The challenges and prospects of formalization in the sme sector in Tanzania a case study of Ilala municipality

The overall objective of this study was to examine the challenges and prospects of formalization in the SMEs’ sector in Tanzania. The study was conducted in the Ilala district Dar es Salaam region. The study involved 120 respondents where 80 (67%) were females and 40 (33%) were males. Data collections were done through questionnaires, interview questions and personal interviews. Data were analyzed both qualitatively and quantitatively with the help of SPSS programme. Three independent variables of cost of formalization, benefits of formalization and institutional efficiency were related to the dependent variable of effective SMEs business formalization. The formalization costs are presented in the context of registration costs, licensing costs and taxation costs. The institutional efficiency on the other hand are presented in the context of Government procedures, legal and regulatory framework and proper policy.. Finally, the benefits of formalization are presented in the context of qualification for collateral, getting more business and qualification for BDS. Findings indicated that the costs of formalization and level of institutional efficiency perceived affected adversely small enterprises to formalize their business in Tanzania. On the other hand perceived benefits of formalization were found to lead to higher level of commitment towards formalization. In view of these challenges, major recommendations proposed include the need for; setting up a legal and regulatory framework that supports SMEs development and setting up SME’s policy that will address the needs of SMEs at all levels. Efforts are also to be made to improve the benefits of formalization for the SMES.