- The strides achieved in the push for financial inclusion in Nigeria haven’t been reflected in access to credit for informal businesses
- As an off-shoot of this discrepancy, many informal businesses prefer saving with cooperatives/contribution and digital banks than with traditional banks
- Also, CBN’s cashless policy and the cash crunch of 2023 led to an uptick in the adoption of digital payments by informal businesses
Despite strides recorded in the drive for financial inclusion in Nigeria, most businesses in the informal economy need access to credit, prompting their dependence on family and friends for loans and other kinds of funding.
According to ‘The Informal Economy Report 2024,’ which gathered data from over two million businesses in partnership with the Small and Medium Enterprise Development Agency (SMEDAN) and the Federal Ministry of Trade and Investment, businesses in the informal economy often face bleak odds and access to credit remains crucial.
The critical need for credit for informal businesses was reiterated by the International Finance Corporation (IFC), which said 65 million businesses, representing 40 per cent of formal micro, small and medium enterprises (MSMEs) in developing countries, have an unmet financing need of $5.2 trillion annually.
The report noted that 70.1 per cent of informal businesses say they have accessed some form of credit for their business while 29.9 per cent haven’t. Conversely, only 35.5 per cent of these businesses are likely to offer credit to their customers, while 64.5 per cent say they cannot.
“For many of these business owners, loans help with restocking, expansion and keeping the business afloat in unfavourable times. But these businesses aren’t as lenient with their retail customers.
“Credit for these businesses includes BNPL (Buy Now Pay Later) offerings to their customers, providing goods and services for repayment at a later date. Business owners cited low trust from previous bad experiences for not extending this service to their customers,” the report stated.
TheRadar had reported that most business owners in the informal economy make less than N250,000 in profit monthly but spend more on day-to-day family expenses and feeding.
Informal businesses prefer credit from family, friends to banks
The bulk of loans and other types of credit for businesses in the informal economy are from friends and family at 70.7 per cent. Other sources are from loan apps/platforms (15.1 per cent), traditional banks (12.2 per cent) and others (2.0 per cent).
This stark reality pales in comparison with the strides recorded in the drive for financial inclusion in Nigeria, which increased to 74 per cent in 2023 from 68 per cent recorded in 2020.
According to a survey by Enhancing Financial Innovation & Access (EFInA), the increase was driven by an uptick in the use of non-banking channels, which grew from five per cent in 2020 to 12 per cent in 2023.
Business analysts believe that without access to credits from traditional banks, MSMEs will be unable to expand and create more jobs in the process.
Cooperatives, digital banks preferred means of saving
From the report, 92.4 per cent of businesses in the informal sector save money, which are tied to regular responsibilities that cannot be met with immediate cash flow, while 7.6 per cent don’t save.
While savings is a major part of informal businesses, like access to credit, a majority don’t also prefer saving with traditional banks. “Their choice could be due to a lower entry barrier and potentially higher returns,” the report noted.
According to the report, cooperatives and group contributions (47.5 per cent) is the major method these businesses choose to save because “for many, this feels “closer to home” than other means.” The digital banks option (39.5 per cent) is the second best means of savings, followed by traditional banks (11.0 per cent).
CBN’s cashless policy doubled adoption of digital payments by informal businesses
The cashless policy of the Central Bank of Nigeria (CBN), introduced in 2012 and the cash crunch of early 2023, caused by the CBN’s naira redesign policy, were the major drivers of the double increase in the adoption of digital payments by businesses in the informal economy. This trend has been sustained despite a reversal of the policy.
According to the report, most informal business owners prefer card payment (80.2 per cent) as a means of receiving in-person payments to transfers (19.8 per cent).
Also, the report noted that digital payment methods like cards and transfers accounted for the bulk of how businesses in the informal economy were paid. It said businesses who listed transfers as the preferred payment option of their customer also showed a higher tendency for their customers to also use cash.
It said one in two businesses prefer to receive cash payments, adding that “The preference for cash was connected to safety and ease of doing business. For businesses that needed to use cash to pay for the goods and services they sold, cash was their preferred means of receiving payments. Still, digital payments accounted for 46.2 per cent, split between card payments and transfers.”
10 lucrative business ideas you can easily try out in Nigeria
Meanwhile, TheRadar previously reported that the unemployment rate in Nigeria had increased and left many turning to entrepreneurship.
For those looking for business ideas to latch upon, 10 business ideas, including fruit drink business, content creation and e-commerce, were highlighted as lucrative options to explore as an aspiring entrepreneur.
