Making Sense of Nigeria’s Informal Sector

I enjoyed reading the Informal Economy Report released by Moniepoint last week (June 2024). It contains a lot of information that entrepreneurs, businesses, investors, public sector agencies, researchers, and especially policymakers can benefit from. For far too long, we have ignored data in our decision making, and seeing that businesses in the informal market contribute over half of Nigeria’s GDP, it is no surprise that our decision in not being at breast with the latest figures in this important economy has impacted negatively on the quality of life of NIgerians.

This attitude needs to be corrected considering Nigeria, the most populous black nation on earth, is home to approximately 40 million Micro, Small, and Medium Enterprises (MSMEs), and an overwhelming 89.4% of these businesses operate within the informal economy. The informal economy, characterized by untaxed and unregistered businesses, forms the backbone of the Nigerian economy. Despite its significance, the report shows that the challenges and dynamics within this sector are vast and multifaceted.

The Demographics and Motivations

The informal economy in Nigeria is primarily driven by young entrepreneurs. Data reveals that the largest group of informal business owners, accounting for 43%, are between the ages of 25 and 34. Following closely, 28.9% of these owners are between 35 and 44 years old. This means a substantial 72% of informal business operators are aged between 25 and 44, highlighting a youthful and dynamic workforce.

The predominant motivation for starting an informal business is unemployment, cited by 51.6% of business owners. Additionally, 35.9% of individuals ventured into business due to insufficient income from their current jobs. These statistics underscore a critical point: the informal economy is a crucial fallback for many Nigerians facing joblessness or underemployment.

Financial Realities and Survival Challenges

The financial landscape for informal businesses is challenging. The average monthly income for these businesses is less than ₦250,000, with 79% making a profit of ₦250,000 or less each month. Furthermore, about 90% of these businesses generate less than ₦500,000 in monthly profits, and only a minuscule 1.3% report profits exceeding ₦2.5 million monthly.

Despite the low income, informal business owners face multiple tax levies, with 89% of them contributing to various forms of taxation. Access to credit remains a significant hurdle, with 70.1% relying on friends and family for financial support. The preference for cash transactions is high, with 52% opting for cash due to its perceived safety and ease.

Industry and Expenditure Trends

Retail and general trade dominate the informal sector, attracting the highest number of business owners. These entrepreneurs often juggle multiple ventures, with half of them managing more than one business.

Income generated from these businesses is primarily spent on feeding and family expenses, as indicated by 68% of the respondents. In contrast, only 30% prioritize reinvestment into their businesses, highlighting the struggle to balance personal and professional financial obligations.

Longevity and Passion

The lifespan of most informal businesses is notably short, with 82% operating for less than five years. However, businesses founded out of passion tend to fare better. Half of the businesses driven by passion survive beyond the five-year mark, suggesting that intrinsic motivation can play a crucial role in business sustainability.

The Gender Dimension

The informal economy is also a significant source of employment, especially for women. In Sub-Saharan Africa, 85% of employment is informal, with nine out of every ten working women engaged in this sector. This statistic underscores the informal economy’s critical role in providing livelihoods, particularly for women who might face barriers in the formal job market.

Conclusion

Nigeria’s informal sector is a vibrant and essential part of the economy, providing income and employment to millions. However, the sector faces numerous challenges, including low income, limited access to credit, and a high tax burden. Addressing these issues could unlock even greater potential, ensuring that these businesses not only survive but thrive. As the informal economy continues to evolve, it remains a testament to the resilience and entrepreneurial spirit of the Nigerian people. The report may be accessed here.