oa Business Management Review - Business formalization procedures and the growth of micro and small enterprises: the case of Dar Es Salaam city in Tanzania

Volume 8, Issue 1
  • ISSN : 0856-2253



The role of micro and small enterprises (MSEs) today as a generator of jobs and a source of income for the large part of the population is now taken as given. However the legal and administrative procedures in the formalization process of the small business sector are limiting the potential contribution of the sector, in that they hinder their growth. A total of 50 business operators were interviewed in a sample survey in Dar es Salaam to establish the legal and administrative procedures to the start up and functioning of MSEs in Tanzania. For the sole proprietors in the trade and service sector, the formalization procedures to business entry entail costs that account to more than ninety percent of the average start up capital. That means a sole proprietor that manages to raise a start up capital of Tshs. 1,000,000 would require an additional of Tshs. 900,000 to meet all the business entry requirements to become formal. The costs include the license fees, registration expenses, expert costs, provisional income taxes, stamp duty, local government levies, and other associated costs in terms of time spent in the application and follow up processes. The time a small business owner spends in the pursuit of the formalization process is enormous. 1t was found that a business operator spends an average of 18 days for registration of a business name, while the time spent for name registration for a company is 15 days on average, , but with the help of a lawyer. 1f the time to process license through all the involved office is included it takes a business operator a total of 55 days to get the business formalized and qualify for growth facilitating factors such as credit facilities from the formal sector or premises in government/municipal land. For companies it was found that in addition to the business entry costs they would require an additional of Tshs. 916,000 to stay formal and this is apart from income tax and other charges like labor related costs. The study finally revealed that there is no relationship between the average size of the firm capital and the formalization costs. Micro firms and small firms were grouped together for income tax purposes and other fees, including municipal fees. This explains why many MSEs prefer to remain small or to grow laterally by opening up 0ther small un-related businesses so as to a void the cost of becoming visible. The above observations show that the regulatory framework constituting of the legal and administrative procedures to formalization of business form one of the major barriers to the growth and creation of MSEs in the country. There is therefore a need to review or overhaul all the legal and administrative systems that hamper the sector so that its contribution to the economy may be realized.

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