Policy Brief Issue 30 MAKING IT EASIER FOR WOMEN GENDER IN MALAWI TO FORMALIZE INNOVATION LAB THEIR FIRMS AND ACCESS The Gender Innovation Lab (GIL) FINANCIAL SERVICES conducts impact evaluations of development interventions in Sub-Saharan Africa, seeking Authors: Francisco Campos, Markus Goldstein, David McKenzie to generate evidence on how to close the gender gap in KEY MESSAGES earnings, productivity, assets and agency. The GIL team is • The rate of informal firms is high in Sub-Saharan Africa, especially for currently working on over 70 those that are women-owned and in the poorest countries, despite a impact evaluations by more than 25 countries with the aim total of 107 business regulatory reforms recorded by Doing Business of building an evidence base across 40 economies in the region. Through an experiment in Malawi, we with lessons for the region. established an effective and replicable design to offer informal firms support The impact objective of GIL is to formalize, costing much less than the typical private sector development increasing take-up of effective intervention. policies by governments, development organizations • The study shows that one of the primary barriers to registration for and the private sector in order women-owned firms is transaction costs. When registration is made to address the underlying causes of gender inequality virtually costless, an overwhelming number of women-owned firms in Africa, particularly in terms (73%) choose to register. However, when offered the chance to engage in of women’s economic and costless registration for taxes, almost no firms select to pursue this option. social empowerment. The lab aims to do this by producing • Combining business registration with an information session at a bank and delivering a new body of including the offer of a business bank account leads to an increased evidence and developing a compelling narrative, geared use of formal financial services, and results in increases in women- towards policymakers, on owned firms sales and profits of 28% and 20% respectively. On the what works and what does other hand, business registration on its own is not as effective in improving not work in promoting gender equality. access to financial services and does not result in enhanced sales and profits. http://www.worldbank.org/en/programs/africa-gender-innovation-lab Developing country governments seek to reduce the BUSINESS REGISTRATION ASSISTANCE pervasive informality of firms for multiple reasons: increasing the tax base, helping firms access formal 73% markets and grow, increasing the rule of law, and as a means to obtain data that can be used for other government functions. However, while governments may desire firms to become formal, firms may find these reasons much less compelling. Registering for taxes will When we offer assistance on registration, which brings impose additional costs on businesses, lowering profits, the costs close to zero, a large majority (73%) of the women-owned firms register their businesses and firms may believe they receive few public goods in return. The result is that when firms weigh the potential benefits of formalizing against the costs, most may 83% choose to be informal. The standard government response to this firm comparison of the costs and benefits of formalization has been to lower the costs of formalizing, and to Combining registration assistance with a separate the process of business registration from that bank information intervention leads to even of tax registration. However, there is little evidence as higher levels of formalization (83%) to whether these methods are efficient in encouraging firms to formalize, and whether formalization can help increase sales and profits. HERE’S WHAT WE DID SO WHAT TO DO ABOUT IT? This study tested three alternatives for how governments can bring firms into the formal sector, To find out what really works in incentivizing informal firms with over 3,000 informal firms in Malawi, of which to register and to improve access and usage of financial 40% were women-owned: (a) assisting firms to obtain services, the World Bank’s Africa Region Gender Innovation Lab, in collaboration with the Global Practice for Finance, a business registration certificate that offers access Competitiveness and Innovation and the Development to formal markets but imposes no tax obligations; (b) Research Group, launched an experiment to identify the assisting firms to obtain business registration and tax impacts of different types of formalization assistance. registration; and (c) supplementing the assistance to obtain business registration with a bank information We did this in the context of Malawi where only 7 session intended to help firms utilize one of the key percent of firms have registered with the government1. potential benefits of formalizing. We aimed to see if entrepreneurs would take advantage of a costless business registration offer and if so, if this In this study we target the informal micro and small registration would have a positive impact on firm-level enterprises that are likely to be able to benefit the most outcomes. from business registration. Source: 2004-05 Integrated Household Survey, which shows 93 percent of firms are not registered with the Department of the Registrar’s 1 General (DRG). HERE’S WHAT WE FOUND On its own, registration brings no discernable impacts on profits and sales for women entrepreneurs. We find the existing transaction costs of However, combining registration assistance with a registering a business are enough to deter the bank information intervention not only leads to even average firm from doing so. When we offer higher levels of formalization (83%), but also to assistance, which brings the costs close to zero, meaningful increases in the use of financial services a large majority (73%) of women-owned firms and, ultimately, firm sales and profits (28% and 20% register their businesses—compared to 7% of the respectively). In particular, we find that women-owned women-owned firms that did not benefit from this firms are 35 percentage points more likely to have a assistance. This goes against the assumption that business bank account after receiving both registration firm registration is low because entrepreneurs do not assistance and the bank information session, whereas want to register their firms. However, the disincentive we find no significant impact of the registration assistance to register for taxes outweighs any potential benefits of alone on the creation of a business bank account. Findings registering, even when transaction costs are removed: show that access to the formal banking system enabled the take-up of our offer of assistance for tax registration women entrepreneurs to be less credit constrained - the was around 5%, and was not statistically significant. firms that benefited from registration assistance and from This could be relevant for efforts to formalize firms in the information session were 600% more likely to have some countries in Africa that do not separate business insurance, a large increase given that approximately 1% and tax registration. of the firms initially had insurance for their business. ACCESS TO FINANCIAL SERVICES & EFFECTS ON SALES AND PROFITS + – Combining business registration with an On the other hand, business registration information session at a bank including the on its own is not as effective in improving offer of a business bank account leads to an access to financial services and does not increased use of formal financial services result in increased sales and profits 28% 20% and results in growth in firm sales of 28%, and growth in profits of 20% Therefore, it appears that transaction costs are not the only barriers that prevent formalization from contributing to firm growth. Greater financial inclusion, with access to credit and other formal financial services is likely one of the main driving factors behind the increase in sales and profits. This highlights that the benefits of formalizing are not automatic for women entrepreneurs, but that additional policy efforts, such as helping firms gain access to the formal banking system, are needed to help firms take advantage of them. POLICY IMPLICATIONS At a one-time cost of $27 per firm registered, this is an effective and replicable design to offer informal firms support to formalize, in a substantially cheaper way than many other government business support programs. Additionally, the combination of registration assistance and bank information session have the same (positive) effects on levels of business performance for women as it does for men. This is in contrast to small business grants and training interventions which have often struggled to be effective in growing women-owned firms. For governments seeking to increase economic growth and achieve gender equality, reducing the costs of registration and coupling it with interventions that increase direct contact with formal financial institutions provide one compelling option. For more information on this study see the Policy Research Working Paper: https://openknowledge.worldbank.org/handle/10986/30510 FOR MORE INFORMATION, PLEASE CONTACT Markus Goldstein mgoldstein@worldbank.org Photo credit: Malawi ILRI/Mann (front page), Mitchell Maher, International Food Policy Institute (left top), UN Women Fannie Delavelle Gaganjit Singh Malawi (left middle), Lindsay Mgbor Department for International Development Malawi (left bottom) fdelavelle@worldbank.org We gratefully acknowledge funding from the Bank Netherlands Partnership Program (BNPP), the International Initiative for Impact Evaluation (3ie), the Private Enterprise Development in Low Income Countries (PEDL), the Strategic Research Program (SRP), and the World Bank Group’s Umbrella Facility for Gender Equality and Investment Climate Impact Program. The first draft of this policy brief was released in January 2019.