95656 Policy Brief Issue 10 | March 2015 MAKING IT EASIER FOR WOMEN IN MALAWI TO FORMALIZE THEIR FIRMS AND ACCESS FINANCIAL SERVICES Francisco Campos, Markus Goldstein and David McKenzie KEY MESSAGES 1. The global rate of informal firms is high, especially for those GENDER INNOVATION LAB that are women-owned and in the poorest countries, despite 149 economies implementing 368 reforms to simplify the registration The Gender Innovation Lab (GIL) conducts impact evaluations process in a recent ten-year period. One assumption to explain this is of development interventions in that people do not want to register their firms, and another is that if only Sub-Saharan Africa, seeking to they registered, it would lead to great benefits for their businesses. generate evidence on how to close the gender gap in earnings, productivity, assets, and agency. 2. Through an experiment in Malawi, we established an effective and The GIL team is currently replicable design to offer informal firms support to formalize, costing working on over 40 impact much less than the typical private sector development intervention. evaluations in 21 countries with the aim of building an evidence Take-up of business registration was extremely high for both men and women- base with lessons for the region. owned firms, with about 75 percent of those offered assistance obtaining The impact objective of GIL is a business registration certificate. However, firms were not interested in tax to increase take-up of effective registration, which could be relevant for efforts to formalize them in some policies by governments, countries in Africa that do not separate business and tax registration. development organizations, and the private sector in order to address the underlying 3. We also found that business registration on its own is not effective causes of gender inequality in in the short-term in improving access to financial services. We found no Africa, particularly in terms of women’s economic and social impact for either men or women on bank account usage, savings, or credit. empowerment. The lab aims to do this by strengthening 4. What works in the short-term is combining business registration knowledge by producing with an information session at a bank including the offer of a and delivering a new body of evidence and developing a business bank account. This led to women entrepreneurs increasing compelling narrative, geared usage of bank accounts for business-only purposes, financial record towards policymakers, on what keeping, and access to other financial services including insurance. works and what does not work in promoting gender equality. http://www.worldbank.org/en/programs/africa-gender-innovation-lab Informal firms are smaller and less productive interventions, while the remaining one was the control than formal ones, and their informal status is often group. The first treatment group was offered assistance associated with a number of costs, including less for costless business registration, the second was offered access to finance. Although 75 percent of the assistance for costless business registration and separate countries included in the Doing Business project tax registration. The third and final treatment group was have adopted at least one reform making it easier to offered assistance for costless business registration, as register a business since 2004, informality remains well as an information session with a bank that included very prevalent, especially in Sub-Saharan Africa. an offer at the end to open a business bank account. This may lead many to believe that entrepreneurs are We then implemented the interventions and gathered not interested in registering their firms, and that if they data on the take up of the different types of business could only be convinced to formalize it would lead to formalization and their result on outcomes of interest great benefits for their business. including changes in access to financial tools. Thus far, we did two rounds of follow up surveys, the SO WHAT TO DO ABOUT IT? first one from November 2012- March 2013 and To find out what really works in incentivizing informal the second from November 2013- March 2014. firms to register and to improve access and usage of financial services, the World Bank’s Africa Region HERE’S WHAT WE FOUND Gender Innovation Lab, in collaboration with the Global Practice for Trade and Competitiveness Neither the assumption that firm registration is low and the Development Research Group, launched because entrepreneurs do not want to register their an experiment to identify the short-term impacts firms, nor that if only they registered, it would lead to of different types of formalization assistance. great benefits, were true in the short term. We did this in the context of Malawi where only 7 We identified an effective and replicable design percent of firms have registered with the government.1 to offer informal firms support to formalize, We aimed to see if entrepreneurs would take costing much less than the typical private sector advantage of a costless business registration offer and development intervention. if so, if this registration would have a positive impact on firm-level outcomes. All three treatment groups had large impacts on business registration, with 75 percent of those offered HERE’S WHAT WE DID assistance accepting and completing the business Our experiment targeted informal enterprises likely to registration process. This benefits the government in be able to benefit most from registration in the country’s providing a better picture of the firms that are active major commercial cities of Lilongwe and Blantyre. in their economy, and it allows enterprises to comply We worked with a sample of over 3,000 informal with the formal requirement to, among other benefits, firms, of which 40 percent were female-owned. open a business bank account, apply for a loan in the We randomly allocated participating firms into four name of the business, apply for government programs, groups. We offered three groups varying formalization and register with the chamber of commerce. 1 Source: 2004-05 Integrated Household Survey, which shows 93 percent of firms are not registered with the Department of the Registrar’s General (DRG). The all-in costs of conducting the business registration intervention was $22 per registration offered and approximately $27 per registration offer accepted. So this is an intervention that can be reasonably scaled up when compared with other interventions typically provided to firms. In sum, we found making registration costless will increase formalization of firms dramatically. One caveat was that even with costless assistance, take-up rates for the tax registration were extremely low (only 4 percent), suggesting that it is the combination of a business formalization status that offers potential benefits (like bank access), low transaction costs and no implied future cost that is responsible for the high business registration take-up. Business registration on its own is not effective in the short-term in improving access to financial services. Simplifying business registration on its own – the first group - was not effective in the short-term in improving access to financial services. This intervention had limited impact on savings and an increase of 2-4 percent in the likelihood of having a business bank account, which was significantly smaller than the intervention that includes registration and a bank information session. Except in the amount of credit that the firm can borrow in two weeks, and in certain savings behaviors, where the impacts of this group were larger for women, there were no significant differences between male and female-owned enterprises. What works in the short-term is combining business registration with an information session at a bank including the offer of a business bank account. When combining the business registration with an information session at a bank and including an offer of a business bank account in the process, the impacts on access to financial services were large. The results were particularly encouraging in that the impact was high for women too, suggesting a way to increase women’s access to financial services. Compared to the control group, women in this treatment group were much more likely to open a business bank account. They were also more likely to start keeping financial records and to have an insurance scheme, as seen in Figure 1 below. WOMEN ENTREPRENEURS USE OF FINANCIAL SERVICES CONTROL GROUP VS. TREATMENT GROUP 3 (FIRST FOLLOW UP) BANK ACCOUNT IN NAME OF BUSINESS Control Group 2.1 Treatment Group 3 45.6 KEEPS FINANCIAL RECORDS Control Group 47.5 Treatment Group 3 56.1 HAS INSURANCE Control Group 1.1 Treatment Group 3 7.5 Figure 1 (above) illustrates the effects for women in this treatment group compared to the control group for the first follow-up survey (we found similar large differences in the second follow-up). While just 2 percent of the women in the control group had a bank account in the name of the business, this figure was 46 percent for the group offered information sessions at the Bank. Female owned enterprises in this group were 6 and 9 percentage points more likely to have insurance and financial records respectively than the women-owned firms in the control group. NEXT STEPS In the next stage of this study, we will analyze mid-term and long-term impacts of the different formalization interventions including the effects these methods have on businesses performance. We will also look at how informality exposes FOR MORE INFORMATION, female entrepreneurs to more risks including confiscation of merchandise or PLEASE CONTACT requests for transactional sex from authorities threatening to shut down their Markus Goldstein businesses, and whether formalization could protect women from harassment. mgoldstein@worldbank.org For more information on this study see the Policy Research Working Paper: Rachel Coleman http://documents.worldbank.org/curated/en/2015/01/23922000/short- rcoleman1@worldbank.org term-impacts-formalization-assistance-bank-information-session-business- 1818 H. St NW registration-access-finance-malawi Washington, DC 20433 USA