Nigeria is starting to pay attention to its informal economy

In a bid to reduce poverty Nigeria has adopted several policies in the past; some have been successful, but the overall idea has not been sustainable as poverty at 33.1 percent remains a challenge in the country. Re-strategizing its effort, the West African country has deployed a social intervention scheme, TradeMoni which would capture the informal economy, a sector that accounts for 65 percent of Nigeria’s GDP, according to the International Monetary Fund (IMF).

Nigeria through its Bank of Industry (BoI) and Government Enterprise and Empowerment Programme (GEEP) launched TraderMoni as an empowerment programme to enable petty traders to boost their businesses. The scheme grants these traders access to loans starting from N10,000 ($27.7).

About 86.9 million Nigerians (nearly 50 percent) live in poverty and this year, the West African country overtook India as the country with the largest number of people living in extreme poverty (living on less than $1.90 a day).

The United Nations Development Programme (UNDP) recommends giving cash through bank transfer to the poor as an acceptable and valuable method of reducing poverty, despite the fear that the money could be wasted on non-essential goods or illegal activities.

According to the Nigerian government, the TraderMoni which aims at empowering 2 million Nigerians, would further enlarge the financial inclusion agenda for all Nigerians regardless of social class and economic status. “TraderMoni scheme is targeted at petty traders, market women, artisans and small-scale business enterprises to cater for ultra-micro enterprises. The policy of the federal government is to support businesses, not just big business but particularly small, medium-sized businesses and micro businesses. The whole idea is that we want to ensure that we give whatever support to people to alleviate their businesses,” the country’s Vice President Yemi Osinbajo stated.

Expected to run for 4 months (September-December), each state would have a minimum of 30,000 beneficiaries. Although highly populated states like Lagos and Kano will have more beneficiaries and more money allocated.

Would TraderMoni Boost Financial Inclusion?

Financial inclusion is the delivery of financial services at an affordable cost to low-income households and access to finance has been a major constraint to doing business, especially for small and medium-sized enterprises (SMEs). Most of the people working in the informal economy lack access to finance and are invariably poor. Meanwhile, economies with high financial inclusion have significantly lower poverty rates.

Worldwide, 2 billion adults are estimated not to have any form of financial services, 60 million of which are in Nigeria. The World Bank Global Findex 2017 Database reported that more than 60 million Nigerians are without bank accounts and financial inclusion has been proven to be an important element in the development of an economy.

The report noted that men own accounts more than women (40 percent) and the majority of people in the informal sector are women, 85 percent of whom are either street vendors or home-based workers. Unregistered household enterprises account for 65 percent of Nigeria’s GDP, says the International Monetary Fund (IMF). The sector is also responsible for over 90 percent of new jobs are in the informal economy

In 2015, Nigeria’s Informal Sector was worth N38.7 trillion. The IMF argues that while the informal economy provides much-needed jobs to a growing working-age population, it also constrains growth. Hence, the need for governments to adopt a balanced approach in the design of policies to grow to the formal sector.

“This means focusing on ways to increase the productivity of the informal sector while working to support the expansion of formal businesses. Policies that improve access to finance, make it easier for small firms to enter the market, and increase access to electricity could go a long way in formalizing the informal sector,” the IMF noted.

Under the TraderMoni scheme, traders need no collateral to collect the N10,000 loan. The repayment plan is for six months of which beneficiaries can qualify for a bigger loan thereafter; beneficiaries can get access to a higher facility ranging from N15,000 to N50,000 when they repay N10,000 within the stipulated time period.

With the Trader Moni scheme that uses bank transfers to get the money and also requires traders to repay the loans in the banks, Nigeria has also found a subtle way of increasing financial inclusion and widening the tax net.

Do handouts work?

A study by the Overseas Development Institute (ODI) shows that there is a relationship between giving cash to people in the informal sector and school attendance, as well as an increase in the use of health facilities.

An experiment similar to the TraderMoni was carried out in Uganda and it resulted in a 38 percent increase in wages, an increase in work hours and business assets. However, in the case of TraderMoni, the money handed to traders is expected to boost businesses, promote financial inclusion and generally contribute to growing the informal economy, but it is a long way from alleviating poverty, given the lack of sustainability of the programme.

TraderMoni can only help to reduce poverty and income inequality when overall economic conditions improve. Otherwise, subsequent governments in Nigeria will only churn out similar schemes with different names.