Contents
ABSTRACT................................................................................................................................................ 1
INTRODUCTION ....................................................................................................................................... 2
1.1 UNDERSTANDING THE INFORMAL SECTOR CONCEPT .................................................................. 2
1.2 HISTORICAL BACKGROUND OF THE INFORMAL SECRTOR ............................................................ 3
1.3 UNEMPLOYMENT CHALLENGE AND THE INFORMAL SECTOR ...................................................... 3
1.4 THE CHALLENGES FACING INFORMAL MICRO BUSINESSES IN SOUTH AFRICA ............................ 4
1.4.1 Challenges at start up ............................................................................................................ 5
1.4.2 Challenges at the growth phase ............................................................................................ 9
SUMMARY OF CHALLENGES ................................................................................................................. 11
CONCLUSION......................................................................................................................................... 12
RECOMMENDATION ............................................................................................................................. 12
ABSTRACT
The informal sector has become, without any doubt, a heated topic of research. The amount
of literature on the role of the informal sector in Africa has increased rapidly, producing
useful empirically-based decision making to governments. Focus on this sector is precipitated
by the unemployment crisis which is threatening regional integration and the democratisation
process in Africa. The role of the informal sector in curtailing unemployment cannot be
questioned. The paper aims to move our attention form the obvious debates about the benefits
of the formal sector, to the implementation of this strategy. The question is whether
governments trust the informal sector, have confidence with the potential vested in it. This is
an outcome of a qualitative study done in Khayelitsha, Cape Town South Africa to explore
the obstacles faced by immigrant youth in the establishment and running of their informal
micro enterprises. Twenty immigrant youth were interviewed and four service providers from
government private sector and NGO. The study indicated that challenges faced are mainly
outcomes of policies and programmes which structurally exclude youth in terms of
benefiting. This hinders this potential vested in this strategy for regional integration.
1
Immigrant informal micro businesses: An unnoticed strategy to curtail youth
unemployment challenge
INTRODUCTION
Due to high unemployment experienced by many African countries, governments in the
continent have invested much in looking for strategies that mitigate this crisis. At the heart of
these strategies is the promotion of SMMEs and informal businesses. Informal sector plays a
very important role in Africa as one of the major sources of employment. It is thus a source
of income and a big producer of goods and services contributing to the GDP of the economy
(ILO, 2006). Government seem in principle to have grasped this major development. In
reality however, what is happening on the ground have shown that governments are far from
taking a positive step towards promoting these informal businesses. They seem to understand
that the informal sector plays a significant role in reducing unemployment which is the major
challenge threatening regional integration, but the interventions and programmes designed
and agencies set, are acting as barriers rather than opportunities for promoting these
businesses. The author believes that though the informal sector plays a major role in regional
integration, the governments have not yet taken this sector as a regional agenda. It is just in
principle with less practical evidence of implementation. The paper aims to awaken
governments to move from mere talking, to implementation of the strategy otherwise the
informal sector remains as an untapped potential for African Development.
1.1 UNDERSTANDING THE INFORMAL SECTOR CONCEPT
In principle, informal sector is easy to define. In reality however the term is contested and
ambiguous. Sherifat (2011) argues that informal economy in developing countries should be
analysed as social and historical processes and as a sector that emerges as a result of crisis.
The term is used in development economics to refer to the enterprises that operate in the
informal economy. The definition is widely contested, for instance it is referred to irregular
economy by Ferman et al (1973), the subterranean economy by Guttmann (1977), the
underground economy by (Simon & Witte 1982; Sherifat, 2011). These definitions show that
informal enterprises were viewed with negative connotations throughout history and these
accounts to why it is mainly operated by the marginalised and vulnerable groups in society.
In Africa, this sector is dominated by the youth, immigrants, the unskilled people,
2
uneducated, women and other marginalised groups in society. The informal sector hence has
poverty connotations attached and social exclusion.
There are three schools of thought that can help to define the informal sector. These
approaches are the dualist approach, the legalist approach and the structuralist approach (Rao
2011). This paper will not explore the three schools but it uses the structuralist approach
which considers the informal sector as comprising marginal activities, distinct and unrelated
to the formal sector (ILO, 1972). This approach is based on the fact that informal activities
emerge due to limited opportunities in the formal sector. Surplus labour, low economic
growth and high population growth may act as catalytic agents for the underprivileged to
operate in the informal sector which provides income for the poor and a safety net in times of
crisis (ILO, 1972).
