From Informality to Competitiveness: Rethinking Africa’s SME Development Model

The issue

In Benin, an experiment involving several thousand small businesses achieved what few public policies manage: it raised formalisation by 16 percentage points. A year later, those firms’ sales and profits had not moved. That result, published in a leading economics journal, captures the paradox of SME development in West Africa. We have long treated informality as the cause of firms’ small size. The evidence suggests it is mostly the symptom.

The question, then, is not “how do we formalise the economy?” but “why don’t our firms grow, and what makes them grow?”

What the evidence says

Informality is the norm, not the exception. In Sub-Saharan Africa, 86.5 % of jobs were informal in 2023, a level almost unchanged in ten years (ILO, 2023). In Benin, the share exceeds 90 %. In Senegal, SMEs and micro-enterprises make up 99.8 % of the business fabric, and 65 % of SMEs fail less than a year after creation (SNDSPI 2025-2029).

The productivity gap is considerable. In the median country, an informal firm produces about 15 % of the value added per employee of a formal firm, and still only 21 % at equal size (La Porta and Shleifer, 2014). World Bank work on African establishment censuses shows that formal firms create jobs as they age, while the distribution of informal firms stays frozen: they are born small and remain so.

Finance is expensive in its structure more than in its rate. In the UEMOA, micro, small and medium enterprises received 52 % of bank credit to legal entities in 2024, at an average rate of 7.07 % against 6.06 % for large firms. More to the point, 75 % of new loans are short-term (BCEAO, 2025). In Senegal, credit to the private sector is only 31.1 % of GDP. Across Sub-Saharan Africa, unmet MSME financing demand is estimated at 331 billion dollars (IFC, 2025). Working capital gets financed; investment rarely does.

Three West African experiments show what changes a firm’s trajectory. In Togo, a “personal initiative” training focused on the owner’s behaviour rather than on bookkeeping raised profits by 30 % on average, where a conventional business-management course produced no measurable effect (Campos et al., Science, 2017). In Nigeria, the YouWiN! competition awarded grants of around 50,000 dollars to firms selected on their business plan: three years later, 93.6 % of winners were still operating against 58.4 % of non-winners, at a cost of 8,538 dollars per job created (McKenzie, American Economic Review, 2017). Also in Nigeria, helping owners hire a specialist or outsource accounting and marketing outperformed training, and matched consulting at half the cost (Anderson and McKenzie, 2022).

Why it matters

For public authorities, these findings move the yardstick of success. A formalisation target, however ambitious, says nothing about the productivity of the firms registered. Senegal’s own strategy now aims at tripling SME credit and growing “champions”, not formalisation alone.

For banks and guarantee funds, the issue is loan maturity and the legibility of risk, more than volume. A firm that keeps accounts, collects payments electronically and has a verifiable track record becomes bankable over the medium term. That is where management capacity and access to finance meet.

For business-support organisations, finally, the evidence is uncomfortable: generic management training, the flagship product of most programmes, is the intervention with the weakest measured effect. What works often costs less, but demands more judgement: selecting, concentrating, and following through over time.

What needs to change

1. Measure growth, not registration. Public programmes and donors should report on the turnover, jobs and three-year survival of the firms they support, not on the number of firms formalised or trained.
2. Concentrate resources on firms with potential. Fifty significant grants or loans, awarded on application and followed up, beat fifty thousand micro-transfers with no accompaniment. The YouWiN! model proved it; “nano-grant” schemes, by contrast, still have no published impact evaluation.
3. Replace generic training with the strengthening of leadership capacity. Behaviour-based programmes, easier access to specialist skills (accounting, sales, digital), structured mentoring: these are the levers with a documented effect.
4. Tie finance to capability. Guarantees, leasing, factoring and e-invoicing will only have a lasting effect if they rest on firms able to produce the information banks require. Formalisation then becomes a consequence, not a precondition.