- Details stages of struggles to stay afloat
Onome Amuge
A worrying trend has been exposed in Nigeria’s informal sector, with a new report revealing that most businesses within this sector fail to survive beyond five years, reflecting the harsh reality facing these businesses which contribute over half of Nigeria’s gross domestic product.
The 2024 Informal Economy Report released by Africa’s fastest growing fintech, Moniepoint, in partnership with the Federal Ministry of Industry, Trade, and Investment, and Small and Medium Enterprise Development Agency (SMEDAN), found that most of these small businesses struggle to survive beyond five years due to multiple taxation and restricted access to credit, which hinder their growth and development.
According to the report, Nigeria’s micro, small, and medium enterprises (MSMEs) are predominantly operating in the informal economy. With approximately 40 million MSMEs in the country, an estimated 90 percent were identified as being in the category of informal businesses, also known as the shadow economy. These businesses, typically untaxed and unregistered, have been found to make up a significant portion of the Nigerian economy.
“Eight in every ten small businesses are relatively new, running for less than five years. Less than 20% of businesses were over five years old, indicating the challenge of keeping businesses running for over five years,” the report explained.
It also indicated that 21.7 percent of these businesses have been in operation between one to six months, 17.3 percent have stayed up to a year in business, 13 percent have been in operations for up to 10 years, while a mere 5.3 percent of these businesses have remained active for 11 years.
Concerning the prevalence of certain industries in Nigeria’s informal sector, the report identified retail and general trade as the dominant industry, representing 24 percent of all informal businesses. Collectively, this category, along with food and drinks, fashion and beauty, and agriculture, constitute 58.6 percent of all informal businesses in the country.
The report also revealed that while a significant number of small businesses (70.1%) in the informal sector have accessed credit at some point, the majority (70.7%) rely on informal sources of credit, with friends and family being the main source. This overdependence on informal credit channels is exacerbated by the low utilisation of loan apps and platforms (15.1%) and traditional banks (12.2%) by small businesses in the informal sector in Nigeria.
The informal economy report also uncovered a significant gap between revenue and profit in Nigeria’s informal sector, revealing that though 72.3 percent of businesses in the informal sector generate more than N1 million in monthly revenue, a huge chunk of individual businesses struggle to generate more than N250,000 in monthly profit. This disparity is further highlighted by the fact that only 1.3 percent of informal businesses are able to achieve monthly revenue in excess of N2.5 million.
The report further revealed that 68.2 percent of informal business owners’ income is allocated towards feeding and family expenses, which demonstrates the centrality of these basic necessities to their financial stability. On the other hand, reinvesting in the business consumes 29.7 percent of income, while only three out of 10 informal business owners prioritise reinvesting in their businesses over other expenditures.
Challenging a commonly held misconception that informal businesses in Nigeria avoid paying taxes, the report disclosed that nearly 90 percent of informal businesses actually pay taxes in the form of market levies. According to the report, approximately 65.1 percent of these businesses pay these levies regularly, indicating their substantial contribution to the nation’s revenue stream.
Charles Odili, director-general of the Small and Medium Enterprise Development Agency of Nigeria (SMEDAN), emphasised the importance of small businesses in driving the Nigerian economy.
“Small businesses are the engine of the Nigerian economy, and the informal sector serves as the pistons providing momentum. The numbers support this reality, as reaffirmed by this report. The vast majority of Nigeria’s approximately 40 million small businesses reside in the informal sector,” he stated.
Addressing the concern that fear of taxes serves as a significant deterrent to formalisation among small businesses in Nigeria’s informal sector, Odili emphasised that SMEDAN is working hard to formalise these businesses in order to improve their access to crucial resources like finance, which will help them develop their brand value and financial history, indicating their creditworthiness and attracting investment.
Odili also assured that the government is currently implementing tax exemptions that are in place to help small businesses grow and thrive. He added that SMEDAN is collaborating with the Association of Local Governments of Nigeria (ALGON) to combat illegal taxation and harassment, issues that discourage businesses from formalising and negatively impact the ease of doing business in the country.