1.2 HISTORICAL BACKGROUND OF THE INFORMAL SECRTOR
The Informal sector as a concept was discovered in the 1970s. It was perceived as marginal
and peripheral to the mainstream economy and not linked to the formal sector or to modern
capitalist development (Swedish International Development Cooperation Agency (SIDA),
2004). It was viewed negatively and was ignored, rarely supported, and sometimes actively
discouraged by policy makers and governments (ILO, 1972). Additionally, it was believed
that in developing countries it would disappear once sufficient levels of economic growth and
modern industrial development were achieved (SIDA 2004). In recent years, however, the
formal sector has increased to an extent that 70 per cent of the workforce in Sub-Saharan
Africa are employed by the informal economy (SIDA, 2004). In fact, Zindiye and
Mwangolela (2007) observe that the question as to whether the development of the informal
economy is a progressive approach that can lead to social and economic transformation in
emerging economies is no longer a matter of debate. They argue that this sector has a
significant job and income-generation potential. Many governments in recent years,
therefore, have been preoccupied in making appropriate policy frameworks and strategies
aimed at the development of the informal economy.
1.3 UNEMPLOYMENT CHALLENGE AND THE INFORMAL SECTOR
Unemployment has become a global crisis. It is affecting the vulnerable segments of the
population (Borjas, 2004). It is for this reason that this study has been conducted focussing
on this marginalised group, paying particular attention to the immigrant youth of Southern
Africa. Unemployment has adverse implications to youth and precipitate vulnerability and
3
marginalisation (ILO, 2006). High youth unemployment represents lost potential for national
economic transformation, and high numbers of economically frustrated youth may contribute
to social instability (World Economic Forum (WEF), 2012). Though several studies were
conducted trying to expound this phenomenon, understanding it is complex. Responding to
unemployment by different governments in Africa has been twofold. The first is supporting
formal businesses so that they can grow and increase their labour absorption capacity, and
secondly by supporting informal businesses as a means to promote employment (Rogerson &
Preston-Whyte, 1991). Since the discussion focuses on the latter, it is a type of ‘safety net’
providing employment and income-earning opportunities for those excluded from formal
sector employment (PGWC, 2007). In addition this sector is taking on increasing significance
in developing countries as a means to absorb significant numbers of unemployed and
underemployed citizens (Portes, Blitzer & Curtis, 1986). Moreover, promotion of informal
businesses increasingly been recognized as an important strategy that can leverage the energy
of youth to expand the creation and supply of jobs (Rogerson & Preston-Whyte, 1991).
Though unemployment is threatening regional integration Africa as a region and initiatives
that respond to this challenge like the informal microbusinesses should be prioritised, the
challenges experienced by immigrant youth has shown that there is lack of priority given to
immigrants informal businesses by the government of the Republic of South Africa. Lack of
attention precipitates unemployment and makes the informal businesses to be a mere talk
than a policy option for African development. The following section discusses the challenges
faced by immigrants which help to explain that informal businesses are not taken as a
priority.
1.4 THE CHALLENGES FACING INFORMAL MICRO BUSINESSES IN SOUTH
AFRICA
There are many challenges which emigrant youth face, some in the start-up phase and others
in the growth of the enterprise. The challenges at the establishment phase are lack of capital,
difficulties in securing area from which to operate, few customers and cultural and language
problems. Business growth posited new challenges like risk and security and customers who
did not want to pay which the succeeding sections discusses. In light of these barriers, the
government of SA implemented programmes, enacted policies and set up agencies
responsible for informal enterprises. In reality, the study conducted affirmed that there
establishing and running successful informal enterprises in SA are cumbersome and complex
for immigrants. Challenges have shown that these youth are not getting support from
4
institutions. Instead of policies and institutions to create an entrepreneurial friendly
environment, they are acting as barriers to new ventures.
