Nigeria: Report Reveals Only 11% of Informal Sector Businesses Use Conventional Banks for Savings, 39.5% Use Digital Banks

As the Central Bank of Nigeria (CBN) intensifies its efforts towards financial inclusion, a new report has highlighted that only 11% of businesses in Nigeria’s informal sector use conventional banks for savings.

The report also revealed that 39.5% of these businesses prefer digital banks, 47.5% save through contributions and cooperatives, while 2.3% employ other savings mechanisms.

The “Informal Economy Report 2024,” produced by Moniepoint Inc. in collaboration with the Federal Ministry of Industry, Trade and Investment, and the Small and Medium Enterprise Development Agency of Nigeria (SMEDAN), shows that the informal market significantly contributes to over half of Nigeria’s Gross Domestic Product (GDP). The report states that cooperatives and group contributions are the preferred savings mechanisms for many informal businesses, as they feel “closer to home.”

“Digital banks are a close second at 39.5%, while traditional banks are the least used at 11%. This preference could be due to lower entry barriers and potentially higher returns,” the report noted.

The report found that about 1.3% of businesses in Nigeria’s informal economy earn over N2.5 million monthly. It also noted that women own 37.1% of businesses in this sector, emphasizing the crucial role the informal economy plays in women’s economic empowerment in Nigeria and across Africa.

The data shows that nearly 58% of Nigeria’s informal workforce is below 34 years old, with the largest group (43%) aged between 25 and 34, followed by those aged 35 to 44, who make up 28.9% of the sector. This youthful demographic presents a significant opportunity for socio-economic transformation through innovation, entrepreneurship, job creation, and wealth generation.

Retail and general trade, along with food and drinks, dominate the informal economy, accounting for 53.6% of transaction value. Businesses in this category typically include neighborhood shops, restaurants, and supermarkets.

The report further highlights that unemployment is the primary reason for starting an informal business. While unemployment is the leading motivator for men, insufficient income from formal employment is a higher motivator for women.

Geographically, the South-West region (including Lagos) has the largest volume of informal businesses at 30.8%, followed by the South-South (19.9%), North-Central (16.8%), and South-East (13.2%). The North-West accounts for 12.8%, while the North-East has the smallest share at 6.6%.

By industry, the informal economy includes sectors such as oil and gas (2.7%), healthcare (2.8%), art and creatives (2.9%), casual use (3.0%), professional services (4.0%), and education (4.1%). Other sectors include construction (4.3%), agriculture (6.2%), food and drinks (13.4%), IT/electronics (6.1%), fashion (8.1%), beauty and personal care (6.9%), and others (11%).

In terms of value, oil and gas contribute 9.6%, healthcare 2.2%, construction 5.6%, education 1.6%, and IT/electronics 6.9%. Agriculture stands at 4.6%, beauty and personal care 3.9%, retail and general trade 38.4%, food and drinks 15.2%, and others 8.9%.

The report states that nearly half of businesses in the informal sector access credit from family and friends. Traditional banks provide 12.2% of their funding, loan apps/platforms 15.1%, family/friends 70.7%, and other sources 20%.

Although informal businesses are often seen as not paying taxes, the reality is that they do, in the form of market levies. The report notes that almost 90% of these businesses have paid market levies, with 65.1% paying regularly.

The introduction of the CBN’s cashless policy in early 2023 led to a significant increase in the adoption of digital payments across various industries. However, cash remains the preferred means of payment for informal businesses due to its safety and ease of use.

Card payments are the most common method (80.2%) for receiving in-person payments, followed by cash (53.8%) and transfers (23.1%). Despite a preference for cash, digital payments account for 46.2% of transactions, split between card payments and transfers.

The report also discusses the challenges faced by the informal sector, such as limited access to banking systems, which restricts their ability to conduct larger transactions and benefit from various support programs and funding opportunities. Lack of financial history further hinders their access to credit from formal systems.

The report concludes by emphasizing the importance of the informal sector to Nigeria’s economy and the need for continued efforts to integrate these businesses into the formal financial system.