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Improving credit access for Nigeria’s informal sector using data, collaboration

About 60 percent of the world’s employed population operate within the informal economy, with Africa alone having 85.8 percent of its employment being informal, according to an International Labour Organization 2018 report. What this means is that eight out of 10 employed Africans are employed in businesses that are usually unincorporated, owned and run by households and generally don’t comply with a number of legal obligations set by the government.

In Nigeria, these businesses make up about 65 percent of the nation’s GDP and in some very good years contributed as much as 90 percent of all the new jobs created for those years. These are jobs that cut across managing farming operations for small-scale farms, offering plumbing services, operating open market stalls, or even holding a constantly changing role within a ‘danfo’ business. But in years like 2020, where the coronavirus pandemic severely ravaged economies and livelihoods, these businesses were hit the most, leading to a spike in poverty rates and huge unemployment.

One reason that can easily be pointed to in order to explain why these sorts of businesses were easily affected is their lack of structure which makes it hard for them to access credit to keep them afloat. With a dependence on daily incomes, the lockdowns proved destructive as weeks and months of revenue were completely lost, leaving their owners to rely on little savings held by trusted parties within their communities and huge-interest loans, which plunged some into debts.

Tomi Adejana, founder of Bankly, a secure digital savings platform for the informal economy, who joined other professionals working closely with the informal sector for a media parley on ‘Securing the Informal Economy’, described this current method used by most business owners in the informal sector as limiting, given the lack of credit history it helps them build. She highlighted the importance data plays in helping to show a pattern for people in the informal sector who might want to use that historic insight as proof of their worthiness for more credit.

Her point explains why financial inclusion has remained a major topic in Nigeria for more than a decade, as the current practices available to this large productive sector of the economy almost certainly ensures that they can’t escape the cycle of poverty and start to create sustainable wealth.

While education is a core factor in financial exclusion, the lack of knowledge about credit facilities and how to access them prevents people within the informal sector from having that as an option, the lack of data for most of them remains a huge setback. In 2016, the Federal Government of Nigeria launched the Government Enterprise and Empowerment Programme (GEEP) to begin to tackle this lack of data by supporting formerly undocumented farmers and traders with micro-credit for their businesses. This move proved instrumental during the peak of the pandemic, as Toyin Adeniji, executive director, micro enterprises at the Bank of Industry, a co-panellist at the media parley, showed how it them helped determine where necessary COVID interventions should go to and which group of people were most in need using over 40 data points collected over the period the programme has run.

Given this experience and others shared by Adeniji, such as interest reductions for registered members due to availability of data, and easier onboarding through digital platforms, a clear case becomes visible for how much impact data availability can make for people within the informal sector, their households and businesses.

As Onyeka Akpadia, founder of Rendra Foundation, a for-purpose organisation that promotes inclusive finance for low-income women, describes it, there is a huge household dependency on the incomes of people, many of whom are women, running most of Nigeria’s informal businesses. This means that every support they receive directly and indirectly affects the quality of life of families and wider communities. Her contribution brought to fore the need to work with more people who understand how the informal sector functions, to see that resources get to the right people and impact the right beneficiaries.

To further explain this point, Godwin Ehigiamusoe, former managing director of LAPO Microfinance Bank, shared a broader view of the benefits that could be available to people within the informal sector if health and education interventions worked with grassroot organizations to use their data in allocating micro-insurance to people in the informal sector to help them reduce heavy expenses made on those two line items. This, he said, would gradually move the process away from an intervention mode and make it institutional where all parties work seamlessly to create a pathway for everyone to benefit from such opportunities and escape poverty.

As it stands, different processes in Nigeria such as the current drive for citizen identification, private businesses in the financial space deploying agent networks to even the most remote areas to move people from unbanked to banked and help them save their money in more secure forms, as well as other financial illiteracy programmes all point to a coming improvement in how the informal sector of the economy will be catered for. What this will mean for Nigeria is an increase in productivity and, as Olawale Ajai of the Lagos Business School highlighted, a shift in focus from people just looking for handouts to more sustainable financing for people eager to create real value.

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