1.4.1 Challenges at start up
The first challenge language is language barrier. Most of the youth participants who were
interviewed mentioned this barrier. Language acts as a stumbling block for immigrants to
gain entry to the community. These participants believed that for them to run a successful
business, support from the community is necessary. The participants mentioned the
challenges which they experienced while attempting to enter the community and get their
business established. They emphasised the negative implications to the business if the
community is not supportive. Since the community forms the customer base, and is likened to
a security guard which means that community members look after the safety of the business.
Language was a problem and affected these participants when trying to get resources from
the community like space to operate from and getting electricity to use from the nearby
houses. Additionally this challenge negatively impacted them in their effort to build rapport
and form networks. More over communication became a challenge with the natives.
Language problem also posited obstacles to better market of their goods.
There were researches that were done to show that immigrants face these challenges but there
is less action that is done. Commenting from a similar finding about immigrant business
owners, Bosma et al (2000) argue that it is generally known that immigrants are potentially
vulnerable group, and they take time to assimilate with the local community. In addition the
above views of business owners indicate that some natives may have negative attitude
towards the immigrants. A number of studies suggest that many South Africans are uneasy
about immigrants (Leggett, 2003). Language barrier is not new in this kind of study Colton
(2007) in his research argues that that, among other challenges language barrier is a major
problem faced immigrants. In reality however it is not only in South Africa that immigrants
face this challenge. Immigrants in America face similar challenges. The Local economic
development officers and the ward representatives of the municipalities could be the point of
call for immigrants to assimilate into the community but it seems that they are not in the
picture and immigrants journey alone. This indicates a lack of support and lack of response to
this challenge by the municipality/ Local government. Tim (2011) notes that policies are
inadequate to address the complex challenges which the youth owned informal micro
businesses may face. Language and cultural barriers may be one of such complex challenges
5
which the policies do not cover. Linked with this challenge was the difficulty of securing an
area from which to operate from which is discussed in the next section.
The services providers interviewed were not aware of the challenge of gaining entry. This
shows that this is why some challenges are not tabled for national agenda as the institutions
of support are not aware of the challenges. There is a lack of research done into immigrants’
businesses. United States Chamber of Commerce (USC), (2012) notes that few policymakers
understand the importance of immigrant entrepreneurial activities in present economies.
Many governments are familiar with the success stories of immigrants like Sergey Brin of
Google, but few realize just how many immigrants have started new businesses, and their
experiences and circumstances (USC, 2012). The study showed a gap in research about
immigrant informal businesses though it is a growing sector creating employment in Africa
yet it is being overlooked. This lack if research affects the adequacy and relevance of policies
and programmes implemented for support.
The second challenge was securing an area from which to operate. Since the participants
could not easily gain entry to the community because of the language barrier, this influenced
the challenge securing an area from which to operate which negatively impacted the start-up
process. Once again the service providers were not aware of this challenge. The youth
participants spent months trying to secure an area from which to operate. The youth believed
that by the fact that they were immigrants, made it hard for them to access land. They see
exclusion of immigrants in terms of accessing some community resources. On the contrary
however, the challenge of land is not only experienced by immigrants but also natives.
Cupido (2010) in his study about while focusing on the natives concluded that new ventures
struggle to get land. However the challenge could have been intensified if one analyses the
legislative framework of the City of Cape Town; Informal Trading Policy and Management
framework (2004) which stipulates provision for an area of operation South African citizens
due to the fact that they give people with identity document. This may validate that
immigrants are structurally excluded from getting area to operate and are left to find their
own ways to get space to operate from. Instead of the policy acting to the advantage of these
business owners, it is a barrier to immigrant informal businesses. In reference to policies,
Gichuru, (1997) argued that legal frameworks are irrelevant to address the current challenges
facing the South African economy hence they need to be revised so as to face new challenges
of the modern day economy. It shows that in principle informal micro businesses are
promoted yet in reality the opposite is happening. Another challenge which these business
6
owners faced was financial capital. This challenge show that some challenges are intensified
by the policies and immigrants are succumbed to face unique challenges which are spill over
effects of exclusive policies
All immigrant youth also mentioned the challenge of accessing start-up capital. This
challenge has negative impacts on the success of the business. It is generally known that
every firm needs financial input. It may be impossible to start a business if one does not have
capital hence all the participants acknowledged that fact that this challenge affected them in
many ways. Capital is a challenge since some of them were not working, while some were
working but getting less salary.
