- Moniepoint’s informal economy report offers insights into key aspects of Nigeria’s informal businesses
- These insights are crucial for aspiring entrepreneurs
- TheRadar has aggregated 10 of them in this article
The recent Informal Economy Report 2024, published by Moniepoint, a fintech company providing banking services and loans through an online banking app, has given insights into the dynamics of informal businesses in Nigeria.
The report, which gathered data from over two million businesses, was done in partnership with the Small and Medium Enterprise Development Agency (SMEDAN) and the Federal Ministry of Trade and Investment.
In defining the general description of the sector, the report noted, “Unlike their formal counterparts, the informal economy comprises businesses typically described as untaxed and unregistered. This section of the economy has also been described using terms that include ‘underground,’ cash-in-hand’ and the ‘shadow economy,’ signifying how hidden they are from formal systems and, often, regulatory bodies.”
With Nigeria being home to approximately 40 million Micro, Small and Medium Enterprises (MSMEs), 89.4 per cent of which are in the informal economy, the report contains insights that aspiring entrepreneurs should know about the Nigerian informal economy landscape.
10 insights from Moniepoint’s informal economy report
1. There are more men than women in informal businesses
As a budding entrepreneur, it is instructive to know that most informal businesses are owned by more men than women. This knowledge should guide your decision about whether or not to venture into informal business.
According to the report, women own 37.1 per cent of businesses in Nigeria’s informal sector against 62.9 per cent owned by men.
This data negates an earlier report by the United Nations (UN) Women, ‘Progress of the World’s Women 2015-2016,’ which noted that 89 percent, or nine out of 10 working women in Sub-Saharan Africa, work in the informal economy.
“These data points show that the informal economy represents a crucial avenue for women’s economic empowerment in Nigeria and across Africa despite challenges in equity,” the Moniepoint report noted.
2. Informal businesses are owned by young people
Another insight to glean from the Moniepoint report is that young people make up the bulk of the workforce in the informal economy. So, if you are a young aspiring entrepreneur, you are in luck.
The report found that almost 58 per cent of the workforce in the sector is below 34 years old. The largest age group in the sector, representing 43.1 per cent, is between 25 and 34 years while 14.4 per cent are aged 18 and 24.
It added that the second largest group, representing 28.9 per cent of the sector, are aged 35 and 44, while the remaining percentage of workforce, a cumulative 13. 6 per cent, are aged 45 and above.
“This youthful energy offers a tremendous opportunity for socioeconomic transformation through innovation, entrepreneurship, job and wealth creation,” the report noted.
3. You may want to consider type of business and location
Before venturing into the informal sector, you need to consider the type of business and the location that best suits your kind of business.
Drawing from Moniepoint’s findings, over half of businesses in the informal economy are in the retail/general trade and food and drinks category. The report also found that Lagos State remains Nigeria’s commercial nerve centre.
According to the report, the retail and general goods category comprise 24 per cent of businesses, while the food and drinks category follows with 13.4 per cent.
The report noted, “By transaction value in naira, retail and general trade, alongside food and drinks, accounted for over half of Nigeria’s informal economy at 53.6 per cent. Businesses you’d typically find in this category include neighbourhood shops, restaurants, supermarkets and others that sell “daily necessities.”
Other categories of businesses in the sector include fashion (8.1 per cent), beauty and personal (6.9 per cent), agriculture (6.2 per cent), IT/electronics (6.1 per cent), construction (4.3 per cent), education (4.1 per cent), professional services (4.0 per cent), casual use (3.0 per cent), art and creatives (2.9 per cent), health care (2.8 per cent), oil and gas (2.7 per cent) and others (11.0 per cent).
The report also found that the South West geopolitical zone has the highest volume of businesses in the informal economy at 30.8 per cent, with almost half of it, representing 15.1 per cent, located in Lagos.
The remaining five states are home to 15.6 per cent of businesses in the zone. This is followed by the South South with 19.9 per cent of business, while the North Central placed third with 16.8 per cent of businesses.
The South East, North West and North East came fourth, fifth and sixth, respectively housing 13.2 per cent, 12.8 per cent and 6.6 per cent of businesses.
4. What is your motivation for venturing into entrepreneurship: unemployment or passion?
You may want to assess your motivation for wanting to go the entrepreneurship route. Is it sheer passion, unemployment, poor earnings from your 9-5 or you inherited the business?
While you consider that, it may not be surprising to know that many business owners in the informal sector started their businesses because of unemployment, a higher percentage of whom are men, according to Moniepoint’s report.
With the increasing rate of unemployment in Nigeria, which rose to five per cent in the third quarter (Q3) of 2023 from 4.2 per cent in Q2, 2023, this is a no-brainer.
Despite a revised assessment methodology by the National Bureau of Statistics (NBS) in 2023, which saw the unemployment rate drop from 33 per cent in Q4, 2020 “in line with international best practices,” the report showed that more than half of business owners in the informal economy, representing 51.6 per cent, went into business because of unemployment.
