For small businesses, formalisation should not feel like another administrative burden. Done well, it can become a route to trust, finance and growth.
Informality is not a marginal issue. The International Labor Organization (ILO) projects that 57.8% of global employment will still be informal in 2027. The picture varies sharply across countries: in 2025, the estimated rate ranged from 94.5% in Angola to just 1.5% in Finland, with agriculture among the sectors where informal work is most widespread.
Behind those figures are millions of people doing very real economic work – selling, producing, moving goods, employing others and supporting families.
In Somalia, this question is especially practical. Small businesses keep local economies moving every day. They open shops, serve customers, move goods and increasingly receive payments digitally. Yet many remain only partly visible to formal institutions.
That raises a simple policy question: are we asking entrepreneurs to formalise because government wants a certificate on file, or because formalisation can genuinely help their business move forward?
Why staying informal can make sense
There is no single reason why firms stay informal. Registration can be confusing, time-consuming or costly. Entrepreneurs may fear taxes or requirements they do not fully understand. Others simply do not see a clear return.
That last point matters.
Business owners are often told to register, but not always shown what registration can unlock: a merchant account, a clearer financial record, access to finance, larger customers, procurement opportunities or new partnerships.
For a micro-business owner worried about today’s stock, rent and customers, paperwork with no visible payoff will always fall down the priority list.
Formalisation therefore cannot rely on regulation alone. It has to create value.
When growth exposes the limits of informality
A business can operate informally for years. The constraint often appears only when it wants to grow.
A financial institution may ask for transaction history before considering finance. A larger company may require business documentation before accepting a new supplier. A public programme may require proof that the enterprise is legally established.
At that point, a business can be commercially active but still difficult for formal institutions to assess.
I have seen this first-hand while working with SMEs in Mogadishu.
One small trading business had loyal customers and strong daily sales. Most customers paid electronically, as many do in Somalia. But the business did not have a licence, so it could not open a formal merchant account. Payments went instead to the owner’s personal mobile-money number.
Later, when the entrepreneur approached a financial institution for financing, one basic question became difficult to answer:
Where is the business’s sales record?
The customers were real. The sales were real. The cash flow was real. But there was no recognised merchant statement showing the transaction history of the business itself.
That experience has stayed with me because it captures the problem so clearly. The business was visible to its customers, but almost invisible to the institutions it needed for the next stage of growth.
In Somalia’s highly digital payment environment, formalisation can create a useful trail:
Licence → Merchant account → Transaction record → Finance readiness → Access to finance → Growth
The exact pathway will differ from country to country. The principle does not: formalisation becomes meaningful when it opens a door that entrepreneurs actually want to walk through.
What good formalisation looks like
The most effective policies do more than reduce paperwork. They connect formal status with real economic and social benefits.
Colombia offers one useful example. In Medellín, the Recuperar co-operative entered into a contract with local authorities for waste collection. Formal organisation helped workers gain access to public medical care, scholarships, and life and accident insurance.
Formalisation, in this case, meant both access to a public market and better working conditions.
India offers another lesson. Support from the Women’s SEWA Co-operative Federation has helped women working in the informal economy organise across sectors, connect more directly to business and consumer markets, and strengthen their skills.
Digital models can create new routes to formalisation too. In the United States, the worker-owned platform Up&Go connects cleaning co-operatives with customers while allowing worker-members to retain 95% of their fees. It is a reminder that formalisation and digitalisation can reinforce each other when workers and small businesses capture a fair share of the value created.
For policymakers, the lesson is straightforward. Make registration easier, but do not stop there.
Link it to services entrepreneurs’ value. Help businesses keep basic records, separate personal and business finances, use digital payments more effectively and become finance-ready. And keep listening to entrepreneurs about where the process still breaks down.
For Somalia, the answer will not come from importing another country’s system. It will come from building a pathway around the realities of Somali businesses.
Small business owners do not wake up wanting another certificate. They want customers, finance, stronger businesses and room to grow.
Formalisation policy should start there: make the process simpler, make the benefits visible, and make registration the beginning of the journey – not the destination.
Yusuf Sodal is an SME banking and entrepreneurship development professional based in Mogadishu, Somalia. He currently serves as Head of SME Banking at IBS Bank, where he works closely with small and medium-sized enterprises on access to finance, businessgrowthand financial inclusion. Yusuf has over a decade of experience across banking, administration, finance,teachingand entrepreneurship support. He is also active in youth entrepreneurship training and business development, helping early-stage entrepreneurs understand opportunity discovery, market validation, businessmodelsand finance readiness. His work focuses on strengthening Somalia’s SME ecosystem by connecting practical business advisory, digital financialservicesand inclusive growth. Yusuf holds an MBA and a BSc in Banking and Finance from SIMADUniversity, andis a Certified Islamic Banker through CIBAFI.