Costly Business Licensing: In the Quest for Business Transition from Informal To Formal Trading

Somalia, just like many fragile states which are recovering from long periods of instability, has laid its focus on improving investment laws, streamlining business registration and licensing, establishing efficient tax systems, and increasing access to finance and credit facilities. It is the hope of the government and other actors that such reforms, if well executed, should result in significant benefits in terms of economic growth and stability. However, the high cost of starting and facilitating legitimate business largely characterized by costly business licensing is proving to be a major limiter to registering with the government. This can deny many small and medium sized businesses from making the much-needed transition from trading in the informal to the formal sector.

In Somalia, individuals who wish to obtain business licenses need to present both personal identification documents and statutory ones [i.e. letter of Application, company profile, articles of association, valid ID, and two passport photos]. Should one be unable to prepare their own company profiles and documentation, they would be forced to pay public notaries between USD $100 and USD $150 to undertake this on their behalf.

There are pressures to create a one-stop-shop for all business registrations. The business community in Somalia, has on numerous occasions, complained of higher trade costs and redundant bureaucracy that have frustrated their operations. These, among other challenges, range from high fees to inefficiencies within government service provision frameworks and incoherent business policies and regulations at the core of licensing policies.

It is difficult for meaningful economic gains to be achieved in a country when the cost of doing business is high and far outweighs the measures being employed to make them productive. For instance, below are samples of license fees that are charged to respective businesses and are ironically renewed on an annual basis:

1.    $300: Licensing Fee for local businesses

2.    $50: Printing the certificate (receipt not available for this amount).

3.    $3,000: Licensing Fee for foreign owned business, including businesses that are partially owned by foreign partners.

4.    $5,000: Licensing Fee for mid-large enterprises, such as telecommunication, financial institutions, electricity, water, airlines, hospitals, large schools, and universities.

It is reasonable to assume that the government uses business licenses as a kind of replacement for corporate income tax. The license is renewable every year and the renewal charge is equivalent to the original registration fee. Businesspeople stand to incur a daily penalty fee of USD $25 if renewal is late.

Taxation camouflaged under licensing fees discourages business registration. Taxation should be a tool for progress, but in the prevailing context, it is seen as a major aggravator to the prevailing slow-down of the economy.

The informal business sector connects to the formal sector at multiple points; informal markets encompass economic activity that occurs outside of formal regulations and is rather guided by informal norms, values, and understandings. There has been extensive exploration on the transition of businesses from informal to formal trading. Largely, formalization contextually implies registering businesses by obtaining the requisite licenses and ultimately regularly paying taxes that come with this formalization. These [costs of licensing], are already high and are beyond the reach of many micro and small businesses. Conceivably, businesses will only be willing to bear this cost if they perceive benefits from operating formally outweighs those of operating informally. Going by the glaring contextual challenges surrounding the licensing costs and procedures, and in consideration that changing the face of informal enterprises is a complex multidimensional process, maintaining the status quo [costly licensing] only exacerbates the situation for most businesses. It remains a pipe dream for most informal businesses to take “the leap of faith” of transitioning from their informal to formal settings.

The government needs to be aware of these harsh realities and to appreciate that the costly business licenses are having serious negative impacts on the growth potential of small and medium businesses. With less funds left for businesses to utilize for their growth and expansion, the government needs to start implementing urgent measures to salvage the situation by creating a friendly and harmonized business licensing framework.

There is an urgent need to address the issue of coordination in public service delivery by national/Federal agencies and regional governments as this lack of synergy across all levels of governance ends up becoming a very costly affair for local citizens and business.

Mohamed Mukhtar is the former Minister of Petroleum of Somalia and CEO GSM Business Solutions. He can be reached at mohamed@gsmbusinesssolutions.net

Edwin Ondiege is a business development officer at GSM Business Solutions. He can be reached at edwin@gsmbusinesssolutions.net