Informality weakens governance. It also dampens income potential, as investment is less secure and therefore more risky in an informal market versus a formal (regulated) market.
Our research has shown that significant amounts of capital are underutilized by financial institutions in emerging markets. This is particularly relevant as it shows that informality is in part a product of a dearth of information available to households/individuals, financial institutions and governments.
There is extensive research related to a largely unmet global demand for credit from small shareholder farmers in developing nations and the untapped supply of capital from financial institutions.
For example, the World Bank (Steel and Snodgrass) estimate that the size of the informal economy in Africa ranges from 50 to 80 percent of GDP and as much as 90 percent of new jobs. The International Finance Corporation (IFC) estimates that to meet the growing global demand for food, an additional US$83 billion per annum is needed to be invested in the Agriculture sector. And a recent article entitled “Catalyzing Smallholder Agricultural Finance” estimates that demand from smallholder farmers for financing is estimated to be US$450 billion, mostly unmet today.
Informality is a tremendous challenge for many investors as scant to no information is available on the creditworthiness of small shareholder farmers in many developing countries. This prevents financial institutions and banks from extending credit.
In our daily business processes, Thomson Reuters conducts regular dialogue with our customers. During some of these discussions, the issue arose of how financial institutions and banks could lend to small shareholder farmers. Traditional financial institutions are interested in engaging with underserved populations but are unable to enter the market for a number of reasons.
Banks want to offer financial products to small shareholder farmers that fit their investment risk profile and meet regulatory limitations. However, they need qualifying collateral to secure loans. They also need to ensure borrowers understand their loans’ terms to avoid reckless borrowing. Banks need to better connect with small shareholder farmers. Paramount for banks is that they need trustworthy methods to evaluate borrowers’ credit risk. They require better risk modeling.
Informality is a paradoxical problem: Financial institutions rely on the government to define regulations and to provide registration for collateral so it may be securitized. Yet too often and in too many countries – as statistics on informality show – governments have no information on who owns what lands and where those lands are located and how much those lands are worth.
As The Answer Company, Thomson Reuters has helped to bridge these gaps by utilizing our intelligence, technology and human expertise to serve as the connective tissue between banks, governments and small shareholder farmers. By providing financial information, insights and analytics to banks; land administration systems and expertise to governments via our Aumentum™ software suite; and a mobile app to manage land, crop and financial services to farmers, Thomson Reuters is building mutually beneficial bridges between key customer groups who were previously disconnected.
In conjunction with our pilot partners, we are developing mobile field collection tools to capture small shareholder information in the field, including:
- Biographical household information
- The location, extent and value of households’ agricultural lands
- Crop-growing information, such as soil quality
- Crop/commodity market information, such as prices, texted to farmers
This information is then used to develop risk profiles so that financial institutions may make sound investment decisions.
Information and technology corporations play a vital role in contributing to formalization, specifically by collecting information relevant to investment decisions which may then be provided back to the government. Risk profiling through the pairing of technology with information sharing has been a trusted role of Thomson Reuters since the founding of the company in the 1860s.
Banks want to offer financial products to small shareholder farmers that fit their investment risk profile and meet regulatory limitations.
Having a government agency recognize, affirm and register a right with restrictions and responsibilities is a defining criteria of formality. Importantly, information services offered between banks and households provides a potentially tremendous pull- through for governments to register rights.
Economic informality is a persistent problem in the world today. Additionally, the world needs more food, and the capital exists to support investment in the Agricultural sector in developing markets. However, small shareholder farmers are starved of capital as information and connections do not exist. We touch on this in our special multimedia report, “9 Billion Bowls,” which highlights securing land rights as the way the world will feed 9 billion people by 2050.
At Thomson Reuters, we are helping answer the question of how technology combined with information services and smart partnering models can solve the uncertainty that contributes to economic informality.
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