Government push to formalise small businesses could backfire

State efforts to bring informal enterprises into the tax net and regulatory umbrella could be doing more harm than good to the country's small enterprise ecosystem. A paper presented during a national policy forum contends that aggressive push factors targeting micro, small, and medium-sized enterprises (MSMEs) risk crippling the operational flexibility that keeps them afloat.

Speaking during the Beyond 2030 national conversation launch, Duke University economic researcher Professor Hiroyuki Hino argued that state planners should leave micro-entrepreneurs alone. He cautioned against forcing small traders onto the Kenya Revenue Authority (KRA) radar, noting that the informal nature of these ventures is often what drives their success.

The arguments draw from a study published in 2024 titled Rethinking the Informal Economy in Africa: Findings of a Survey of Microbusinesses in Ghana, Kenya, and Nigeria. Co-authored by Hino, the research shows that informal firms expand faster when allowed to operate using unconstrained business methods.

Government strategy has traditionally focused on nudging or strong-arming micro-enterprises into formal compliance. State-backed initiatives, such as the Credit Guarantee Scheme (CGS) and the World Bank-funded Nyota programme, use access to credit as an incentive to bring unrecorded traders into official channels.

Financial institutions often struggle to lend to unorganised ventures because they cannot track cash flows. During the event, Ecobank Kenya Commercial Banking Director Victor Mbaabu noted that bankers cannot read what is in an entrepreneur's mind, making formal structures necessary for traditional commercial lending.

However, Hino countered that small operators naturally find financing options without needing subsidized state loans or central banking access. He pointed out that microfinance institutions and informal community networks already meet those funding demands without introducing prohibitive tax burdens or bureaucratic drag.

Data from the Kenya National Bureau of Statistics (KNBS) shows that Kenya hosts approximately 7.4 million small businesses, though independent analysts suggest the figure is significantly higher. These MSMEs contribute nearly 40 percent to the national gross domestic product (GDP) and sustain 14.9 million jobs, compared to 3.3 million jobs in the formal sector.

The study challenges the common assumption that micro-entrepreneurs pay no taxes at all. Research findings reveal that roughly 50 percent of surveyed self-employed traders are already registered with regional or local agencies, paying local levies, utility fees, and municipal operational licenses.

Across Ghana, Kenya, and Nigeria, only about half of the surveyed micro-entrepreneurs had no registration with any government body. The paper indicates that while small traders avoid central government compliance, they regularly participate in local civic systems, meaning state claims of total non-compliance are overstated.

Imposing central registration fees, revenue tracking, and strict reporting protocols onto fragile informal units threatens to squeeze their narrow margins. Policy analysts urge state authorities to reconsider blanket formalization campaigns, recommending instead that local governments support informal trading environments as legitimate economic drivers in their own right.