Ask why a small trading company in Mogadishu or a workshop in Eastleigh has not registered, and the answer is rarely ignorance of the law. Owners tend to know precisely what registration would cost them, in fees, in time away from the counter, and in the visibility it creates. What they cannot see, because it is genuinely hard to see, is what they get back. Formalisation as currently designed asks a business to pay in full at the front and collect later, and most arguments about compliance culture are really arguments about that payment schedule.
Formalisation is built as a threshold
The prevailing design treats formality as a line. On one side a business is invisible to the state; on the other it is registered, licensed, taxed and subject to reporting obligations, and crossing the line is a single act. For a company with three employees and a working capital cycle measured in weeks, that is not a decision about compliance but about absorbing a step change in fixed cost for a return it cannot yet quantify.
CONTEXT NOTEA ladder, not a single leapRead note
The article proposes three design properties: an immediate benefit from the first step; obligations that increase in stages; and the ability to step down a band when a business contracts.
The point is to make formalisation a sequence a small business can sustain, rather than an all-at-once increase in cost and obligations.
A policy-design proposal, not a description of current registration rules or legal advice.
The sequencing makes it worse. Registration in Kenya is not difficult so much as ordered: each step depends on a document produced by the step before it, and a mismatch between a company name on a tax record and the same name on a bank mandate can cost a fortnight. In Somalia the sequence is shorter but less written down, so requirements are learned one rejection at a time. Both punish the applicant doing it for the first time, alone, which describes almost every small business that attempts it.
What informality is actually buying
It is tempting to treat informal operation as avoidance. In practice it is closer to a risk position. An unregistered business trades flexibility for exclusion. It can move premises, change what it sells, take on and release staff and settle in cash, none of it generating a record to be reconciled later. What it gives up is access: it cannot bid for a public tender, supply a buyer that runs due diligence, borrow against its own trading history, or enforce a contract with a customer who does not pay. That trade is rational at a certain size and irrational above it, and nothing in the current design helps a business notice where the line sits.
What a ladder looks like
A laddered design has three properties. The first rung returns something immediately: a legal identity, a business bank account, and an invoice a formal buyer will accept. That is a benefit a trader can price on the day they receive it, and it costs the state very little to grant. The second is that obligations arrive on separate rungs, with reporting and tax scaling by turnover band rather than switching on in full at registration. That is administratively harder for the revenue authority and considerably easier for the business.
The third property is that each rung is reversible without penalty. A business that formalises and then contracts should be able to step down a band rather than fall out of the system entirely. Systems that only ratchet upwards teach businesses to stay off them.
The reciprocity problem
None of this works without the other half of the exchange. Registration is a claim by the state on a business, and a business will accept it only if the state is visibly on the other end. The register has to be useful to the registered: procurement genuinely open to small suppliers, a working route to enforce a contract, and lenders able to rely on the register. Where those exist, businesses formalise without much persuasion. Where they do not, no amount of awareness campaigning moves the number, because the business is reading the situation correctly.
This applies with particular force to women-owned enterprises, heavily represented in small trading and services across the region, which often carry the extra cost of proving ownership when documents sit in a male relative's name. A ladder that begins with identity and a bank account addresses that directly.
What this means for advisers
For those of us who take businesses through this process, the practical lesson is to stop selling formalisation as compliance. The useful conversation is about what the business wants to do that it currently cannot: bid, borrow, supply or sell. Formalisation is then a route to that, taken in the order that produces the earliest return. Handled that way, most owners are not reluctant at all.