What's the Point?
The Quest for Systemic Change
In the first part, we briefly laid a basic foundation for the argumentation in this part. We argued that accounting plays a vital role in economic development. This part explores how international development programmes and impact investing could achieve more inclusive growth in the receiver countries through leveraging accounting practices at micro and macro-economic levels.
A different approach is needed
Scores of migrants arrive at Europe's shores often due to lack of opportunities in their own countries. More than 50 years of development aid and efforts have seemingly had little impact at grass-roots levels.
South Africa's president Ramophosa pledged at his inauguration this year to eradicate large-scale corruption. At the time of South Africa's first fully democratic election, I was working for a not-for-profit organisation in Cape Town that received funding from international donors. It closed doors 6 months later as funding dried up. During the apartheid years, funds were almost exclusively given directly to organisations operating at grass-roots levels for obvious reasons. In order to support the new democratically elected government, the direction of funds flipped sides. Massive international funding flooded into weak political structures. Civil servants were appointed for the role they played in the apartheid struggle, or their allegiance to the main political party or affinities. Inapt political leaders were inadequately equipped for the new roles and often genuinely saw their new role as their turn to improve their personal lives. The majority of South Africans are still poor if not poorer today. Infrastructure, education and heath systems are at breaking point. SA has one of the highest crime rates in the world and well armed gangs are controlling towns and townships. Chronically high unemployment and particularly youth unemployment steal people's hope in the future. On the contrary, skilled labour is hard to find as many qualified workers have left to find a more secure and prosperous future abroad. Highly regarded doctors and nurses are being absorbed by European and Australian health systems. Money is now lacking everywhere to address even the basic needs of people. It fills me with incredible sadness to witness how a country so full of hope and realistic prospects for a prosperous future for all was run down by political and business elites enriching themselves. Additionally international governments and media appear to have turned a blind eye to this.
Combining Aid with Trade
Much of the aid from international governments is meant to benefit national business interests which is unashamedly stated in their official publications (I have seen it in a government sponsored programme). In many cases, this has meant, funding will end up in the hands of corrupt officials to return the favour in terms of subsidies, trade contracts, visas, access to resources, etc. Evaluation and monitoring of public and private (foundations) funds channelled into local development programmes have been undertaken haphazardly. For example, donors are still satisfied with case studies to promote outcomes of business-skills programmes. Some rely on estimated numbers of created jobs without meaningful data-backup. As long as donors provide funding per head, receiving organisations are hesitant to enforce book-keeping vital for business growth as this will turn some entrepreneurs away or cause others to drop-out of their programmes.
Micro-lenders funded by impact-investors and international aid generally charge high interests to cover costs and risks rather than requiring and reinforcing financial management discipline of their clients. Despite the much lamented lack of funding for micro-businesses, competition among micro-finance institutions (MFI) is fierce. For most, its a quantity game to achieve sustainability. Each loan-officer not only has to have a high number of clients (often more than 300), he also often works in severely restrictive work-conditions. While commercial banks require financial records to support loan-applications, which they get emailed or posted, can check company registers and banking history in their air-conditioned offices, MFI loan-officers lack most of it. Often the loan-application processes requires that the loan officer uses public transport to visit clients in remote areas, generate some financial details based on impressions of the business and memory of the owners. Regular follow-up visits are required to monitor businesses, use of funds and keep repayment morale up. Demands on his time, pressure from competition and availability of international funds, are major reasons for hesitance to impose more stringent loan-application criteria such as requiring financial records. Where funders require businesses to have financial records, often they are being generated relying on memory rather than data. As a major source for funding, the state-owned South African lender SEFA, is using this method as admitted by an employee we spoke to. In their last financial year, over 46% of their loans were impaired. Rather than being helpful, this is actually a dis-service to business owners as most get bad credit records and experience a measure of guilt over being unable to repay.
Lack-lustre accounting practices among micro-businesses
Growth of micro-enterprises is stifled by a lack of financial record keeping. Without records, businesses struggle to access regulated funding sources, business finance such as leasing, opportunities such as sub-contracting and tenders, and to rent premises. It excludes them from opportunities in the mainstream economy. Thus, on macro-economic levels, the divide between the so-called informal and formal sectors is perpetuated and growth opportunities are lost.
Suppliers' business records facilitate due-diligence that orders can be fulfilled. Business records are also used by landlords to check rent affordability. Financial literacy and management are promoted through regular record-keeping and analysis of the information they provide. Record keeping transforms businesses to operate in a more formal fashion.
Organisations supporting record-keeping micro-entrepreneurs are able to provide donors and funders with data-backed outcome details and are able to target scarce resources more effectively.
Municipalities and government may not receive more tax-income from micro-businesses often earning below national minimum income levels, but could improve their infrastructure and public-services planning based on the data received.
Benefits of record-keeping are rarely disputed. So why do many international donors hesitate to insist on record-keeping in their livelihood/ entrepreneurship development programmes? Possible reasons are:
unavailability of appropriate record-keeping solutions
difficulties encountered in enforcing record-keeping, such as low literacy and numeracy levels, managing behavioural change
lack of book-keeping skills among staff supporting businesses
other demands on time
data-protection and privacy concerns, fear of the Taxman
difficulty incorporating into existing programmes
added administrative burden for donors and recipients
disparity between preconditions for donor KPIs and recipients' reality
worst reason: effectiveness is less important than the political and business benefits
It won't change on the bottom
A change of attitude and policy among public and private donors requiring financial data from supported businesses would have a major impact on inclusiveness of many markets. Quality of outcome should become more important than quantity. A principle used in many incubators nowadays is to allow the entrepreneurs to fail fast rather than keeping him cosily supported until his business collapses as soon as he has to make it on his own. While still in the incubator, he is usually given a second chance building on what he learnt from his failure. Likewise, carrot and stick approaches may be needed in skills and support programmes. Entrepreneurs repeatedly failing to keep records regularly despite an organisation's best effort should be prevented from entering advanced programme phases or forced exit the programme altogether without adverse financial consequences to the organisation. Well structured programme phases with mutually agreed, clearly stated criteria or membership levels tend to be self-selective and avoid confrontations between staff and programme participants. While quantity can be measured through head-count, quality requires more data and perhaps even selection of recipients. It may also require more funds for staff training, better payment, improvement of their working conditions and equipment. In my experience, the payment per head practice of donors frustrates business support officers on the ground as they would like to spend more time with their clients. Training their clients in book-keeping skills, understanding and managing financial information and motivating them to keep records is time-consuming but vital for helping entrepreneurs to grow their businesses and being part of the mainstream economy.
How can EXCEED be used to foster inclusive economies?
EXCEED is the world's first mobile record-keeping solution specifically targeting micro-entrepreneurs. Organisations supporting business owners using EXCEED as well as the business users themselves can access reports automatically collated from the data online. EXCEED can also function as a CRM or be merged with an existing CRM to produce detailed reports from socio-demographic and business data of the users. This can be used in donor reports and to achieve a higher impact through more effective targeting.