Licensing Slow, Cancellations High

Costly, Cumbersome Business Licensing Procedures

Small business owners have demonstrated resilience in the daunting process of applying for and renewing their business licences. Operators of microenterprise are often in an even worse position, taking risks to engage in businesses without a licence. Not all of the sole traders’ businesses survive but those that do, overcome challenges related to the time and cost of the procedures and show that they have staying power.

One such owner is Tarikua Girma, 38 and a mother of two, who is the sole proprietor of Henok Café, located at Temenja Yazje. Tarikua was serving her customers and instructing her workers at nine in the morning when Fortune went to her café. Tarikua has been in the business for around 15 years after her inclination and experience drove her to engage in such a sector though she initially wanted to open a large-scale hotel. Sadly, this was not realised due to her financial restraints.

Despite this, Tarikua’s current café also passed a lot of tests both in terms of her own personal limitations and administrative procedure involved in opening such a business. One of the prominent challenges she faced came from the process of acquiring and renewing of her business licence, a service rendered by the then Ethiopian Investment Agency (EIA).

“The procedures are unaffordable by business persons with lesser financial capacity and money, just like me. Covering all other costs such as rent and employees’ salaries alongside the costs for renewing business licence, I would not have survived at the business had not husband’s income not supported me,” she told Fortune, feeling irritated by the type and number of procedures she had to go through in order to renew her license and remain in the business.

Another sole proprietor, Saba Kelelo, owner of a cosmetics business named as Sefora Cosmetics at Legahar, did not attribute the difficulty of starting business to the long time it takes to get and renewed licence. She rather blames the lack of co-ordination between concerned stakeholders as the cause of her problem.

She recalled the inconvenience of her own experience when she had to apply for the licence and was asked to come up with a lease contract and tax clearance.

“Ethiopian Revenue & Customs Authorities (ERCA) categorised me as a retailer and labeled my business as a trade of medical, pharmaceutical and sanitary equipment. But this nomenclature didn’t comply with the permit I had to get from the Addis Abeba Housing Development Administration Agency (AAHDAA) that categorised my business as a cosmetics shop, and I had to spend more than 15 days to manage such contradicting procedures and obtain a licence” Saba explained to Fortune.

The type and number of procedures required for the issuance and renewal of business licences by the Ministry of Trade (MOT) varies from one business to another. For sole business persons such as Tarikua, the MOT required nine procedures with presentation of the relevant documents, namely, the newly issued or renewed of a commercial registration certificate; copy of power of attorney or guardianship if the applicant is an agent; taxpayers identification number; photocopies of kebele identification card or valid passport; bank letter of the allocated capital for the commercial activity; certificate of professional competence; title deed for owned business house or authenticated contract of lease by kebele administration if it is leased; investment permit in case of foreign investors; and two passport sized photographs.

The number of procedures is the same but the procedures themselves are different for business organisations other than share companies and among these are authenticated original copies of Memorandum and Articles of Association; newly issued or renewed commercial registration certificate; taxpayers identification number; bank statement evidencing capital of the business organisation and title deed or authenticated document. In case of share companies, there are nine procedures with slightly different requirements and among these are authenticated Memorandum of Association and Articles of Association; taxpayers identification number; bank letter showing deposit in blocked bank account of one fourth of the par value of the subscribed shares of the company, and two passport size photographs of the company’s manager.

Despite time and cost constraints, Tarikua did not think the licence issuance procedures were annoying. However, she was annoyed by the seven requirements for renewal of the business licence, mainly tax clearance, a renewed commercial registration certificate and a certificate of professional competence.

The specific requirement of the certificate of professional competence was the main complaint among most sole business owners such as Tarikua even though its strictness varied from one type of business to the other. Due to the nature of businesses which are usually associated with health and sanitation, the specific procedures in obtaining certificates of professional competence are more and stricter for restaurants, cafes and barber shops than for photo studios, retail shops, stationery and other businesses.

Mandatory procedures for restaurants, cafes and barber shops entail employing hotel and tourism graduates; require employees to have a comprehensive medical checkup every three months, to maintain a very clean and modern kitchen, shower and toilet; to have a fire extinguisher strategically located and to replace waiters’ gowns every six months. It is unaffordable to employ hotel graduates paying a minimum salary of 2,000 Br per month, spending 5,000 Br for employees’ medical checkups every three months after covering other business costs such as rent, food ingredients, transport, water and electric fees. The high costs all worsen the condition of starting business, Tarikua told Fortune.

