The unseen billions: When business is a broker’s paradise but trader’s nightmare

There was a time when Alice Juma bought all her clothes from Nairobi’s Gikomba Market, East Africa’s largest marketplace for second-hand clothes.

Although the clothes were not new, they were cheap, fashionable and of good quality. And then all of a sudden, prices shot up.

“It got to the point where these clothes sold in the open air were not any cheaper than those sold in exhibition shops in the city centre,” recalls Alice.

So, what really happened to contribute the sudden increase in price?

Unregulated and informal

The cost of getting the clothes to the market may have gone up, but more than anything else, there was a group of traders that discovered the lucrativeness of the trade in Gikomba market. They scented the billions of shillings involved and sought to cash in on the boom.

These are the brokers – unregistered and unregulated middlemen plying their trade in unregulated and informal markets.

They are neither traders nor customers, they add no value to the products traded in Gikomba. They aren’t like the tailors who trim oversized trousers, or the young men who spend their time by the river adding colour to faded jeans or giving old shoes new shine. And oftentimes, they make more money than the owners of the products.

Robert Gichuru is one such broker. He has earned his living from Gikomba for close to five years, and says he’s better off as a broker than a trader.

“When a trader opens a bale of clothes I take it and go find a market for it. The owner of the bale will only need Sh1,000 from every bale. However, I can sell it for about Sh1,500,” says Robert, adding that he can sell as many as 10 bales, earning Sh5,000 in a day, while each trader along this line earns his Sh1,000.

In addition, Robert says, the owner of the bale still has to pay for the stall, as well as county government fees.

He says the most difficult job for a broker is finding customers, but with social media platforms like Facebook and WhatsApp, this is getting easier.

Robert’s only costs as a broker are for the data he uses to upload images of the bales, and the time he spends wooing everyone that passes by.

The broker-trader partnership is one based purely on trust.

“I don’t deposit any cash with the trader to get the products, I just bring back what the trader wants after I have sold the bales. Whatever I earn on top is mine,” says Robert.

Wilberforce Ouma is also a broker. He sells shoes, walking around with one of each pair from the bales that traders opens.

“The trader has to trust you; if she doesn’t, she’ll ask you to leave her a valuable item, such as your phone,” says Wilberforce.

“You can decide to look for customers in the shops around Gikomba, or walk into town. You target the clients who won’t go deep into Gikomba.”

Wilberforce can make as much as Sh1,000 from a pair of shoes, depending on how lucky he is, or how little his customer knows about market prices.

Farmers to customers

His brokerage services are not that different from those offered by those who sell umbrellas in the streets immediately it begins to rain. Have you ever wondered where the umbrellas come from?

Well, the sellers, who are normally hawkers, rush to retail shops, leave their national IDs and walk out with the umbrellas to sell at a profit. The owner will ask for the normal price, with the brokers keeping any amount above this. And because they’re selling to desperate customers, the prices may go up to double the normal cost.

According to Bitange Ndemo, an associate professor at the University of Nairobi’s School of Business, brokers like Robert and Wilberforce are critical in the Kenyan market where there is an asymmetry of information.

That is, they have more or better information than the customers.

And it’s not just Gikomba that has turned into a broker’s paradise, but almost the entire informal sector, affecting all sorts of necessities, from food and housing to transport.

Early in the morning in Wakulima Market when trucks carrying fresh produce from different parts of the country get to Nairobi, there are people waiting. These are brokers who purport to connect farmers to their customers.

They determine who offloads vegetables and fruits at the country’s largest fresh produce market, which is better known as Marikiti.

John Rimulo, who grows watermelon in Meru, has had his fill of brokers, saying his first attempt at making a business out of agriculture left him too disappointed with the market chain to keep at it. He got into farming after losing his bank job last January.

“I grew the fruit in the belief that I could take a truckload to Marikiti and sell the fruit at at least Sh30 per kilo. But the cartels and brokers quickly killed this idea,” he says.

Left with the option of either letting his watermelons rot in the farm for lack of a large enough customer base or selling them at a loss, he reluctantly chose the latter option.

“I ended up selling a kilo of the fruit at Sh20 to a broker, yet I knew the final consumer was buying the fruit at Sh35 to Sh40 a kilo. Why bother struggling to farm when a broker who has no idea how difficult the process is makes more money than you do?”

If you have ever tried looking for a house to rent in some of the estates in the country or land to buy, then you might have been asked to pay viewing fees by people who claim to be agents of the owners of the property you’re eyeing.

“Most of these agents do not have regulated offices, but they are the ones who will tell you there is a vacant house or property available to buy. Sometimes the owner of the house or land doesn’t even know these agents exist, which means they can get away with charging you even twice the price,” says Scholastica Odhiambo, an economics lecturer at Maseno University.

“And if you don’t know the market price, you will be robbed. What these brokers end up doing is distorting market prices and even increasing the costs of living.”

Matatu prices

She adds that this is common in the matatu sector, where some brokers have created bus stops, and made them their own. They, therefore, charge matatu operators every time they make a stop to pick waiting passengers who have no idea about the underlying economics.

Dr Odhiambo notes that there is a bus stop in Kisumu city where matatu operators pay those manning the stage, or shimo, Sh400 a day. This has distorted the costs of public transport.

“A distance that would have cost you Sh80 now costs Sh100 because the matatu operator has to give a cut to these informal brokers,” she says.

There are, of course, regulated brokerage services as in the insurance business, stock market or banking sector.

Their conduct and fees are regulated. And if you’re a customer, these brokers will play a critical role in furnishing you with market information regarding prices, products or market conditions

However, many of the brokerage businesses in the informal sector are unregulated and tend to rob business owners and customers by distorting market prices.

But even here, there are a brand of brokers who play a more legitimate role. They ensure, for instance, that products move from sellers stuck in muddy, inaccessible places to middle class patrons who have discovered the beauty of designer clothes sold in open-air markets.

Experts, however, say that the line between broker and extortionist has grown thin.

Dr Ndemo says it is really difficult to differentiate a middleman from a cartel in most informal markets, noting that in some cases middlemen have exploited farmers or small entrepreneurs to the point of killing their businesses.

Dr Odhiambo says that brokers, unlike cartels who are “organised thugs”, do not want to take undue advantage of a vulnerable situation.

“They want to take advantage of some money somewhere, even if it is Sh10,” she says about brokers.

But there are registered brokers, like those in the agricultural sector, who have exploited farmers by getting crops at suppressed prices and selling them at exorbitant prices, not because they enjoy an asymmetry of information, but because “they hoard”, according to Ndemo.

“When they sell the produce to the National Cereals and Produce Board on behalf of farmers, they sell at a marked-up price, so the farmer is not getting the right price in the market. These are the people we call ‘middlemen’,” says Dr Odhiambo.

“There are unseen billions of shillings circulating in the economy because of the prevalence of the brokerage business.”

There’s hope

But there is hope for those in business who want to avoid exploitative middlemen who will take away profits and still scare away customers by hiking prices without just cause.

According to Dr Ndemo, the Internet will end the asymmetry of information by easily connecting the entrepreneur to the customer.

The growing wave of e-Commerce is expected to end parasitic trade relationships. And for budding farmers like John, it offers a better way to reach the market.

“There is an app called M-Farm that connects farmers directly to those people that sell produce,” says Dr Ndemo.

He adds that in Toi Market in Kibera, for instance, residents of the slum have been exploited by brokers so much that “food in Kibera is more expensive than in Nakumatt and Uchumi supermarkets. That is why my team and I are trying to link those selling vegetables straight to the consumers in Kibera.”