The research team is currently carrying out a randomized experiment in Malawi to measure the impact of formalization for Micro, Small and Medium Enterprises (MSMEs), and assess the complementary value of business bank accounts as a means of separating firm and household finances. While informality is often seen as an obstacle to business growth and economic development, very little is known on the relative importance of this constraint. The benefits of formality may include increased access to financial services, markets, government support programs and networks.
Other development obstacles are often considered complementary to informality. One problem for MSMEs in Malawi is that household and business resources tend to be strongly intertwined, resulting in the depletion of working capital. Hence, spurring the separation of household and business money by informing about its benefits and offering business bank accounts with access to the SME Department of a Bank, may have strong positive effects in adding value to business registration. This study also examines whether male and female-owned enterprises gain equally from registration, and whether the effects of registration are heterogeneous on other dimensions.
The target group of this study consists of 3,000 informal MSMEs located in Blantyre and Lilongwe, the major commercial cities in Malawi. These firms were identified through several listing exercises and selected based on a pre-defined set of criteria. The researchers stratified firms in the sample by a set of measures, including gender, location, and sector and then randomly assigned them to either one of the treatment arms or the control group. The study intervention consists of three treatment arms (totalling 2,250 firms) and one control group (750 firms). In order to test the impact of business registration on business performance, all 2,250 firms in the treatment group were offered costless registration with the Department of the Registrar General (DRG) – which is the main step to firm formalization in Malawi. Out of these, 750 firms were solely offered the DRG registration. A random group of 300 firms was also offered to register for taxes and obtain a Tax Payable Identification Number (TPIN) from the Malawian Tax Authority, allowing the researchers to test the additional value, if any, of this step in the formalization process. The remaining 1,200 firms in the treatment group were invited to information sessions by a local bank on the benefits of separating business from household money and offered business savings accounts.
The team is collecting extensive data – the first two follow-up surveys have been completed and two more rounds of follow-up surveys are planned for 2014 - to estimate the impact of the different treatment arms on business expansion, access to finance, and productivity of MSMEs. The outcomes of interest include measures of firms’ financial performance, investments in the business, survival rates, number and skill composition of employees, access to finance, number of customers, and harassment levels.
The outputs generated by this study will be directly relevant for policy. Malawi is currently streamlining its registration process to increase the registration rate amongst MSMEs. The Business Registration Impact Evaluation (BRIE) is a direct response to the interest of the Government of Malawi in evaluating whether or not business registration improves business performance. The government will therefore use the results of this study to promote registration (if positive impact is detected) or to identify the corresponding bottlenecks that affect enterprise performance (if no impact is identified).