Rethinking “informality” in Kenya’s economy

One such word is informality.

Gomera and Kubheka wrote in the Daily Maverick recently, that the word “informal” conveys bias. It implies that the businesses so described are somehow “incomplete, waiting to be fixed, registered or rescued”.

The Oxford dictionary says informal is an adjective meaning having a relaxed, friendly, or unofficial style, manner, or nature. That sounds very much like popular entertainment spots of urban Kenya – like Quiver, Homeland Lounge or the Bull.

Informality is the noun denoting absence of formality. Formal, also an adjective, means something done in accordance with convention or etiquette; suitable for or constituting something that is officially sanctioned or recognised. Formality, therefore, is the rigid observance of convention, or a thing that is done to comply with convention, regulations, or custom.

Most businesses in Kenya operate in that relaxed, friendly manner, using everyday language, not stifled by officious ways. The Business Registration Service (BRS) on average registers 121,000 businesses every year.

Applications for dissolution declined from 2,540 in 2020/21 to 1,817 in 2023/24. 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.

Technology has all but eliminated the need for traditional brick and mortar associated with formality. Scaling business need not mean adopting old business models. Therefore, the lens we have been using to look at these businesses is ill-suited. The formal-informal frame has outlived its usefulness.

A study by Ernst and Young and Kenya Institute for Public Policy Research and Analysis, 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, (and which likely will be repeated here), 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, lowering their survival rate.
Here is the thing. Since 2017, the Moveable Property Security Register gets about 106,000 security interest notice per year. In 2023/4, livestock was the fourth most commonly used asset after motor vehicles, household items and furniture. These assets secured about Sh23 billion in credit facilities.

On the formal-informal dichotomy, the data showed that only 28 percent of firms surveyed had either a single business permit (SBP) or were registered by BRS. 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. Not surprising, businesses in areas and sectors where the SBP was costly, were slow to register or formalise their businesses.

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 Kenya Revenue Authority (KRA). Unsurprisingly, 69 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 licenses 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.

Ladies and Gentlemen, it is time to dump the conventional thinking. The informal is the main sector. Kenyan is a good name for it.

For KRA, the opportunity of our time is to design a tax system that supports enterprises and maintaining fairness across the economy. That opportunity lies in creating processes and systems that simplify payment of tax, and reduce costs of complying.

Technology is playing a transformative role in how we support businesses. The digitalisation of tax services is helping to make the system simpler, faster, and more accessible.

Innovations such as auto-populated VAT returns are reducing the administrative burden associated with tax return filing. The introduction of the Electronic Tax Invoice Management System, or eTIMS, is enhancing transparency and promoting fair competition among businesses.

@NdirituMuriithi, an economist, is partner at Ecocapp Capital, the advisory firm