Lagos, Nigeria – A recent survey has highlighted that friends and family are the primary funding sources for many Nigerian entrepreneurs operating in the informal economy. According to the Informal Economy 2024 Survey conducted by Moniepoint, approximately 70% of Nigerian business owners who lack access to formal loans rely on financial support from close personal connections, such as family members and friends, to keep their businesses afloat.
The report reveals that only 15% of entrepreneurs in this sector utilize online loan platforms, while just 12% turn to traditional banks for financing. This reliance on informal sources of credit underscores the significant barriers that many small businesses in Nigeria face when it comes to accessing formal credit lines.
Credit Challenges for Informal Economy Entrepreneurs
For many small business owners in Nigeria, loans are crucial for activities such as restocking inventory, expanding operations, or navigating difficult economic conditions. However, the report also notes a stark contrast in how these businesses treat their own customers. While entrepreneurs are highly dependent on loans to sustain their operations, they are often hesitant to extend similar credit facilities like Buy Now, Pay Later (BNPL) offerings to their customers, largely due to previous bad experiences with defaults or late payments.
This highlights the financial vulnerability of businesses operating in the informal sector, where access to affordable credit is limited and business risks are compounded by a lack of formal financial infrastructure.
The Global Context: Unmet Financing Needs for MSMEs
The International Finance Corporation (IFC) reports that 65 million businesses, or about 40% of micro, small, and medium enterprises (MSMEs) in developing countries, face an unmet financing need of $5.2 trillion annually. In Nigeria, this situation is compounded by high production costs, regulatory complexities, and limited access to financing options, which are significant barriers to growth for many MSMEs.
Despite these challenges, MSMEs continue to play a vital role in Nigeria’s economy, creating jobs, driving innovation, and fostering rural industrialization. However, access to credit remains one of the most pressing issues for these businesses, especially in the informal sector, where financing options are scarce and often come with unfavorable terms.
Government Efforts to Support MSMEs
In light of these challenges, Doris Uzoka-Anite, former Minister of Industry, Trade and Investment, emphasized the importance of MSMEs as the backbone of Nigeria’s economy. “Micro, Small, and Medium Enterprises (MSMEs) are the lifeblood of Nigeria’s economy, driving job creation, rural industrialization, and innovation,” she stated, underscoring the sector’s contribution to national development.
Uzoka-Anite also acknowledged the Nigerian government’s efforts to support MSME growth under the leadership of President Bola Ahmed Tinubu. The Federal Ministry of Industry, Trade, and Investment (FMITI) has prioritized improving the ease of doing business, fostering policy development, and increasing access to finance. These efforts aim to address some of the long-standing challenges faced by MSMEs, particularly in accessing affordable credit and entering global markets.
The Path Forward for MSME Financing
The Moniepoint survey highlights the need for more inclusive financial solutions for Nigerian businesses, particularly those in the informal sector, where access to traditional financing remains limited. While family and friends currently serve as the main lifeline for many entrepreneurs, expanding access to affordable credit and alternative financing solutions is critical for supporting the growth and sustainability of MSMEs in Nigeria.
The Nigerian government’s continued focus on policy reforms and facilitating access to finance will be key to addressing these challenges and empowering small businesses to thrive in an increasingly competitive global market.