The economy is increasingly being dominated by informal sector players and therefore it is critical that the Government expedite the formalisation of these small and medium enterprises.
Formalisation of the local SME sector is particularly important as the sector has the potential to contribute significantly to the fiscus. The SME sector is also poised to play a key role, especially in employment creation and poverty alleviation.
The country’s SMEs sector is very heterogeneous, ranging from small handicraft-makers to medium-sized firms across the diverse sectors.
Experts believe that over time and with access to affordable financing, undersized enterprises can produce competitive products because of the low transaction costs that are derived from their low capital and labor costs, and they can record growth margins even with liquidity challenges in the economy.
However, funding initiatives geared towards SMEs growth have been very limited. Fundamentally that is because banks and other financiers have been overly cautious to lend to SMEs on concerns of loan defaults due to their informal structures.
Although the local banking sector can be blamed for poor SME financing in the country, SMEs themselves tend to be typically constrained in terms of lacking suitable and acceptable collateral to secure borrowings from banks, they tend to lack proper book-keeping and accounting mechanisms, and most operate without registration and hence borrow as individuals, which prevents them from accessing lower premiums afforded to corporate borrowers.
It is therefore important that the Government assists SMEs to become more formal as this will help ensure them access funding. Informality has huge costs. For one thing – as indicated above – the majority of small enterprises do not enjoy property rights, a factor that deprives them of access to both capital and credit.
Second, it traps the small enterprises in a spiral of low productivity. Third, informality also hurts the broader economy as most SMEs do not pay taxes to the State, hence reducing Government revenue which would have enhanced its capacity to offer improved social services.
So formalisation of the SMEs sector will go a long way in ensuring they have access to funding. But more than that, the formalisation of SMEs can help grow the linkages between small-scale operators and large firms, which will help drive the economy forward.