Why African Entrepreneurs Stay Informal – And How to Change the Equation

By Danilo Desiderio

Across Africa, a vibrant spirit of entrepreneurship is driving economic activity in markets, villages, and bustling city streets. Yet, despite this energy, the vast majority of these ventures remain in the informal sector – where they operate outside the regulatory and tax systems.

In Sub-Saharan Africa, the informal economy accounts for more than 85 percent of employment, representing not just a challenge, but a massive, untapped economic opportunity – one that the African Continental Free Trade Area (AfCFTA) cannot afford to ignore.

As AfCFTA aims to create the world’s largest free trade area by connecting 1.3 billion people across 55 countries, integrating the informal sector is no longer optional – it is essential. But to do so effectively, policymakers must confront a critical question: Why do so many African entrepreneurs choose to stay informal, even when governments offer incentives and streamlined registration processes?

The answer, as a recent Brookings Institution analysis highlights, is both simple and systemic: for most small businesses, the costs of formalization far outweigh the benefits.

Becoming a registered business in many African countries means navigating a complex web of tax obligations, regulatory requirements, and bureaucratic hurdles. These include high registration fees, lengthy approval processes, and disproportionately burdensome tax rates.

In some cases, digitalization – often touted as a modernizing force – has inadvertently created new barriers. Online tax platforms and digital compliance systems, while well-intentioned, often exclude traders with limited digital literacy or unreliable internet access, deepening the divide between formal and informal operators.

Consider Cameroon in 2005: the cost of formally starting a business was a staggering 172 percent of the country’s gross national income (GNI) per capita. While reforms have since reduced this burden, the perception – and often the reality – of high entry costs persists across the continent.

These financial and administrative obstacles deter formalization, shrinking the pool of registered enterprises and limiting the state’s ability to collect revenue, enforce labor standards, or extend social protections.

Meanwhile, the promised benefits of formal status – access to credit, government contracts, infrastructure, and social safety nets – remain elusive for many. When formalization does not reliably translate into tangible gains, staying informal becomes not a sign of defiance, but a rational economic decision.

The Hidden Rationality Behind Informal Entrepreneurship

This is especially true for cross-border traders, a critical yet often overlooked segment of Africa’s informal economy. My recent research, “Beyond Duty Relief: Revisiting the Simplified Trade Regime for Enhanced Formalization in Africa,” underscores this point.

While mechanisms like the Simplified Trade Regime (STR) – designed to ease customs procedures for small-scale traders – hold promise, they fall short when implemented in isolation. Without active support, such as training, legal assistance, and access to finance, informal traders lack the capacity to transition into the formal system, regardless of how “simplified” the process appears on paper.

The lesson is clear: reducing barriers to formalization is necessary, but not sufficient. To shift the calculus, governments and development partners must also increase the value proposition of being formal.

Evidence suggests that even if registration were free and instant, informality would still persist for up to 25 – 30 percent of the workforce. This isn’t a failure of policy alone – it’s a signal that trust in institutions and confidence in the returns of formalization remain low.

Building a Real Incentive Structure for Formalization

What would this look like in practice?

• Targeted incentives: Link formal registration to immediate, visible benefits – such as access to microloans, mobile-based insurance, or inclusion in public procurement databases.
• Capacity-building: Provide digital and financial literacy programs tailored to small traders, especially women who dominate informal cross-border trade.
• Graduated compliance: Introduce tiered regulatory frameworks that scale obligations with business size, allowing micro-enterprises to grow into formal status organically.
• Leverage AfCFTA: Use the continental trade framework to harmonize STR implementation across borders, reducing complexity and building trust in formal systems.

The path forward requires a dual strategy: demolish unnecessary barriers, while simultaneously building real, measurable rewards for playing by the rules. Only then will formalization shift from a burden to a benefit – and from a choice to an advantage.

Africa’s entrepreneurs are ready to formalize. Now, it’s time for institutions to make it worth their while.

Danilo Desiderio serves as the CEO of Desiderio Consultants Ltd in Nairobi, Kenya, specializing in African customs, trade, and transport policies. He is a customs and trade expert at the World Bank and a senior associate to the Horn Economic and Social Policy Institute (HESPI).