Micro, small, and medium-sized enterprises (MSMEs) account for more than 96 percent of Lebanese firms, yet nearly one-third of firms and 65 percent of workers operate outside the formal system. Informality leaves workers without social protection, limits businesses’ access to financing and support services, and weakens the state’s capacity to provide public services and effective governance. 

In the peer-reviewed article, From Shadow to Structure: Lebanon’s Decentralized Path to Micro, Small, and Medium-Sized Enterprise Formalization, published in Public Administration and Development, Founding Director of the Center for Policy Action (CePA) and Associate Professor at the School of Arts and Sciences and Adnan Kassar School of Business Leila Dagher, along with CePA Fellow Isabelle-Yara Nassar, senior student Nadia Ahmad, and undergraduate student Ali Fala, explores how Lebanon can encourage informal MSMEs to enter the formal economy without placing additional burdens on already vulnerable businesses.

Unlike many formalization strategies that rely primarily on stricter enforcement, the framework argues that businesses are more likely to formalize when registration is simple, affordable, and accompanied by tangible benefits.

The study draws on primary data from a stakeholder roundtable, insights from Dr. Dagher’s advisory work with the Minister of Economy between 2020 and 2023, peer-reviewed research, and lessons from experiences with reform in Egypt, Morocco, Tunisia, and Peru. 

The main recommendation is that formalization should be gradual, local, and incentive-based, through a proposed three-year transitional registration phase led by municipalities. During this period, newly registered MSMEs would pay a fixed annual fee to their local municipality before moving to full registration with the Commercial Register.

The study emphasizes that formalization should not be understood as a mechanism for imposing taxes or penalizing informal businesses. Instead, it should help entrepreneurs gradually move from the shadow economy into the formal sector by building trust, simplifying administrative procedures, and empowering municipalities to play a leading role. 

“Formalization should not be a burden or a punishment,” said Dr. Dagher. “It should be a gradual process that rebuilds trust, expands opportunities for entrepreneurs, and strengthens local communities.”

To that end, when it comes to implementation, the paper recommends developing a national one-stop shop for business registration and a mobile application, along with improved coordination between the Ministry of Finance, the National Social Security Fund, and the Ministry of Labor to link tax identification with social protection systems.

Municipalities, NGOs, and private actors would also conduct outreach and training to help entrepreneurs understand the benefits and requirements of formalization. The study also proposes exploring an AI-enabled data platform to help map informal activity and better target policy support. 

Dr. Dagher explained that Lebanon’s proposal is designed with the country’s low banking trust in mind, especially after the 2019 financial crisis. For this reason, the framework does not rely on immediate digital banking adoption but proposes a hybrid approach that combines digital registration tools with in-person municipal support.

Municipalities are central to the model because they generally enjoy higher levels of public trust than central institutions. Digital systems would initially focus on simplifying registration and administrative procedures, while broader digital financial services could expand as confidence in the financial system is restored. 

“The framework was intentionally designed as a gradual, crisis-responsive reform that does not depend on the completion of a broader economic recovery plan,” noted Dr. Dagher. “Formalization can begin at the municipal level with modest institutional capacity and scale up progressively over time.”

In fact, the process itself can contribute to recovery by broadening economic participation, strengthening governance, and supporting more resilient local economies. 

The proposal argues that “formalization should make economic sense for businesses and should not be viewed simply as a civic obligation,” added Dr. Dagher. Formal firms can benefit from increased credibility with customers and suppliers, access to insurance and social protection systems, eligibility for export markets, improved access to financing and business support, reduced legal uncertainty, and easier integration into formal supply chains. The transitional design is intended to allay fears of retroactive taxation, legal exposure, and high compliance costs. 

Ultimately, she said, “the objective is to create a win-win situation in which businesses gain security and growth opportunities, while the country benefits from stronger institutions and a more resilient economy.”

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