One of the major reasons why some micro and small enterprises (MSEs) prefer being in the informal sector is fear of compliance with regulatory requirements.
However, failure to comply has unintended repercussions. MSEs operating informally cannot access credit due to lack of information about their existence — Know Your Customer (KYC). Neither can they qualify for lucrative tenders. In summary, they will forever live in the margins of poverty.
It is important that these enterprises that employ the majority in developing countries be assisted to scale and move up the ladder to become formal, sustainable contributors to economic growth.
Digitalisation is the surest bet to change this grim picture for MSEs. Simple reforms at the company registry could easily change the fortunes of these enterprises. Local authorities have records of virtually every MSE operating in their areas. However, the data is neither shared nor get domiciled at the registrar of companies.
A change in legislation could enable shared information, leading to formal registration of MSE followed by incentives like a five-year tax exemption. Since the company registry is already digitalised, an enabling software intermediary (Application Programming Interface or simply API) will be required to allow the existing database to talk to other databases, including banks and regulatory agencies.
Such an infrastructure will facilitate business verification through open API for MSEs and individuals as a single point of truth to transform the entrepreneurial landscape in the country. As e-commerce platforms expand and create new enterprises, MSEs should not lose out for lack of trust. This lack of verification is holding back even the stimulus package meant for MSEs due to the burden of KYC for lenders.
With the API, KYC becomes easier, for new clients can validate the existence of the MSE without going through third parties, and the regulators will implement hard-to-enforce regulations such as anti-money laundering. At the same time, the tax authorities will expand the tax base, improve MSEs’ ability to access formal markets and become more productive with prospects of scalability.
Further MSEs will start providing better quality, well paid, more sustainable jobs, improve reliability of contracts between companies, and build investor confidence especially at Nairobi Securities Exchange’s (NSE) Growth Enterprise Market.
It will also enable the formal financial sector to provide resources to the MSEs, freeing them from shylocks who are currently fleecing them.
Lest we forget, the traditional model of economic transformation is to move from petty trade, informality and subsistence agriculture to industrialisation, services and knowledge economy. If we ever want to move out of replicative and wasteful entrepreneurial activity, we must guide the MSE sector out of their misery that benefits only a few lords of poverty into a modern economy that creates sustainable jobs with living wages. This can best be done through better visibility and traceability of these enterprises to establish greater trust.
The dark cloud under which MSEs operate undermines their success. Take, for example, the case of Gikomba Market. With open API, traders in this famed place in Nairobi will access insurance. As it is at the moment, a few moneyed people hound them with fires that destroy their hard-earned investments. Sham investigations often fail to help but with insurance, this could change as they have the influence to have better investigations from both the government and media.
Open API will also enhance existing infrastructure for validation without which many of the services that we enjoy today like mobile money will not be in existence. The Huduma Namba will even do better to enable entrepreneurial activity in the country like never before.