As the Central Bank of Nigeria (CBN) advances its financial inclusion efforts, a new report highlights that merely 11% of businesses in Nigeria's informal sector save in conventional banks.
The "Informal Economy Report 2024," conducted by Moniepoint Inc. in collaboration with the Federal Ministry of Industry, Trade, and Investment and the Small and Medium Enterprise Development Agency of Nigeria (SMEDAN), revealed that 39.5% of informal sector players use digital banks, 47.5% save through contributions and cooperatives, and 2.3% use other savings mechanisms.
The report indicates that the informal sector contributes over half of Nigeria's Gross Domestic Product (GDP). It noted that cooperatives and group contributions are the primary savings methods, as they feel more "homegrown" for many businesses.
“Digital banks follow closely at 39.5%, while traditional banks are least preferred at 11% due to lower entry barriers and potentially higher returns,” the report stated.
The data also showed that 1.3% of businesses in the informal sector earn above N2.5 million monthly. Additionally, it revealed that women own 37.1% of these businesses, and almost 58% of the workforce is under 34 years old, indicating significant potential for socio-economic transformation.
In terms of economic contribution, retail and general trade, along with food and drinks, accounted for 53.6% of Nigeria’s informal economy. This includes neighborhood shops, restaurants, and supermarkets.
Unemployment is the most common reason for starting an informal business, particularly among men, while women are more motivated by insufficient income from formal employment. The South-West region, including Lagos, has the highest volume of informal businesses at 30.8%, followed by the South-South at 19.9%.
The report also discussed the sources of credit for informal sector players, with about half accessing loans from family and friends. Traditional banks provide just 12.2% of their funding, while loan apps/platforms account for 15.1%.
Taxation in the informal sector mainly comes in the form of market levies, with 89% of businesses paying some form of tax, challenging the notion that informal businesses do not contribute to the tax system.
Digital payment adoption has surged due to the CBN's cashless policy, with card payments being the most common method for in-person transactions at 80.2%. However, cash remains the preferred means of payment due to its safety and ease.
The report emphasized the challenges faced by informal businesses, including lack of access to formal banking systems, documentation for grants, and external funding, all of which hinder their growth.
“Many of these businesses are locked out of formal banking systems, limiting their transaction capabilities and access to development programs and funding,” the report concluded.
Emmanuel Terhemen
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