Understanding informal SMEs

It is estimated that about 80% of all enterprises globally, roughly 280 to 340 million, fall under the informal SME category. The statement raises one common question, what is an informal SME?

The definition of “informality” may vary based on different legislative frameworks, but as a whole, it can be understood in three different ways. One school of thought argues that informal SMEs result from formal organizations incapable of producing sufficient jobs to meet the workforce demands. This understanding criticizes that large organizations are not contributing enough to the economy, and the lack of opportunities lead to unorganized, often under-achieving alternates for formal work in the form of side businesses that are often irregular and managed informally.

To support this conceptualization, another understanding explains informal SMEs as sub-organizations in larger enterprises’ supply and distribution chains. However, the most simple and legally sound explanation for informal SMEs is those organizations that prefer to operate informally to avoid the capital requirements to comply with regulations. To explain better in a legal sense, SMEs not registered with relevant governing bodies employ a marginal proportion of the working population in an unregulated, informal manner.

Regardless of how one would like to conceptualize an informal SME, the core challenge that affects formal employment also impacts informal SMEs. A survey conducted by the World Bank across 15 developing economies indicates that finance is the greatest challenge that obstructs operation, growth potential, and even the ability to formalize businesses.

Image from the World Bank

At SMEXCHANGE.COM, we understand that SMEs face an uphill business battle due to the lack of information, knowledge, technology use, funding & support of a real eco-system. We are here to help and be a leader in bridging these gaps.

This excerpt is adapted from a study by The World Bank: https://documents1.worldbank.org/curated/en/804871468140039172/pdf/949110WP0Box380p0Report0FinalLatest.pdf