Unlocking growth: Formalizing Bangladesh’s informal enterprises for a sustainable future

By Melita Mehjabeen

Bangladesh’s economic landscape is shaped by a vibrant and dynamic informal sector. From small-scale vendors and roadside shops to home-based industries, the informal economy plays a crucial role in providing jobs, goods, and services to millions of Bangladeshis.

The country’s informal sector contributes 43 percent of the gross domestic product, and generates 85 percent of employment, according to the Labour Force Survey 2022. But the survey, conducted by the Bangladesh Bureau of Statistics, only picked up just over 7,000 informal enterprises. This is likely much lower than the real number, reflecting the difficulties in collecting reliable data on the informal sector. Informal enterprises operate outside the formal regulatory framework, leading to a range of challenges for both the enterprises themselves and the broader economy.

As Bangladesh strives for sustainable development and inclusive economic growth, the formalization of these enterprises has become a critical issue. Yet, this process is fraught with complexities. Recently, I, along with my co-researcher, conducted research funded by SME Foundation and FES Bangladesh Limited to explore the challenges and motivations of formalizing the informal enterprises and the way forward.

Challenges of formalizing the informal enterprises

From a national standpoint, categorizing informal enterprises presents a significant challenge due to the lack of a centralized database. The absence of a standardized definition for informal enterprises, coupled with their exclusion from key national policies such as the Industrial Policy 2022 and SME Policy 2019, has further complicated the issue.

Informal business owners often find the formalization process overwhelming due to extensive documentation requirements. The involvement of intermediaries in the process further adds to the difficulties they face. Additionally, the costs associated with the registration and renewal of legal documents such as trade licences and taxes significantly increase their financial burden. Many informal entrepreneurs worry about falling under government scrutiny and fear potential penalties for missed payments, leading them to perceive formalization as more of a burden than an opportunity.

“I’m trying, but I don’t know how to get a trade licence or where to go for it,” said Md. Sobuj, an informal retail business owner. “Also, I don’t understand what benefits I’d have with a trade licence.”

While several challenges are shared by all entrepreneurs, female business owners often face additional societal criticism. Many women reported a lack of guidance and support during the formalization process, which further isolates them in their efforts to legitimize their businesses.

“When I told my mother about my business, she resisted, saying that we are a Dhakaiyya family [a cultural group associated with the earliest inhabitants of Dhaka], and we don’t approve of girls going out to work,” said Marzia Akter, owner of a clothing store.

Motivations to formalize the informal enterprises

We wanted to have a holistic understanding of what could motivate informal enterprises to formalize. A 2024 survey conducted among 304 informal enterprises found that one-stop solutions, government incentives, and financial support all positively motivate the informal entrepreneurs to formalize their businesses.

As Sayema Haque Bidisha, pro (deputy) vice chancellor of Dhaka University, notes, one point of view is that “formalization provides stability, integrates income into a support system, and encourages more people to create employment opportunities.” This, of course, requires a regulatory environment that is supportive of business activity. Yet informal sector enterprises frequently consider the burden as outweighing the benefits.

Formalization further potentially improves working conditions and social security. Gunjan Bahadur Dallakoti, SME development specialist at the International Labour Organization, explains: “If informal enterprises are to be formalized, they must also adopt formal employment practices, including making social security contributions, fulfilling employment obligations, and meeting minimum wage standards.” Yet in Bangladesh, the labour law only applies to a select number of sectors; most workers would thus not benefit from legal security or the very limited social safety net, and minimum wage applies to even fewer sectors.

Despite the challenges mentioned above, formalization presents several key advantages, particularly for enterprises with growth potential.  Zahirul Islam Sajib, a formal SME owner who exports Bangladesh-made products, said: “I realized that formalization provides greater opportunities. As a business, there’s no other way to fulfil large orders without becoming formal.”

For many informal businesses, the prospect of accessing formal markets and customers is a compelling incentive. The ability to secure loans from financial institutions that were previously inaccessible or carried very high interest rates also becomes a strong motivator. Aman Ullah Aman, owner of a formal consultancy firm, noted: “When people see us as a formal company, our market acceptance increases.”

Recommendations for an effective formalization strategy

Given the challenges, it is important that the government of Bangladesh weaves its strategy for formalizing the informal enterprises with care. Some of the recommendations could be:

Develop a nationwide formalization strategy: The government should collaborate with public and private-sector stakeholders to create a comprehensive formalization strategy with clear short-, medium-, and long-term action plans. This should include policies, institutional roles, and programs to assist SMEs in transitioning to formal status, along with post-formalization support.

Target entrepreneurs with strong growth potential: The strategy could usefully focus on entrepreneurs who have the potential to thrive post-formalization, rather than subsistence-level businesses where the costs may outweigh the benefits.

Simplify the formalization process and introduce a one-stop solution platform: Streamlining the paperwork and digitizing processes would reduce the complexity of registration. Establishing a centralized, digital platform for SME registration, similar to successful models in Malaysia, Singapore, and India, would ensure ease of access and efficiency.

Offer financial and non-financial incentives: The government should simplify taxation, reduce documentary burden, and provide needed services: training, financial literacy, market access, and credit facilities to support growth.

Extend coverage of worker benefits: Improving labour law, legal protection and social security would strengthen workers’ interest in formalization.

With the right set of actions, formalizing these businesses can ensure the sustainable and inclusive economic growth of the nation.