Can the adoption of mobile money entice microenterprises in Burkina Faso to formalize their businesses?

Burkina Faso, like most developing countries, is characterized by a large informal sector, populated mainly by small, unregistered firms with low productivity and not paying taxes. According to the latest estimates, there are approximately 1.5 million informal firms and 65,000 formal firms in Burkina Faso, with just 500 formal firms[1] considered large. Meanwhile, the private sector accounts for 60% of non-agricultural employment, and an estimated 90% of workers are in the informal sector. Moreover, the population is growing at around 3% per year, but there is not enough creation of formal jobs to absorb the additional population into the labour force. Informality is prevalent and represents around 85% of the non-farm workforce (FinScope, 2016; World Bank Group, 2019).

The informal sector -- a threat to the formal sector

The existence of a large informal sector raises several concerns: besides lower tax collection that reduces the government’s ability to finance public goods and services, the literature often emphasizes the adverse impact of the presence of informal firms competing against formal firms on the latter’s business operations. According to the results of several World Bank Enterprise Surveys, the practices of the informal sector are consistently ranked the second most serious constraint faced by registered SMEs after the lack of access to financing. In Burkina Faso, the latest World Bank Enterprises survey shows that 75% of firms compete against unregistered or informal firms.

Therefore, how informal firms can be encouraged to formalize is an agenda shared by many countries across the globe. As such, many countries have implemented several regulatory reforms designed to facilitate the formalization of firms by making it easier and cheaper for them to register. However, the majority of small firms in most developing countries choose to remain informal mainly because of the perception that the costs of formalization usually outweigh the benefits.

SMEs formalization: a promise of mobile money

Meanwhile, mobile financial services have been spreading rapidly in developing countries with large informal financial sectors and low formal financial deepening and inclusion. For instance, while cash remains the predominant payment method, mobile money ranks second in Sub-Saharan Africa. Furthermore, although initially tailored for individuals to perform P2P (Person to Person) money transfers, Micro, Small and Medium Enterprises (MSMEs) are increasingly using mobile money services to perform a wide range of financial transactions.

MSMEs can use mobile financial services: 1) to receive payments from their customers, both in-store and remotely; 2) to make payments to their suppliers or employees; 3) for government payments and for receiving government subsidies; 4) and even to access credit. This can help MSMEs address some of their financial challenges, including overall bookkeeping capabilities, cash flow and liquidity management, and limited access to credit. The transaction records produced by mobile money can also help foster a shift to the formal economy by integrating informal sector users into business networks, and formal finance, and linking them to the government. Against this backdrop, we argue that adopting/using mobile financial services could be a critical step for MSMEs to become financially included and join the formal economy.

Mobile money and SMEs formalization: the role of incentives

To test leading theories of demand for mobile money for enterprises and business registration in developing countries, in the first step, we used a quasi-experiment approach conducted in March 2021 to help informal businesses adopt merchant accounts. Three cities of Burkina Faso are retained for the study: the political capital Ouagadougou that has the highest concentration of firms (55.4%) followed by the economic capital Bobo-Dioulasso (17.3%) and Ouahigouya located in the North of the country. We succeeded in equipping 53% of the targeted 1,387 informal businesses with merchant accounts. In a second step, a randomized controlled trial[2] was designed and conducted to investigate whether mobile money may induce business formalization. This involved two target groups formed on the following basis. First, business owners were invited to evaluate the difficulties associated with providing the documents required for registration and second, in the light of required documents, business owners were asked whether they were willing to formalize their businesses. Hence, the first target group  included business owners who indicated willingness to formalize at baseline (Panel A) while the second group comprises those who are against registration (Panel B). Then, several treatments were designed for each of the two target groups.

Initial results showed that businesses equipped with mobile money are more incline to formalize. Moreover, results also revealed that the impact of adoption and usage of merchant accounts on formalization is stronger for comparatively younger businesses (less than 3 years old), lack sales records, or are located outside the capital city, Ouagadougou. These results suggest that providing mobile money to businesses is sufficient to induce willingness to register.

Therefore, mobile money appears to be a springboard toward formalization for this category of informal firms. According to the designed treatments, while information about the registration process, formal merchant account, and supporting 30% of registration fees (through reimbursement or payment in advance) increase formalization, the impact varies across several factors. Precisely, whether the recipient of the program indicated willingness to formalize or adopt the merchant account at baseline appears to be of great importance raising the very question of how microentrepreneurs perceive formalization, where much still remains to be done.  For instance, subsidizing 30% of registration fees works better when paid as a reimbursement instead of payment in advance, particularly for business owners who responded willing to formalize. Thus, these findings cast doubt on universal incentives packages and suggest that incentives should be carefully designed and tailored to the characteristics of the targeted firms. Mobile money can therefore contribute to reducing informality of businesses if policies are well implemented and take into account the needs of informal businesses.

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The long version of the paper can be found HERE

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About the authors:

Serge Stéphane Ky is an Assistant Professor in Economics at the Université de Ouahigouya. He holds a PhD in Economics jointly from the Université de Limoges and the Université de Ouaga II. Serge research interests include digital financial inclusion, climate change, and development.

Clovis Rugemintwari is an Associate Professor in Economics at the University of Limoges. He holds a Ph.D. in Economics from the University of Limoges. His research focuses on Financial Stability (Prudential regulation, bank risk and performance, Monetary unions); Financial inclusion (Mobile money, SME finance, Informal sector).