All the service providers also noted that capital is one of the major challenges that affect new
ventures. Previous studies have shown that capital enhances the successful establishment of
the business (Tim, 2011). Though this challenge is similar to any youth starting a business as
the study of Cupido (2010) purports, immigrants are affected in that they also have limited
sources of support to cater for them. Added to this challenge is that youth in general are
affected by unemployment. Rogerson (1999) argues that most SADC entrepreneurs acquired
their start-up capital from their previous jobs in South Africa. Instead of governments to
assume that youth have resources, unemployment should give a message that starting
businesses is a myth, thus promoting informal businesses should be accompanied by making
start-up capital available. Taking unemployment through the lenses of social exclusion, one
would see that regarding economic conditions the youth are structurally excluded from
starting new ventures due to unemployment since they consist of the highest percentage of
the unemployed. Olawale and Garwe (2010) also notes that lack of financial support is the
second most reported contributor to low new firm creation and failure, after education and
training in South Africa. Though sources of support are available there are challenges in
accessing support.
Government departments and agencies do not have funding programmes for immigrants
businesses. They mentioned that they are mandated to assist South African citizens. These
institutions are responding to the legacy of apartheid hence the focus is on historically
disadvantaged South Africans. Immigrants seem to be excluded from benefitting from these
government service providers. Tim (2011) notes that South Africa’s small business policies
have done little to create effective support agencies to help support business owners to start
up and grow their business. Some of the legal institutions were set up to respond to the
7
legacy of apartheid hence they are irrelevant to address the current challenges facing the
South African economy hence they need to be revised so as to face new challenges of the
modern day economy (Gichuru, 1997). This challenge however is not only unique to South
Africa, but to immigrants in other counties. They also struggle to access government
administered funds, since this government do not have programmes for immigrants. Centre
for an Urban Future (CUF) (2007) on their comment about government funds for immigrants
businesses in New York states that it is virtually impossible to get start-up capital for
anybody at the local level, but it is certainly almost out of the question for immigrants. With
the recent increase in the number of immigrants and globalisation government institutions are
failing to integrate immigrants in the economy. If government value informal businesses
hence the red tape, bureaucratic structure and inefficiencies and exclusion should be dealt
with so as to transform this unnoticed development potential to a reality. Government funds
are rigid and exclusive and fail to respond to immigrant entrepreneurship. Besides
government fund immigrants struggle to get even bank loans.
Regarding business loans, informal business remain excluded in the South African landscape.
Participants who inquired about a bank loan mentioned that he could not access it because of
not meeting other requirements needed for one to qualify for a loan. The bank mentioned that
they only assist formally registered businesses with businesses loans. Banks mentioned that
they do not lend informal businesses, but only registered businesses. This shows that,
accessing a loan is for formal businesses which leave most of the informal businesses
structurally excluded from accessing business loans from this organisation. The claim by
Nieman & Nieuwenhuizen (2009) that banks play an important role in supporting emerging
businesses is challenged here. In principle banks support emerging businesses but in reality
not all emerging enterprises are supported. The complex procedures and regulations make
them unable to be irrelevant to the needs of informal micro businesses. Rogerson and Reid
(1997) notes that the private sector is not prepared to take risk unless the expected rate of
return is high which may be the reason why they do not trust informal micro enterprises. In
addition Cupido (2010) states that it is not easy to approach financial institutions for financial
assistance, they are barriers which may hinder accessing these loans. The difficulty that
informal micro businesses face in accessing business loans brings us to the core periphery
relationship between the formal and informal sector discussed in. Since the participants did
not qualify for business loans, they pursued personal loans.
8
The youth participants who inquired about getting a personal loan so that she may use for
business, faced challenges. Participants failed could not get personal loans because some did
not have the surety or a payslip which is a requirement for them to qualify for such loans.
