The informal sector constitutes a dominant feature of urban economies in many African nations, presenting both a critical livelihood source and a complex policy challenge. In Ethiopia, urban informality is characterised by limited access to formal finance, regulatory exclusion, and vulnerability to economic shocks, yet it remains a primary engine of employment and innovation. This analysis aims to develop a coherent policy framework to support the development and gradual formalisation of urban micro-enterprises. It seeks to identify the key constraints faced by these businesses and to propose actionable, evidence-based interventions for policymakers. The policy analysis employs a mixed-methods approach, synthesising data from national labour force surveys, existing academic literature on informality, and a systematic review of recent government policy documents and strategies pertaining to urban enterprise development. The analysis identifies a critical misalignment between existing regulatory instruments and the operational realities of informal enterprises. A predominant theme is that excessive compliance costs, rather than tax burdens, act as the primary barrier to formalisation. Specifically, over 70% of surveyed enterprise owners cited complex business registration procedures as a major deterrent. Effective policy must move beyond coercive formalisation and instead focus on creating an enabling ecosystem that reduces transaction costs and provides tangible benefits for registration. A phased, incentive-based approach is essential for sustainable integration. Key recommendations include: simplifying the business registration process into a single digital portal; establishing targeted financial literacy programmes; creating a graduated tax schedule for newly registered micro-enterprises; and integrating informal business clusters into urban planning and service provision. informal sector, policy framework, urban enterprise, formalisation, micro-enterprise, business development, Ethiopia This paper provides a novel, integrated policy mechanism that links incremental formalisation with improved access to municipal services and finance, offering a pragmatic pathway for urban economic development.