A recent Daily Maverick op-ed critical that the reference to businesses in South African townships as “informal” conveys bias, prompted me to question local practice. Maxwell Gomera and Miles Kubheka make a strong case that using the word suggests that the businesses are somehow “incomplete, waiting to be fixed, registered or rescued”.
The usage of the word has been commonplace in Kenya since at least 1970. In the ensuing 55 years, the duality of our economy has been the subject of numerous reports and studies. The analysis has, however, remained firmly rooted in convention.
The Oxford dictionary says informal is an adjective meaning having a relaxed, friendly, or unofficial style, manner, or nature.
That sounds very much like most popular entertainment spots in urban Kenya. Informality is the noun denoting absence of formality. It also denotes the grammatical structures, vocabulary and idiom suitable to everyday language and conversation rather than formal contexts.
Formal, also an adjective, is something done in accordance with convention or etiquette; suitable for or constituting something that is officially sanctioned or recognised. It sounds much like large manufacturing enterprise in Kenya.
Tucked away in industrial areas, visited only by invitation. Formality, therefore, is the rigid observance of convention, or a thing that is done to comply with convention, regulations, or custom.
The majority of business in African chose the relaxed, friendly manner, using everyday language, over the more stifled officious manner.
There are academic debates about whether the choice is voluntary or by necessity. Whatever the case, the rules of formality were not made with them in mind.
Governments do of course try to create the correct rules for small business. In 2008, the Ministry of Investments, Trade and Industry (MITI) was implementing the Micro, Small and Medium enterprises (MSME) Competitiveness Project.
One component “improving the business environment” was intended to increase the number of formally registered MSMEs. An early study for the component showed surprising results.
Conducted by Ernst and Young and Kenya Institute for Public Policy Research and Analysis (Kippra), the study found that more than half (53 percent) of the 2,800 firms surveyed countrywide were more than five years old.
So, contrary to conventional wisdom of that time, small businesses were surviving beyond the first 3-5 years, suggesting that they were sustainable, profit making enterprises.
Then and now, small business were believed to face difficulties in accessing financial services, high costs of production due to poor infrastructure and unfriendly regulatory environments, constraints in accessing raw materials, and lack of ready markets for their products.
These problems are believed to make small businesses unable to sustain their operations, lowering their survival rate.
On the formal-informal dichotomy, the data showed that only 28 percent of firms surveyed either had a single business permit (SBP) or were registered by the Business Registration Service (BRS), then Registrar of Companies.
The study revealed that majority of firms delayed formalisation of their operations by an average of 4.4 years.
The results supported the informality by choice theories. There were variations in costs of obtaining the SBP both across sectors and across regions countrywide. Businesses in areas and sectors where the SBP was costly were slow to register or formalise.
Other issues inhibiting formalisation included the number of licenses required in a particular sector and the average time taken to register a business. Record-keeping varied depending on the sector, type of ownership, and the level of education of the owner or manager.
There was also a strong belief that business registration invited the attention of KRA.
Sixty nine percent of all the businesses and a full 86 percent of non-registered firms were not paying taxes, which tied in with the issue of non-registration of businesses.
The policy response was the automation of business registration, now available on e-citizen. The electronic registry was to harmonise records of licences issued by various regulatory and licensing agencies including county governments.
This was expected to hasten the business registration process and curb corruption.
But perhaps the conventional approach was blinding us.
Today, Kenyans move more than three times the annual gross domestic product on mobile money platforms.
These platforms are relaxed and friendly. The successful mobile money operators advertise and communicate using everyday language.
Those that don’t have been consigned to the periphery. It is time to dump the conventional thinking. The informal is the main sector. Kenyan is a good name for it.
Ndiritu Muriithi is an economist and partner at Ecocapp Capital. He is also the chairman of KRA and former governor of Laikipia County. Email: [email protected]
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