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Informal economy contribute over half of GDP

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By Usman Oladimeji

72.3 percent of the businesses consistently generate over ₦1m each month.

Findings from the Informal Economy Report 2024, developed by Moniepoint in collaboration with the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), has revealed that more than half of Nigeria’s Gross Domestic Product (GDP) is generated by businesses operating in the informal market. Street vendors, artisans, and service providers are among the unregistered businesses contributing to this significant portion of the economy. This is further supported by their impressive revenues, with about 72.3 percent of them consistently generating over ₦1 million per month. However, their profit margins don’t align with these impressive Revenue numbers.

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Most of these businesses earn below ₦250,000 on a monthly basis. Only a small percentage, about 1.3%, of businesses in the informal sector earn over ₦2.5 million each month. The Retail and general Trade sector is the most prominent industry in the informal economy, representing 38.4% of all businesses, while food and drinks businesses follow up with 15.2%. Meanwhile 68.2% of respondents indicated that feeding and family expenses were their main financial priorities. Some also highlighted school fees and transportation costs as additional expenditures that are sustained by their business earnings.

70.1% of entrepreneurs in the sector have taken out loans.

In order to analyse the informal market thoroughly, entrepreneurs across Nigeria were surveyed, delving into their joblessness, businesses, saving habits and Taxation issues. Shockingly, findings revealed that a mere 18.3% of business owners in the informal sector have managed to keep their businesses afloat for more than 5 years. The data revealed that less than 20% of these businesses have survived the challenging task of remaining operational for over five years. Individuals who had been in business for more than 6 years were 65% more likely to own multiple businesses than those with less experience.

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As per the report, the majority (70.1%) of entrepreneurs in the informal sector have taken out loans to support their businesses, with many using the funds for restocking, growth, and sustaining operations during challenging periods. Family and friends are a more popular source of credit for these businesses compared to traditional banks and formal Loan providers. Accessing credit from traditional banks is the least preferred option for businesses operating in the informal economy. The majority of individuals in the informal Economy are under the age of 34, with the largest proportion (43%) falling within the 25-34 age range.

More than half businesses set up due to unemployment.

Having such a youthful population in the economy presents a vast potential for driving socio-economic change through creativity, entrepreneurship, and generating employment and prosperity. The informal economy serves as a key platform for empowering women economically across Africa, despite facing obstacles related to fairness. It was reported that women make up 37.1% of those working in the informal sector in Nigeria. More than half (51.6%) of the informal sector business owners in Nigeria reportedly began their businesses due to being unemployed. Men primarily started their own business due to unemployment, whereas women were more motivated by inadequate income from formal jobs.

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Whereas just 2.8% of informal economy businesses were established due to passion. A vast majority of 92.4% of businesses in the informal sector prioritize saving money. These savings often serve as a financial safety net for essential obligations that cannot be covered by immediate profits. The majority of these businesses choose to save their funds through a cooperative, with only 1 in 10 opting for traditional banks. Businesses often opt to save through cooperative and group contributions, which they find more familiarity and relatable compared to other saving methods.

Related Article: Building Your Small Business in Nigeria

Businesses operating in the informal economy are commonly associated with Tax avoidance, but they actually contribute through market levies instead. The majority of these businesses reported having paid market levies at some point during their operation. Minister of industry, trade and investment, Dr. Doris Uzoka-Anite, who launched the report in Abuja, emphasized the importance of small businesses in the informal sector and how they significantly impact the nation’s GDP. The minister believed that by analyzing the report, the government could gain insight into the needs of the informal sector and develop strategies to promote growth and inclusivity throughout the country.

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