Report: Only 11% of Informal Businesses Save in Conventional Banks, 39.5% in Digital Banks

*89% of players pay some form of tax

Ndubuisi Francis in Abuja

As the Central Bank of Nigeria (CBN) continues to gravitate towards maximising its quest for financial inclusion, a new report shows that only 11 per cent of businesses in the informal sector of Nigeria’s economy save in the conventional banks.
The report also revealed that 39.5 per cent of players in the informal sector used digital banks, 47.5 per cent saved through contributions and cooperatives, while 2.3 per cent applied other savings mechanisms.

The “Informal Economy Report 2024” was anchored by Moniepoint Inc., in partnership with the Federal Ministry of Industry Trade and Investment, and Small and Medium Enterprise Development Agency of Nigeria (SMEDAN).
The report said businesses in the informal market contributed over half of Nigeria’s Gross Domestic Product (GDP). It disclosed that cooperatives and group contributions formed the bulk of informal businesses’ savings, as many of them felt “closer to home” with such savings mechanism.
“A close next option is digital banks (39.5%), and least frequently, traditional banks (11%). Their choice could be due to a lower entry barrier entry, and potentially higher returns,” the report said.

It explained that about 1.3 per cent of businesses in Nigeria’s informal economy earned above N2.5 million monthly.
It stressed, “Our data at Moniepoint shows that women own 37.1 per cent of businesses in this sector.
“These data show that the informal economy represents a crucial avenue for women’s economic empowerment in Nigeria and across Africa, despite challenges in equity.

“Our data shows that almost 58 per cent  of Nigeria’s informal workforce is below 34 years old. The largest group, making up 43 per cent, is between 25 and 34.  The second largest group of young people, 35 to 44-year-olds, represent 28.9 per cent  of the sector in Nigeria.
“This youthful energy offers a tremendous opportunity for socio-economic transformation through innovation, entrepreneurship, job and wealth creation.
“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’.”
Providing further insight on the informal economy, the report stated that unemployment was the most common reason for starting an informal business.
However, it stressed that while unemployment was the leading motivation for starting a business among men, insufficient income from more formal employment was the higher motivation among women

It found that the South-west (including Lagos) had the largest volume of businesses in the informal economy, at 30.8 per cent.
The zone was followed by South-south (19.9 per cent); North-central (16.8 per cent), and South-east (13.2 per cent).
The North-west stood at 12.8 per cent, while North-east maintained the rear at 6.6 per cent.
By volume, the informal economy had oil and gas at 2.7 per cent, health care (2.8 per cent), art and creatives (2.9 per cent), casual use (3.0 per cent), professional services (4.0 per cent), and education 4.1 per cent.

Others were construction (4.3 per cent), agriculture (6.2 per cent), food and drinks (13.4 per cent), IT/electronics (6.1 per cent), fashion (8.1 per cent), beauty and personal 6.9 per cent, and others (11 per cent).
In terms of value, oil and gas stood at 9.6 per cent; healthcare 2.2 per cent; construction 5.6 per cent; education 1.6 per cent; and IT/electronics 6.9 per cent.
Agriculture was at 4.6 per cent; beauty and personal 3.9 per cent; retail and general 38.4 per cent; food and drinks 15.2 per cent; and others 8.9 per cent.
Retail and general trade had the highest number of informal business owners, the report said, adding that the lifespan of most informal businesses is under five years.

On the sources of credit for the informal sector players, the report stated that approximately half of businesses in the
informal economy accessed credit from family and friends. It explained that traditional banks accounted for just 12.2 per cent of their funding, loan apps/platforms offered 15.1 per cent; family/friends 70.7 per cent, and other sources 20 per cent.
The report pointed out that although businesses in the informal economy were often identified by the fact that they did not pay taxes, the reality was that taxation just looked different to them.

“For them, taxation comes in the form of market levies, which most of them pay,” the report said.
According to the report, almost nine out of 10 of these “businesses say they have paid some market levies in their lifetime. 65.1 per cent  pay these levies regularly, 23.6 per cent  pay sometimes, and only 11.3 per cent  do not.

“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.
“Taxation is one of the key areas used to define the informal economy, as most of these businesses typically do not pay taxes. However, our research pointed in a different direction regarding Nigeria’s informal economy.”

The report said “89 per cent of businesses in

the informal economy say they pay some form of taxes”.

On digital adoption, the report stated that the introduction of the cashless policy by the Central Bank of Nigeria (CBN) at the start of 2023 saw a double increase in the adoption of digital payments across different industries – an increase that had been maintained, despite a reversal of the policy.

While various digital payment collection methods existed for business owners in the informal economy, the report stated that

businesses in Nigeria’s informal economy preferred to receive cash payments.

The preference for cash was connected to safety and ease of doing business, the report explained.

However, card payments were the most common way (at 80.2 per cent), for these businesses to receive in-person payments.

Their preferred means of payment was cash (53.8 per cent), card 23.1 per cent and transfer 23.1 per cent.

The report stressed, “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.”

It said despite its importance to the growth of the economy, some key challenges affected the informal sector.

“Banking systems provide leverage for many formalised businesses, from payment collection to the ability to perform business transactions at a larger scale,” the report stated.

However, it said, “Many of the businesses in the informal economy previously were locked out of these banking systems, so they have been unable to benefit from the advantages that come with being included.

“Without a bank account, for example, they are limited to doing transactions with only people they can physically interact with.

“This lack of access to banking also impacts them in other ways. Many programmes and initiatives from development institutions, including the Nigerian government, exist to support businesses of all sizes in the country.

“However, with most of the businesses in the informal economy invisible, access to them remains constrained. They also do not have the requisite documentation to apply for these grants.

“This means that although opportunities for them do exist, they are often unable to access them in ways that can help them grow meaningfully.

“This extends to a larger problem with access to funding for informal businesses. Funding remains crucial to the growth of businesses in any economy. Despite its importance, many businesses in the informal economy cannot obtain external funding, with many seeking loans from family and friends as earlier established.”

The report said, “Lack of a financial history also makes it impossible for many of them to access credit from the existing formal systems.”