Only 1.3% of informal businesses in Nigeria make above ₦2.5 million in monthly profit. This data is according to Moniepoint’s 2024 Informal Economy Report. According to the report, most informal businesses in Nigeria can only boast a monthly profit of ₦250,000. This is despite many of them generating monthly revenues of up to ₦1 million. The disparity between revenue and profit highlights the high costs and inefficiencies that plague the informal sector.
The Moniepoint report surveyed two million of Nigeria’s 40 million informal businesses, revealing critical insights into how these enterprises operate. It showed that retail and general trade are the most popular sectors, accounting for 24% of the businesses surveyed. The food and drinks sector follows closely, representing 13.4% of the total. Other common sectors include fashion, beauty, IT/electronics, agriculture, and education. While many informal businesses report monthly revenues of ₦1 million, the high operational costs and inefficiencies within the sector reduce their profitability. This disparity between revenue and profit highlights systemic issues such as poor infrastructure, high transaction costs, and limited access to affordable finance.
Moniepoint’s report paints a stark picture of the challenges faced by the majority of Nigeria’s informal sector. While the informal economy is a significant contributor to Nigeria’s GDP, accounting for 34%, the financial reality for most of these businesses is far from rosy. This is not just concerning for the individual entrepreneurs but for the entire economy.
Despite their informality, these businesses are crucial to Nigeria’s economy. They make up over 80% of all enterprises in the country. The informal sector is not just a safety net for the unemployed but also a vital engine of economic activity. According to the National Bureau of Statistics (NBS), the informal sector accounted for 57.7% of Nigeria’s employment in 2020. This translates to millions of Nigerians relying on informal businesses for their livelihoods. Moreover, these businesses contribute significantly to the economy by providing essential goods and services that may be unavailable or unaffordable in the formal sector. Informal enterprises, therefore, play a crucial role in ensuring economic inclusivity and resilience, particularly in underserved areas.
Low profitability means that millions of Nigerians face economic insecurity. As of 2022, Nigeria’s poverty rate stood at 40% of the population, equating to about 83 million people living below the poverty line. The World Bank reports that the lowest 40% of Nigeria’s population shares less than 20% of the country’s income. This affects their ability to invest in education, healthcare, and other essential services. According to the National Bureau of Statistics (NBS), only 7% of household spending is directed towards education, while healthcare spending is even lower at 4%. The informal sector’s low profitability also limits its contribution to economic growth. Informal businesses often fall outside the tax net, resulting in lost revenue for the government. The NBS estimates that the informal sector officially contributes less than 10% to the overall tax revenue. Higher profits would enable more significant reinvestment into the economy, driving innovation and expansion.
Yet, the challenges faced by Nigeria’s informal sector are multifaceted. Informal businesses face higher operating costs due to poor infrastructure, unreliable electricity, and high transportation costs. The Nigerian Economic Summit Group (NESG) estimates that these factors can increase costs by up to 40%. According to the World Bank, only 55% of roads are paved, and power outages are frequent, averaging 32.8 outages per month. Also, only 5% of informal businesses have access to formal financial services. The remaining rely on informal lending practices, which often come with high interest rates. High operating costs, limited access to finance, poor infrastructure, and regulatory hurdles are just some of the issues that prevent these businesses from thriving. The World Bank’s Doing Business report shows Nigeria ranks 131 out of 190 countries for ease of doing business. The lack of formal recognition and support exacerbates their struggles, making it difficult for them to scale and increase their profitability.
Improving the fortunes of Nigeria’s informal businesses requires a holistic approach. For one, investing in better infrastructure, such as reliable electricity and efficient transport systems, can reduce operational costs for informal businesses. Expanding access to affordable financing options can also help businesses invest in growth and innovation. Moreover, leveraging comprehensive data, like the 2024 Informal Economy Report, can help the government and stakeholders identify and address the most pressing challenges facing informal businesses.
According to the Minister for Industry, Trade, and Investment, Doris Uzoka-Anite, the government is implementing measures to support businesses. These measures include a ₦200 million intervention program for MSMEs and the “Grow Nigeria” initiative aimed at accelerating economic growth for SMEs in key sectors. However, these initiatives have yet to yield the desired results, as Nigeria has fallen behind South Africa, Egypt, and Algeria, ranking as Africa’s fourth-largest economy. The fact that only 1.3% of Nigeria’s informal businesses make over ₦2.5 million in monthly profit underscores the need for significant support and reform. By addressing the systemic issues that limit the profitability of these enterprises, Nigeria can unlock substantial economic growth and improve the livelihoods of millions of its citizens.