Access to finance and formalisation

Financial Services Providers- including banks, credit unions and microfinance institutions - are a potential conduit for promoting the formalization of informal enterprises.

Financial Services Providers- including banks, credit unions and microfinance institutions - are a potential conduit for promoting the formalization of informal enterprises. In many countries, these institutions have significant outreach, providing financial services to millions of small and micro enterprises, and therefore hold some leverage to influence business practices.

The products and services offered by financial institutions can promote formalization of enterprises in a variety of ways. For example, by offering a payment system platform, microenterprises can upgrade their operations and process employees’ payroll formally. Graduation lending schemes, where eligibility conditions for larger loans are related to enterprise status, is a way to incentivize formalisation. Another incentive is to provide additional benefits to formal enterprises, such as free insurance protection.

Financial institutions with a social agenda, or a double bottom line approach, might be interested to promote formalization to efficiently enhance their social impact. It is also possible that such interventions could enhance business objectives, through better performance of the MSMEs, which would be of interest even to financial institutions without a social agenda. For an MFI, a formalised enterprise is more transparent and hence less risky borrower, which helps to reduce operating costs and to identify more accurately future earning opportunities.

Social finance work on the topic:

  • Through MF4DW, the Social Finance Programme promoted the idea of formalizing enterprises through financial institutions. While ESAF in India implemented awareness raising on formalization and business development services, FCFB in Burkina Faso carried out a sensitization campaign about the benefits of formalization, complemented with client training on enterprises management and incentives to formalize. In both cases very positive results were observed. To access ESAF’s detailed information press here, for FCFB press here, and for the MF4DW synthesis report here.
  • As ESAF’s results were promising and the MFI was very interested in follow up work on the topic, a follow up study was commissioned to assess whether the high rate of formalization among the target group had produced further effects on relevant business and socio-economic indicators. The subsequent study ''Microfinance and Formalization of Enterprises in the Informal Economy'' can be accessed here.

Broader ILO agenda on the topic:

  • The Recommendation No. 204 concerning the Transition from the Informal to the Formal Economy has been labelled as historic and it highlights that the transition from the informal to the formal economy is essential to achieve inclusive development and to realize decent work for all. It clearly states that members should ensure that an integrated policy framework to facilitate the transition to the formal economy is included in national development strategies or plans as well as in poverty reduction strategies and budgets. More information on this historic convention can be found here
  • The Enterprise Department through the Enabling Environment For Sustainable Enterprise has developed a comprehensive and powerful methodology to assess, advocate and reform the environment in which enterprises start up and grow. Through its 4 stages process: assess, advocate, reform and grow, one of its key achievements is the creation of incentives to informal business to formalize. More information can be found here.