To lack something doesn’t mean one cannot afford it. The consumer goods sector is growing rapidly in Africa. From 2000 to 2010, natural resources contributed to one-third of African growth.

According to McKinsey & Company’s report, “The rise of the African consumer,” sectors operating at least partially in B2C represented 45% of this growth in 2012. The authors predict that by 2020, more than half of African households will be able to afford extras, which represents 130 million compared to 85 million today. They also forecast that consumer sectors (including wholesale and retail, retail banking, telecommunications, and tourism) will see growth of over $400 billion. This increase accounts for more than half of the total estimated growth for all commercial revenues over this period.

A significant portion of African wealth growth is hidden, in both figures and facts. Statistically, the World Bank’s GDP calculations are solely based on the official economy, i.e., incomes declared to the state.

The volume of the informal economy is unknown, but it’s estimated that undeclared work represents nearly 80% of non-agricultural employment, over 60% of urban employment, and over 90% of new jobs in Africa in the second half of the 2000s. In the seminal study he conducted for the World Bank’s Doing Business project, Friedrich Schneider found that the informal economy accounted for over 42% of GDP on average in the early 2000s. Urbanization and the structuring of the economy have certainly to some extent reduced the share of the informal economy, but the result is that purchasing power in African cities and villages is consistently underestimated by official GDP figures. Warning about the reliability of these statistics, African investor Miles Morland recounts that a simple change in the method of evaluating the economy caused Ghana’s official GDP to soar by 70% in one year.

James Mwangi has a more human vision of invisible spending in African cities and villages. Sixth of seven children raised by a widowed mother, James grew up in rural Kenya and in poverty. As a child, his family insisted on him getting an education, but he also earned money by selling fruit and peddling charcoal. This was his first contact with consumers on the fringes of the official economy. It was by leveraging the strength of these customers that James built Equity Bank, the largest bank in East Africa. Today, Equity manages 7.8 million accounts and has a market capitalization of over $1.3 billion. In 2012, James was named “African Businessman of the Year” by Forbes magazine.

For James, Equity’s success is linked to what he learned in his youth selling charcoal door-to-door. “I saw that my customers had money, but they kept it close at hand because they needed it immediately,” he recently told me. “Before being on Equity accounts, this money was hidden under mattresses.”

One reason competitors of James failed to meet the needs of low-income customers is that they viewed these customers as an unbearable credit risk. In reality, Equity Bank’s loan default rate in the last quarter of 2012 set industry records at a mere 3%. This perception…

This text is an excerpt from the book “These Successful Businesses in Africa” written by Jonathan Berman.

We invite you to read the following article “GET YOUR HANDS IN THE DIRTY“.

Comments (0)

Leave a Reply

Your email address will not be published. Required fields are marked *