Determinants of Business Formalization in Singida Municipal Council

Abstract

While Small and Medium Enterprises (SMEs) are recognized to be the engine of
growth of the economy, most businesses continue to operate informally. There
are competing arguments on prospects of business formalization. This study
analysed the attitudes of business owners towards business formalization and
determinants of such formalization among SMEs in Singida Municipality. The
study adopted a cross-sectional research design, and a mixed-methods approach
whreby both quantitative and qualitative data were collected. A sample of 200
SMEs owners were selected using Fisher’s formula. Qualitative data were
analysed using thematic content analysis with a constant comparison.
Quantitative data were analysed with the aid of the Statistical Package for Social
Sciences (SPSS) software whereby descriptive statistics were computed to obtain
frequencies and percentage distributions of the responses. A five-point Likert
scale was used to establish the level of attitude towards business formalization.
Binary logistic regression was used to determine effects of predictors on chances
of business formalization. It was found that education, age, sex, firm location,
firm size, employment and access to credit were important predictors of business
formalization (p <0.005). Many respondents (56.6%) had positive attitude on
business formalization. Insufficient capital (30.1%) and high tax charges
(21.7%) were the most frequently cited factors hindering business formalization.
Prospects and factors enhancing business formalization in the area include:
compliance with government directive which avoids disturbances from
government law enforcers, growth of business, and easy access to credits which
were mentioned by 27.7%, 16.9% and 15.7% respectively of the respondents as
the most important factors enhancing business formalization. The study
concludes that ability of business owners’ to formalize their businesses is influenced by their socio-economic characteristics as well as firm size and its
location. It is, therefore, recommended that SMEs owners should be given more
education on the prospects of business formalization and their obligatory need
to pay taxes and other government levies. On the other hand, law enforcers on
the compliance with tax payment should devise a friendly environment and
encourage business operators to pay taxes in ways which do not harm or threaten
their business growth and encourage informal business operations.