By Taonga Sabola:
A study by the World Bank’s Africa Region Gender Innovation Lab—in collaboration with the Global Practice for Finance, Competitiveness and Innovation and the Development Research Group—has revealed that softening registration fees could help turn more informal businesses into formal enterprises.
The survey comes at a time about 93 percent of micro, small and medium enterprises in Malawi have remained informal, thereby, not paying the necessary taxes.
The study reveals that the benefits of formalising businesses are not automatic for women entrepreneurs, but that additional policy efforts, such as helping firms gain access to the formal banking system, are needed to help firms take advantage of them.
The study was designed to see if entrepreneurs would take advantage of a costless business registration offer and, if so, if this registration would have a positive impact on firm-level outcomes.
It tested three alternatives for how governments could bring firms into the formal sector, with over 3,000 informal firms in Malawi, of which 40 percent were women-owned.
The alternatives included assisting firms to obtain a business registration certificate that offers access to formal markets but imposes no tax obligations; assisting firms to obtain business registration and tax registration; and supplementing the assistance to obtain business registration with a bank information session intended to help firms utilise one of the key potential benefits of formalising.
“We find the existing transaction costs of registering a business are enough to deter the average firm from doing so. When we offer assistance, which brings the costs close to zero, a large majority (73 percent) of women-owned firms register their businesses—compared to seven percent of the women-owned firms that did not benefit from this assistance.
“This goes against the assumption that firm registration is low because entrepreneurs do not want to register their firms. However, the disincentive to register for taxes outweighs any potential benefits of registering, even when transaction costs are removed: the take-up of our offer of assistance for tax registration was around five percent, and was not statistically significant. This could be relevant for efforts to formalise firms in some countries in Africa that do not separate business and tax registration,” read the study results.
The study further says, on its own, registration brings no discernable impacts on profits and sales for women entrepreneurs.
However, combining registration assistance with a bank information intervention not only leads to even higher levels of formalisation of about 83 percent, but also to meaningful increases of about 28 percent in the use of financial services and, ultimately, about 20 percent increase to firm sales and profits.
“In particular, we find that women-owned firms are 35 percentage points more likely to have a business bank account after receiving both registration assistance and the bank information session, whereas we find no significant impact of the registration assistance alone on the creation of a business bank account.
“Findings show that access to the formal banking system enabled women entrepreneurs to be less credit constrained – the firms that benefited from registration assistance and from the information session were 600 percent more likely to have insurance, a large increase given that approximately 1 percent of the firms initially had insurance for their business,” the study says.
It adds that for governments seeking to increase economic growth and achieve gender equality, reducing the costs of registration and coupling it with interventions that increase direct contact with formal financial institutions provide one compelling option.
GIL conducts impact evaluations of development interventions in Sub-Saharan Africa, seeking to generate evidence on how to close the gender gap in earnings, productivity, assets and agency.
The GIL team is currently working on over 70 impact evaluations by more than 25 countries with the aim of building an evidence base with lessons for the region.
The impact objective of GIL is increasing take-up of effective policies by governments, development organisations and the private sector in order to address the underlying causes of gender inequality in Africa, particularly in terms of women’s economic and social empowerment.