While only 2.8 per cent started their businesses out of passion, the report added that 35.9 per cent started businesses because their jobs weren’t enough income, while 3.8 per cent of businesses were passed down to their current owners.
It was also found that 53 per cent of those who started businesses because of unemployment were men, compared to 49 per cent of women. On the other hand, women, representing 40 per cent, started their businesses because their jobs weren’t providing enough income, compared to 34 per cent of men who started businesses for the same reason.
5. What strategies will you employ to keep your business running for more than five years?
With strings of informal businesses fizzling out less than five years after establishment, according to the report, it will be essential to map out sustainability strategies for your business before starting out.
Another point to note is that those who had been in business for over six years were more likely to own multiple businesses, showing the importance of sustainability and its role in business growth.
According to the report, 42.7 per cent of informal businesses have existed for between two and five years. Those that have operated for one to six months account for 21.7 per cent while those in existence for seven months to one year represent 17.3 per cent.
Business owners that have operated for six to 10 years account for 13 per cent while those that have operated for 11 years and above represent 5.3 per cent.
“Less than 20 per cent of businesses were over five years old, indicating the challenge of keeping businesses running for over five years. Programmes designed to enhance business resilience, like improved access to financing and support and development programmes, could be valuable,” it stated.
6. How liquid is your network? You may need to access credit from them
The expression “Your network is your net worth” particularly applies to informal business owners because they will often need family and friends to come through for them, especially as sources of credit.
Despite strides recorded in the drive for financial inclusion in Nigeria, most businesses in the informal economy struggle with accessing credit, prompting their dependence on family and friends for loans and other kinds of funding.
This holds a bleak future for informal businesses because without access to credits from traditional banks, MSMEs will be unable to expand and create more jobs.
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 MSMEs in developing countries, have an unmet financing need of $5.2 trillion annually.
The report noted that 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.
“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,” the report noted.
7. Most businesses make just 250k profits monthly, 1.3% make above N2.5m
If making huge profits is the sole motivation for going into business, you may want to think again, as most business owners in the informal economy make less than 250,000 monthly profits despite boasting high monthly revenues.
According to the report, 79.4 per cent of business owners sampled make up to N250,000 profit monthly, while 10.3 per cent make between N251,000 and N500,000 in profit monthly. When aggregated, approximately 90 per cent of informal businesses make less than N500,000 in monthly profit.
The report also showed that 6.6 per cent make between N501,000 and N1 million profit monthly, 2.3 per cent make between N1.1 million and N2.5 million while 1.3 per cent make above N2.5 million as profit monthly.
By monthly revenue, 48.3 per cent of businesses in the informal economy make above N2.5 million, 12.2 per cent make between N500,000 and N1 million, and N1-N2.5 million. The report also noted that 6.6 per cent make between N250,000 and N500,000 monthly revenue while 8.9 per cent make N250,000 or less revenue monthly.
“Put together, businesses in the informal market contribute over half of Nigeria’s GDP. This is evident in their revenues with the bulk of them (72.3 per cent) hitting monthly revenues of over N1 million monthly. But their actual profit deviates from these high figures. Individually, most of them make less than N250,000 monthly. On the higher end of the spectrum, only about 1.3 per cent of businesses in Nigeria’s informal economy earn above N2.5 million monthly,” the report noted.
8. Black tax is a thing
Not minding little profits, informal businesses spend more on day-to-day family expenditure and feeding, while only a few reinvest in their businesses. This is not unconnected to the family-oriented mindset of most Nigerians.
According to the report, business owners in the informal economy primarily spend 48.1 per cent of their earnings on day-to-day family expenses, 20.1 per cent primarily spend on feeding while 29.7 per cent prioritise reinvest into their businesses.
The report stated, “Most businesses in the informal economy earn money for daily living expenses and feeding. They also mention things like school fees and transportation as additional expenses. Only three out of 10 of these businesses choose to reinvest in their business as their primary expense.”
9. Get ready to accept card payment or bank transfers
Card payment and bank transfers have gained popularity over the years, no thanks to the Central Bank of Nigeria’s (CBN) cashless policy of 2012, which reached an all-time high in January and February 2023, when the naira redesign policy held sway.
Since then, businesses and customers have not looked back in their adoption of digital payment options like card payment and bank transfers despite a reversal of the currency redesign 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. What is your preferred means of saving?
Another insight from the Moniepoint report is that the abundance of traditional banks has not fazed out the age long cooperatives and contributory methods of saving by most informal businesses.
While savings is a major part of informal businesses, like access to credit, the 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).
Businesses in informal economy make less than 250k profit monthly, spend more on family expenses, feeding
Meanwhile, TheRadar reported that despite boosting of high monthly revenues and the contribution to Nigeria’s Gross Domestic Product (GDP), most business owners in the informal economy make less than 250,000 profit monthly.
According to Moniepoint’s report, 79.4 per cent of business owners sampled make up to N250,000 profit monthly, while 10.3 per cent make between N251,000 and N500,000 in profit monthly. When aggregated, approximately 90 per cent of informal businesses make less than N500,000 in monthly profit.