This reinforces the fact that it is difficult if not impossible for immigrant youth to access
loans. Immigrants sometimes face the challenge of not having surety which results in them
having to forfeit bank loans. The challenge of accessing bank loans seems to affect almost all
businesses regardless of whether immigrant owned or South African owned. FinMark Trust
mentioned in Berry at al (2002) notes that 75% of applications for bank credit by new
SMMEs in South Africa are rejected due to failure to meet the rigorous requirements. Though
bank funding programmes are available, it seems that these programmes are not in touch with
realities on the ground. Immigrants in other countries seem to be facing similar challenges. In
New York, microenterprise experts and banking officials say that immigrants are less likely
than other entrepreneurs to have the collateral necessary to secure a loan and banks have long
shied away from these loans because new ventures have a high rate of failure (CUF, 2007).
The participants were not aware of any NGOs hence did approach any of these organisations.
Org F which is an NGO mentioned that they only have 10% of their services for immigrants.
Like any other organisation mentioned above they also are mandated to support South
African Citizens first. This shows that the institutions are responding to apartheid challenges
not the new challenges in the current economy (Gichuru, 1997). The youths were not aware
of NGOs who can assist them which can show that there is a lack of outreach to micro
enterprises, both emerging and established micro businesses show little awareness of the
existence of support initiatives. Bloch and Kesper (2000) in Berry et al, 2002), states that
though programmes are available with NGOs there is lack of evidence of marketing and
outreach to these exclude informal micro enterprise.
1.4.2 Challenges at the growth phase
The owners find themselves dealing with challenges at all stages of the business cycle. Once
the business was established, it did not mean that it was immune from challenges, it meant
facing new challenges relating to the growth of the business. The informal micro businesses
of these participants grew in terms of annual turnover, in terms of customer base and with
regard to the quantity of the goods produced. This growth however posited new challenges
like risk and security and customers who did not want to pay which the succeeding sections
discusses.
9
At the growth phase was a challenge of theft and robbery. Participants mentioned that in spite
of Khayelitsha being a place where businesses can succeed because there are a lot of people
dwelling there, the challenge of crime often negatively affects the growth of their businesses.
This problem demotivates these owners and affects their performance in business. The
service providers also identified the challenge of violence and theft associated with the
geographical area in which the research participants operated their businesses. Crime and
violence not only affect the business in terms of the goods that are stolen. The impact goes
beyond that. The business owners mentioned the attitude to work is stolen too. Time is also
lost while businesses may be closed because of fear. More over since these businesses are
informal, they are normally uninsured hence theft has a great impact even when replacing the
stolen goods. This confers with the stance of the Department of the Presidency (2008) and
Gape (1999) that theft and robbery are thus major challenges that impact negatively on
business ventures. Additionally, Isaacs & Freidrich (2007) supports this notion through their
study when they investigated the impact of crime on the performance of SMEs in South
Africa and found that crime negatively affects the SME sector. The inherent crime in the
country has thwarts micro enterprises. Emerging businesses in informal settlements are likely
to be victims of crime because the locations like Khayelitsha are known for violence theft and
robbery and other deviant attitudes (PGWC, 2007). The participants have mentioned that they
report such cases but there is less that has been done by the Police Services. This shows that
the government needs to initiate security programmes through the police to end violence and
crime against business which seems missing currently. Businesses are affected by crime
while the government seems less bothered to respond to such a crisis.
Second at the growth phase was the challenge was of customers who did not want to pay. The
participants mentioned that some customers do not pay them when they buy goods on credit.
This affect the business in that the cash needed for the day to day running of the business may
not be available. The service providers did not mention this finding because they were
unaware. The youth participants accredited this problem to the fact that he was an immigrant
and the customers take advantage of them. One can be lured to think that it is only the
immigrant owned micro informal businesses that face this challenge. In reality however, most
of the businesses are affected by this challenge in South Africa. Lorgat (2003) notes that
South Africans lack a comprehensive savings culture hence they are indebted. The study of
Kotze & Smit (2008) emphasized that bad debt affect cash flow. Formal businesses may have
debt collecting mechanisms while informal businesses do not have hence they suffer this
10
challenge. The government and other stakeholders need to consider ways to redeem this
sector from such a predicament otherwise the sector’s success will remain in theory. There is
no policy evident responding to this challenge.
