Formalising Nigeria’s Informal Economy

EDGY OPTIMIST BY Obinna Chima

Tade Wasiu is a fashion designer with an uncommon flair for fine fabrics and exceptional craftSmanship. He has carved out a niche for himself in African fashion and is renowned for making some of the finest dashikis, Kaftans, Babanrigas, and female Buba designs. Wasiu’s success story began in Ilogbo, a ghetto in the Ojo area of Lagos, before he moved to Surulere, Lagos.

“The tailoring job kept me away from the streets and helped me to engage in something productive,” he said in a recent interview.

Still, Wasiu is worried that he has not been able to access any form of support from the government. Having spent more than four years in the business, he is faced with a litany of challenges common with small businesses in the country.

But his love for his craft has kept him going.  “Funding is a major issue in the business. It prevents us from buying the necessary tools to expand. Power is also a challenge. We pay so much for electricity, ” he said.

Away from Wasiu, along the Lagos-Badagry Expressway, the amount of informal business activity underscores the resilience of Nigeria’s vast informal economy despite mounting economic challenges.

In Wasiu’s story, as well as the experience of so many artisans and informal business operators scattered all over the country lays the opportunities in the country’s untapped economic potential.

With rising level of unemployment in the formal sector, the number of those seeking for opportunities in the informal sector has continued to swell.

Nigeria’s population presently exceeds 200 million, with over 60 percent of the citizens under the age of 30, making it one of the most youthful countries in the world.

The informal sector, which is also referred to as ‘grey economy’ is part of the economy that is neither taxed, nor monitored by any form of government. Unlike the formal economy, many activities in the informal economy are difficult to measure and are often underreported, meaning they may not be fully captured in a country’s Gross Domestic Product (GDP).

A Moniepoint Informal Economy Report 2025 paints a picture of a largely youthful, resilient but financially vulnerable sector that continues to provide employment and sustain millions of livelihoods despite mounting economic pressures. The study revealed that profitability remains weak across the sector. About 38 per cent of informal businesses earn less than N10,000 in daily profit, while 44 per cent generate less than N20,000 in daily revenue.

The report found that 42 per cent of businesses have savings that would last less than one month if their businesses stopped generating income, while 69 per cent save less than N50,000 monthly, underscoring the limited financial cushion available to most operators.

Despite this, 74 per cent said they save regularly, mainly to finance business expansion, purchase inventory and prepare for emergencies, with cooperative societies, digital banks and commercial banks emerging as the preferred savings channels.

On formalisation, the report observed that many informal businesses remain outside the formal economy not because they deliberately seek to evade regulation, but because operating informally has become the default. For many micro-enterprises, registration is simply not considered a prrising, as owners are preoccupied with earning daily income and meeting immediate household needs.

Therefore, deliberate efforts are needed to encourage more informal businesses to transition into the formal economy, where they can contribute more effectively to economic growth, tax revenues and job creation.

The informal sector represents an important part of the economy, and particularly of the labour market, in many countries, especially developing countries, and plays a major role in employment creation, production and income generation.

Formalisation should not be approached as a regulatory obligation but as an economic opportunity that delivers tangible value to informal business operators. Rather than relying on punitive compliance measures, policymakers should create incentives that make formalisation attractive, affordable and rewarding.

A good starting point would be to expand access to finance by encouraging cash flow-based lending instead of the traditional collateral-heavy models that exclude most informal operators. More financial institutions should be incentivised to design products that reflect the realities of micro and small enterprises, particularly those owned by women, who continue to face greater obstacles in accessing credit, productive assets and digital financial services. I must acknowledge that some fintech companies have taken the lead in this area.

Equally important is the need to simplify the formalisation process itself. Business registration should be inexpensive, largely digital and completed through one-stop platforms linked to existing identity systems such as the National Identification Number (NIN) and Bank Verification Number (BVN).

Structural barriers that keep millions of entrepreneurs trapped in informality must be removed. When the costs of formalisation are reduced and its benefits become visible, more businesses would be willing to open their books for scrutiny and to pay taxes to governments, instead of evading taxes.

Digital inclusion must also become a central pillar of Nigeria’s informal sector strategy. Regulators should work more closely with fintech companies to develop simple, affordable digital payment solutions that encourage informal businesses to transition into the formal financial system.

At the same time, expanding digital literacy programmes and integrating social protection initiatives with digital identity platforms, mobile wallets, pensions and insurance schemes would significantly improve the financial resilience of millions of small businesses.

Micro-enterprises should also benefit from graduated regulatory requirements, simplified documentation and phased tax obligations that reflect their scale of operation. Incentives such as subsidised registration fees, temporary tax holidays and government-backed credit guarantees should reward businesses that choose to formalise.

Beyond financial inclusion, Nigeria must deliberately transform informal enterprises into sustainable, job-creating businesses.

Ultimately, Nigeria’s informal economy should be viewed as a strategic engine for inclusive growth, employment generation and national productivity. The country’s long-term economic transformation will depend on how successfully government creates an environment where formalisation becomes the natural and profitable choice for millions of entrepreneurs.