“The requirements are mandatory and strict for restaurants and barbers in order to secure the public health and prevent the environment from pollution and that is why we thought that the business person should come to such capacity.”Alebachew Setotaw head of communication consultancy and advisor at the MOT Licence Issuance and Renewal Department, reasoned.

The procedures should consider the current economic capacity of the majority of business persons and should not target removing small business persons who are unable to meet difficult and costly requirements. This often leads people to engage in the operation of unlicensed businesses, Tarikua said. She remembered that once she had been involved in a fight with a street vendor who attempted to give tea service in front of her cafe and managed to shift Tarikua’s customers to her microenterprise because of the vendor’s lower price.

Murida Awel, 30 years old and a widowed mother of three, is one of these street vendors who have been vending tea, coffee and Coca Cola for the last six years. She started the business with capital of 300 Br by buying only a few cups and a flask. She had no other administrative expenses and the price of tea at her place is 1.5 Br, that is, five Br less than the price at Tarikua’s cafe.

Murida engages in this business because she did not have the financial capacity to work on a lawful basis fulfilling the trade licence issuance procedures. Despite this she still cannot manage to have a stable vending business because the police persecute her and take her goods whenever they find her vending.

“I vend coffee and tea being hidden from the sight of the police, because if they find me doing so, they will take my goods just like the previous three times and I cannot manage to buy them easily.” Murida said adding the reason the police told her for taking her goods is because she has no licence for doing such business.

Murida gets an average of 25 Br profit per day and she has to feed her children plus pay 600 Br per month for residential rent.

Birtukan Birhanu, another vendor who is 23 years old and a mother of one, started the business of vending tea, coffee and cookies on an initial capital of 100 Br on a debt basis. But she had to buy her goods four times again because police confiscated her stock saying that she should obtain a business licence.

“I couldn’t finance the startup capital for my business which is worth less than 200 Br let alone obtain the capital to start a licensed business which is around 200,000 Br.”She said.

The number of days taken to obtain issuance and renewal of business licence is another area which makes starting business difficult. But the business persons Fortune talked to, such as Solomon Negusie, who is an owner of Dessie barber shop at Balcha and Saba Kelelo, an owner of Sefora cosmetics business, prefer to attribute the delay to the lack of communication between other administrative stakeholders saying that the number of days to obtain a licence renewal by MOT is only one day.

This time will be extended to more than 15 days because the requirements to be fulfilled before going to the MOT are not finalised early, Solomon said, adding that most business people, who go for these licences themselves, tend to pass the provided timeline for renewal by MOT.

“The delay happens because most business persons come at the deadline of the schedule for renewal, which is between July 1 to December 30, and that creates load,” Shemelse, public relations head at MOT said, adding that in order to curb such overload at the ministry office, a branch had been opened at Lideta and given the mandate for renewal to five districts. According to Shemelse, the MOT also had a plan to start an online registration system.

The 2015 World Bank report of doing business in Ethiopia ranks the country three places below its rank in 2014. Ethiopia ranked 132 from 189 countries in terms of ease and difficulty of doing business. The report ranked Ethiopia taking into account 11 indicators, among which is starting a business. In terms of this indicator, Ethiopia ranked 168 out of 189 countries, coming behind competitive economies like South Africa, Egypt, Rwanda, Kenya and Uganda.

The report also used specific measurements on each indicator in order to paint a clearer picture. For example, It would take an average of 15 days to start business in Ethiopa, a much longer time than, for example than in Egypt which would take only eight days, Rwanda, which would take about 6.5 days and New Zealand where the average time for starting business is only half a day.

In Ethiopia, one has to go through nine procedures in order to start a business, in Rwanda, eight, and in Egypt only seven procedures. The number of procedures in these African countries is, of course, too many when it is compared with New Zealand which has only one procedure for starting business. Responding to this report Shemelse said that the number of procedures are all necessary and cannot be minimised.

The MOT 2014/15 six-month performance report on licence issuance showed that 148,821 business persons were issued new licences, which was higher than the targeted 125,391 persons. The number of canceled licences was 30,707, a significantly higher number than the anticipated 10,239.

In the fiscal year of 2014, 266,280 persons were issued new licences which was fewer than the targeted 268,105 people. The number of persons who cancelled their licence during this year was 54,340, which is far higher than the targeted 22,225 persons.


Published on April 6, 2015 [ Vol 15 ,No 779]



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