Lastly service providers mentioned the challenge of lack of business skills. The service
providers note that the youth involved in informal micro businesses are generally taken from
necessity than opportunity. Skills affect then when they want to deal with other sources of
support. These skills involve the business communication skills and business management
skills. Service providers indicate that lack of business skills makes these youth to be at a
disadvantage managing growth of the businesses. Berry et al (2002) argue that skills are very
important for the success of businesses. The preceding study is supported by Dana and
Morris (2007), who note that the barriers to performance of immigrant entrepreneurs include
lack of skills and lack of support. Moreover, Brüderl, Preisendörfer and Ziegler (1992) from
a human capital perspective argue that there is a general belief of business owners with
human capital endowments will be more likely to own surviving firms. Hence skills are vital
for the success of business. In reality however the immigrants are excluded from benefiting
from government training and bursaries for education. The agencies that trains cater for South
Africans and there is no training programmes for immigrants. This affects them in skills
development, hence policies are far from being inclusive and it is evident that the informal
sector is not yet taken seriously.
SUMMARY OF CHALLENGES
The immigrant youth faced challenges at all the phases of the business cycle. These include
securing area from which to operate, start-up capital and violence. From the study on the
obstacles it is clear that most of the challenges faced by immigrant youth are similar to other
informal business owners in South Africa and other countries. However there were
challenges specifically linked to the fact that they are immigrants and the policies were not
responding to their needs. In addition, service providers had limited understanding about the
challenges hence they were not aware of several challenges. This also explains why the
policies and programmes do not respond to the challenges faced because of lack of
knowledge about the challenges. These challenges were sometimes outcomes of policies and
at times its showed lack of programmes and policies in place to respond to these challenges.
Immigrants are rather excluded from the informal economic landscape.
11
CONCLUSION
On all the challenges mentioned service providers were aware of financial challenges only.
This shows that service providers had limited knowledge about challenges which the youth
experience. At the growth phase, challenges of customers who did not want to pay and risk
and security. Lack of awareness of challenges questions the relevance of policies since good
policies are made through research. Since service providers are unaware of challenges this
affects the policy landscape. Being unaware shows that informal businesses are taken for
granted and less effort is done to know their circumstances and challenges so that policies can
respond to such challenges.
The study found out that the immigrant youth did not get any support from any institution.
They relied on resources which they had. Though they approached government organisations
they were not assisted because there were no programmes for supporting immigrant youth
run by these government institutions. This was so because there are no programmes to
support these youth, which shows lack of priority and reluctance in supporting the informal
sector. Though they did not approach any NGO, the NGO interviewed mentioned that like
any other organisation they prioritise on South African Citizens and have limited programmes
for immigrants. Participants who approached banks, they could not access business loans due
to the fact that their business was not registered. The bank interviewed show that they do not
have programmes for informal businesses and for one to take personal loans they require
payslips, bank statements and surety. This makes the process complex and difficult for
informal businesses.
RECOMMENDATION

Funding organizations
Commercial Banks: There is a need to design lending programmes which creates an
opportunity for informal business to access the loans available. In addition banks may
redesign their personal finance lending programmes and be flexible on the requirements like
surety and other paperwork for accessing these loans.
NGOs: Though some organizations have limited programmes for immigrant youth, the
business owners in this study were not aware of these organizations hence the study
recommends a need for outreach to be done to these organizations.
12
Government funding institutions: Designing lending programmes that cater immigrants is
recommended.

The government
Immigrants seem to have been neglected and do not have an economic space hence there is a
need to set up agencies with programmes catering for this group. There is a need for tailor
made government services to support immigrant owned informal micro enterprises.

Policy Landscape
There is evidence that immigrant informal businesses are operated in South Africa
responding to the challenge of unemployment. It is recommended that policies should be
implemented in a way to cater for the historic challenges but also for the current challenges of
immigrants in South Africa.
All service providers in the study
Service providers had limited understanding of the challenges. They were only aware of the
challenge of capital yet the youth indicated more which shows lack of information on their
part. They were also not aware of other reasons behind starting informal businesses. The
study recommends that these service providers to do research to inform them when designing
programmes and policies since they seem to lack information.

Recommendations for Further Research
This research exposed further problems and introduced more questions. Based on the findings
there are areas that deserve further investigations. Since some immigrants felt that they were
facing challenges related to the fact that they were immigrants, a comparative study of the
process followed by South African citizens and immigrants could help to determine nature of
challenges and strategies employed.
13
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