Determinants of business formalization in Singida Municipal Council, Tanzania

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.