- Most businesses in the informal economy make less than N250,000 in profit monthly, high monthly revenues notwithstanding
- Family expenses and feeding take the bulk of spending by informal businesses while reinvesting little into their business
- They also pay some form of tax to local council authorities who decide the amount and regularity of payment
Despite boasting 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.
Also, businesses in the sector spend the bulk of their earnings on day-to-day family expenditure and feeding.
This is according to a report by Moneipoint, a fintech company providing banking services and loans through an online banking app, titled ‘The Informal Economy Report 2024.’
The report, which is data gathered from over two million businesses, was launched in Abuja on Friday, July 5, in partnership with the Small and Medium Enterprise Development Agency (SMEDAN) and the Federal Ministry of Trade and Investment.
Founder and Group CEO of Moniepoint Inc., Tosin Eniolorunda, noted that the insights from the data would be beneficial in contextualising the unique operating environment of Nigeria’s informal businesses, which make up 89.4 per cent of the country's 40 million Micro, Small, and Medium Enterprises (MSMEs).
“With access to this large sample of the informal economy, it’s become important for us to contextualise and share this information. This is especially important because the Nigerian market is unlike many others. We believe these insights will help entrepreneurs and regulators alike as we work together to improve this part of the economy that contributes so much to Nigeria’s GDP.
“By quantifying the informal economy’s impacts and nuances, we can better shape policies and programmes to empower and uplift the entrepreneurs driving it forward. Their success is inextricably linked to Nigeria’s continued growth and development,” he stated.
Recall that TheRadar reported that fewer women own businesses in the informal economy than men. Also, the largest group of people, representing almost 58 percent of the workforce in the sector, are young people under 34 years old.
Only 1.3% of businesses in informal sector make above N2.5m in profit monthly
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.
Family expenses, feeding take bulk of spending
Given the peculiar family-oriented culture of Nigerians, often leading to black tax, it is not surprising that most business owners in the informal economy spend hugely on day-to-day family expenditure and feeding, while only a few reinvest in their businesses.
According to the report, business owners in the informal economy primarily spend their earnings on day-to-day family expenses (48.1 per cent ), 20.1 per cent spend on feeding while 29.7 per cent prioritise reinvesting into their businesses.
The report noted, “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.”
Contrary to belief, most informal businesses pay tax
Businesses operating in the informal are often 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.”
It is also popularly believed that they are outside the tax net. However, The Informal Economy Report 2024 has shown that 89 per cent of them pay some form of tax.
According to the report, 65.1 per cent of business owners in the informal economy pay taxes regularly, 23.6 per cent sometimes pay while 11.3 per cent say they do not pay taxes.
In explaining the informal businesses’ notion of taxation, the report stated, “Although businesses in the informal economy are often identified by the fact that they do not pay taxes, the reality is that taxation just looks different to them. For them, taxation comes in the form of market levies, which most of them pay.
“For many of them, these levies are paid to local councils and bodies, which determine how much and how regularly they are to pay. Businesses that do not pay their levies risk losing their goods and/or having their businesses closed by these local councils.
“The amount these businesses pay in taxes varies based on location and size. Those factors can affect their taxes (or levies), which can range from N3,500 to as high as N15,000 yearly.”
FG’s tax harmonisation path of the essence
The Presidential Fiscal Policy and Tax Reforms Committee had in May, recommended that the taxes and levies collected by the three tiers of government be streamlined and harmonised into eight headings.
Chairman of the committee, Taiwo Oyedele, said the proposed list of taxes and levies will include income tax, property tax, value-added tax (VAT), customs duties, excise tax, stamp duties, special levy and harmonised levy.
Oyedele said the recommendation will make tax administration modern, simple, adaptive and enable economic growth.
He also said the Federal Government is working towards a system that will exempt 95 per cent of businesses in the informal sector that mostly earn N25 million or less yearly from paying all taxes including withholding tax, company income tax and payroll taxes.
Oyedele added that the informal sector comprises “people simply trying to earn a living” and should not be burdened with taxes, instead, government officials and the elite would be targeted for tax compliance.
10 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.
