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Employees and civil servants: Major lenders to the real sector

The real sector of the economy is very important as it involves the production of goods and services which are sold in exchange for income. It comprises the agricultural, mining, manufacturing, general retail services, building and construction, commerce and services. Index Mundi describes Services as covering “government activities, communications, transportation, finance and all other private economic activities that do not produce material goods. Therefore, the real sector is a combination of the sectors that produce material and non-material goods.

Considering the sectors that make up the real sector, there is no doubting its importance to Gross Domestic Product (GDP) which is a measure of economic growth. According to Investopedia, “GDP is the monetary value of all finished goods and services made within a country during a specific period”. In fact, looking at the contribution of services (a subset of the real sector) to GDP, it is clear that for Nigeria to grow to the level most of us believe she can reach, the real sector has to drive it. Statista, a reputable online portal for Statistics, reports that the contribution of services to the GDP of Nigeria was 59.7% in 2016, 55.8% in 2017 and 52.01% in 2018.

The Central Bank of Nigeria and other regulatory agencies have been trying to stimulate growth in the real sector by implementing policies which are favourable to her growth. For instance, the Loan-to-Deposit Ratio policy of the CBN seeks to address the financial difficulties companies/firms within the sector are experiencing by encouraging banks to lend to them. The new finance bill that took effect on February 1, 2020 also seeks to boost the real sector by excluding companies with less than N25 million turnover from Company Income Tax (CIT) while companies whose turnover is between N25 million and N100 million get to pay a reduced CIT of 20% which is significantly lower than the 30% that was applicable to all companies previously.

While the CBN, the Ministry of Finance and other government agencies are seeking ways to encourage growth in the real sector, there are a set of people who do not need any extra motivation to lend to the real sector and these are employees of private organizations and Civil Servants. Civil servants include employees of the Federal Civil Service, State Civil Service, Local Government, as well as other federal and state agencies including parastatals and corporations. These people without doubt constitute a major proportion of the informal lenders to the real sector and their impact is both great and significant.

Employees and Civil Servants first of all invest in human capital for the country by spending a substantial part of their income on providing quality education for their children to acquire skills essential for breeding new ideas that can bring about both economic growth in the short run and economic development in the long run. They are also the ones who usually lend to small and medium scale enterprises directly or sometimes indirectly through Cooperative societies.

Most new businesses find it difficult to obtain loans from financial institutions majorly because financial firms prefer to take a risk on established businesses with a stable cash flow rather than on a new business with a low probability of success. Even in developed countries, majority of start-ups fail and even though there is no data on the failure rate of start-ups in Nigeria and Africa as a whole, it is likely that this will be worse than that of the developed economies due to the more difficult terrain and harsh business climate in most part of the continent. In spite of this, employees and civil servants are the ones who normally lend to individuals the funds they need to start up a business because these people are either their friends, family members or some have even been referred to them by other friends. They lend to people based on trust and usually without collateral as they seek to see friends and family succeed. Considering, the high risk they take on businesses, they take the most hit of any failed business.

As employees and civil servants have a more direct relationship with the people they lend to, they are better able to assess the creditworthiness of these people which helps to inform their decision. Sometimes, they just lend to offer support to close friends and family members with almost no expectation of repayment. These businesses they support are the major drivers of the real sector.

It is these employees and civil servants who also form cooperative societies to support one another by pooling funds together to help one another when there is a need for this. These funds are collected by participants in the societies at different times to fund individual projects and businesses which later become big enough to source for funds from venture capitalists and other financial institutions as they begin to scale up.

When employees and especially civil servants are owed salaries, it has a very negative effect on the real sector and the economy at large as funds become difficult to assess by entrepreneurs and businesses as this is their first and probably most reliable source of funding. It is important for private employers and governments to recognize the importance of employees and civil servants to the overall economy and treat them better as their effect transcends their primary place of work or assignment to include their contribution to the real sector through lending to businesses and individual projects.


Philip Oguntoye

Twitter: @oguntoyephilip


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