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Round 4

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What is the Informal Economy?

The informal economy can be defined as the set of economic activities, such as businesses or jobs, that are not regulated or protected by the state. The term originally applied to unregistered self-employment and small enterprises. Today, the informal economy sector includes remittances, mutual savings, and investment activity, as well as any kind of unregistered business or goods production. It includes more than 60% of the global workforce and 90% of micro and small enterprises (MSEs).

The phenomenon is common both in developed and developing countries, with a tendency to take a more significant share in developing countries. Generally, a lower level of economic opportunity and state stability leads more citizens to take care of their money, jobs, and businesses by themselves. In South Asia, approximately 80-90% of the workforce is employed in the informal sector; for example, in Bangladesh, this indicator is ~89% based on results of research published by the Asian Development Bank. In the majority of African countries, the situation is pretty similar. People are not only using the informal sector for jobs and businesses, but also for basic financial needs such as savings.

One intriguing phenomenon of the informal economy is the formation of informal savings groups, which exist in 73 countries across the globe. Informal savings groups play a crucial role in the daily life of people from certain countries of Africa, South Asia, and South America. In the presence of an unstable banking system and untrusted and corrupted government, people prefer to take care of all financial activities by themselves and rely only on services based on social trust. These structural problems are relatively widespread in developing countries. The most studied region where savings groups are widely used is the sub-Saharan region of Africa. For example, in Kenya savings groups are called “Chamas”, which means “group” or “body” in Kiswahili, the national language.

A Chama is an offline cooperative group of 15-25 members created for collective savings and investments and based only on social trust. “Chamas” are widespread - only in Kenya, there are more than 300,000 Chamas holding more than $3.5 bln in assets. In different countries, informal savings groups have their own local names but the core principles are the same. Individuals put their savings together and invest jointly in projects, lend out money to members, and collectively manage the funds. The groups often come together around one goal, such as saving to acquire land or production inputs, and they promote financial discipline and mutual support mechanisms. Members tend to point out the outstanding stability and effectiveness of such social organizations.

In the Akropolis network, the broader term “autonomous financial organization” (AFO) is used to incorporate savings groups and other forms of collective financial organizations. We are trying to provide a flexible and seamlessly customizable solution that can be used by savings groups, cooperatives and other forms of mutual community-based organizations all over the world.

An autonomous financial organization (AFO) is a self-sovereign, digital, member-owned organization that provides financial services such as co-saving and co-investing, access to credit on flexible terms, and a basic form of insurance.

The AFO concept covers not only informal savings groups in developing countries but also other types of cooperative organizations used in such countries like the UK, Netherlands, and Germany. Common examples are mutuals (UK, Germany), Broodfonds (Netherlands) and cooperatives. One of our goals is to empower the informal economy by offering a secure and reliable digital platform that will support the majority of known forms of informal organizations to function more smoothly and interact.