Mark Graham's The Digital Continent: Placing Africa in Planetary Networks of Work extends the analysis structurally: African platform workers occupy positions in global value chains where the platform captures the data, the algorithm, and the governance authority while the worker captures the variable cost.

The implication for African scaling analysis is direct. Platform-mediated informality is the fastest-growing segment of the informal economy. It is not captured by the headline ILO figure (which uses 2018-vintage labour-survey methodology). It is the structural condition under which ride-hailing, last-mile delivery, agent banking, and the AI-training-data labour treated in What AI does to the existing structure actually scale. The Sama / OpenAI contract, the Scale AI Remotasks workers, the African Content Moderators Union - all are platform-mediated informality at the layer where AI scaling actually depends on labour. The ventures scaling on this substrate are doing so on terms that have not been substantively negotiated.

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. ESG requirements imposed by international investors create pressure for formal employment contracts, tax compliance, and environmental reporting. The pressure operates not only on the ventures themselves but on the markets they serve - when a venture is required to formalise its supplier base or its agent network, the formalisation pressure cascades down the value chain.

The AfCFTA's interaction with informality is the clearest illustration. Cross-border trade across most African corridors is substantially informal. UNECA's analysis of informal cross-border trade accounts for between 30 and 72 percent of trade between neighbouring African countries, while COMESA data places the figure at around 30 to 40 percent in parts of the SADC region. The scale is especially visible along high-volume corridors such as Tanzania–DRC, Nigeria–Benin, and Zimbabwe–South Africa. WIEGO’s documentation of informal cross-border traders records the dominant role women play in these networks across West, Central, and Southern Africa. The AfCFTA architecture is designed to formalise. Where formalisation displaces existing informal trade networks before substituting equivalent formal routes, the result is net trade contraction, not expansion. The AfCFTA's Simplified Trade Regime is the explicit response - designed to allow small-scale traders to continue operating across borders without full customs procedures - but its operationalisation across member states is uneven, and the bridge between informal cross-border trade networks and formal AfCFTA channels is mostly not yet built. Reform that displaces working informal architecture before substituting working formal architecture produces transitional damage, not transition.

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.

The hybrid position is not a transitional state on the way to full formalisation. It is the equilibrium position for ventures whose customers operate in informal markets. Ventures that confuse it for transition - and design their architecture toward eventual full formalisation - typically lose the operational advantage that depended on the informal embedding. The structural design challenge is to maintain the hybrid position over time, not to graduate from it.

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.

Informality varies more across African regions than most macro variables do. Informal economies range from 20 to 25 percent of GDP in Mauritius, South Africa, and Namibia, to 50 to 65 percent in Benin, Tanzania and Nigeria, per the IMF's foundational sub-Saharan Africa informality study. Nigeria's informal economy at this scale is not a segment of the economy. It is the economy. Egypt's informal sector - shaped by the legacy of subsidy-based industrial policy and decades of urban demographic pressure - 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.

The variation matters because 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.

The Capital Architecture Mismatch is most visible in the informal-economy interface. DFIs and international investors require formal legal status, audited accounts, formal employment contracts, ESG documentation, and reporting standards 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. This is not an accidental feature of programme design. It is a structural feature of the institutional architecture donor capital itself sits within.

The fiduciary architecture binds upstream of the programme architecture.

BII's investment policies, the IFC's Performance Standards, Proparco's ESG standards, and FMO's investment criteria all require documentation that hybrid formal-informal ventures cannot produce without first dismantling the operational architecture that makes them work. The criteria are designed to satisfy the fiduciary obligations of the public capital that funds DFIs - capital sourced from European parliaments, US Congressional appropriations, sovereign treasuries - whose accountability mechanisms cannot accept investments without the standard documentation. Reforming the programme architecture without reforming the upstream fiduciary architecture moves the problem one layer down without solving it.

Owen Barder and Charles Kenny's CGD work on aid effectiveness documents the mechanism. Aid bureaucracies are accountable to fiduciary requirements that do not match the investment characteristics of the markets they serve. Reform proposals that operate at the programme level - better diligence design, more flexible reporting, simplified compliance - do not address the upstream constraint. Sustained reform requires changes to the appropriations frameworks, parliamentary oversight standards, and fiduciary obligations that the programme architecture downstream from them is required to satisfy. That is institutional reform at a depth the ecosystem-design discourse mostly does not touch.

The implication for scaling-venture policy is that the informal economy is not a secondary segment requiring auxiliary support. It is the substrate on which the most durable African scaling ventures are actually built - and the most binding constraint on those ventures is not their informal embedding but the inability of the formal capital architecture to engage with what they actually are. The evidence on which African business models demonstrate genuine durability consistently points back to ventures that built with the informal economy's institutional logic rather than against it. The correction-period survivors are disproportionately those that treated informality as a design parameter rather than a constraint to be overcome. The capital architecture has not yet learned the lesson that its most successful investees have already taught it.