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Tuesday, 14 May 2019

Formalizing micro businesses the key to building a strong SME sector

Formalizing micro businesses is the key to building a strong SME sector: Arab governments should make micro businesses the priority of their financial inclusion efforts, Amr Adly writes for Bloomberg. Micro-sized enterprises employing fewer than five people far outweigh SMEs in Egypt, making up more than 92% of all businesses and employing 58% of the country’s labor force, according to a 2016 report by the African Development Bank.

Almost all of these businesses are informal: They are unregistered, operate without licenses or permits, and use cash for most of their transactions. In comparison, SMEs account for just 7.9% of businesses and provide a quarter of the country’s jobs, while large businesses constitute just 0.1% of business and account for 17% of employment. This lop-sided private sector is what Adly calls the “missing middle syndrome”: A situation where a small group of very large companies exist alongside a vast number of micro businesses and a largely-absent SME sector. (For context, the concept isn’t new: It was popularized in Egyptian policymaking circles by the Finance Ministry as led pre-2011 by Youssef Boutros Ghali)

Building trust: One of the main obstacles to formalizing micro businesses is the lack of trust between the state and the private sector, Adly says. Developmental programs currently struggle to work with micro business owners, many of whom are wary of giving information to the state for fear of taxation and corruption. To overcome this, governments and donors should work to build stronger links between micro businesses and the government, the banking sector and special funds. Creating locally-based development associations would enable the government to simultaneously gather information, provide technical and financial assistance, and build trust. Formalizing micro firms in this way is “crucial for building a robust SME sector, and achieving the goal of more inclusive development,” Adly writes.

MUST READ if you’re looking to dig into the nitty-gritty: The small and medium enterprises landscape in Egypt: New facts from a new dataset (pdf), authored by now-Planning Minister Hala El Said (and colleagues) when she was dean of FEPS at Cairo University.

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