Evaluating the Impact of Business Registration in Malawi

Businesses in the informal sector typically grow more slowly, have poorer access to credit, and employ fewer workers than those in the formal sector.Household and business resources also tend to be strongly intertwined for those in the informal sector, resulting in the depletion of working capital. Bringing more businesses into the formal sector, which begins with business registration, may have numerous benefits, such as the ability to open a business bank account, acquire an export license, access business bank loans, and become eligible for government programs. This study assesseswhether becoming formal improves enterprise performance. It aims to determine if the benefits of business registration outweigh the costs, if both male and female-owned enterprises gain equally from registration, and if business bank accounts add value to formalization by helping business owners separate business from household money.

In Malawi, the informal sector represents 93 percent of the non-farm small-scale enterprises.[1] Businesses in Malawi have faced significant barriers to formalization in the past. Malawi is streamlining its registration process to increase the registration rate amongst MSMEs. The Business Registration Impact Evaluation (BRIE) is a direct response to the interest of the Government of Malawi in evaluating whether or not business registration improves business performance. If a positive impact is detected in this study, the government plans to use the results of this study to promote registration. If no impact is identified, it plans to identify the corresponding bottlenecks that affect enterprise performance.

This study evaluates the impact of formalization—through business registration, tax registration, and business savings accounts—on enterprise performance.Participants consist of 3,000 informal MSMEs located in Blantyre and Lilongwe, the major commercial cities in Malawi. The study is being conducted over a four year period.

All 2,250 firms in the treatment groups are being offered free registration with the Department of the Registrar General (DRG) – which is the main step to firm formalization in Malawi. A random group of 300 firms is also being offered to register for taxes and obtain a tax identification number from the Malawian Tax Authority, allowing the researchers to test the additional value, if any, of this step in the formalization process. The remaining 1,200 firms in the treatment group were invited to information sessions by a local bank on the benefits of separating business from household money and offered business savings accounts. In short, the firms were randomly assigned to one of the following groups:

1)    Offered free business registration only (750 firms)

2)    Offered free business registration and tax registration (300 firms)

3)    Offered free business registration, invited to information sessions, and offered business savings accounts (1,200 firms)

4)    Comparison group – no intervention (750 firms)

The team is collecting extensive data over a four-year period to estimate the impact of the various interventions on business expansion, access to finance, and productivity of MSMEs. The outcomes of interest include measures of firms’ financial performance, investments in the business, survival rates, number and skill composition of employees, access to finance, number of customers, and harassment levels.

Results forthcoming.

[1] National Statistics Office, Malawi. “Malawi Second Integrated Household Survey 2004-2005.”