The Informal Sector

Posted by on 12/29/2003 6:14:06 PM
Post Comment The Informal Sector Nigeria

I A. H. Ekpo and 0. J. Umoh I


The informal sector in Nigeria refers to eco nomic activities in all sectors of the economy that are operated outside the purview of gov ernment regulation. This sector may be invisible, irregular, parallel, non-structured, backyard, under ground, subterranean, unobserved or residual (Magbagbeola, 1996). Informal economic activities in Nigeria encompass a wide range of small-scale, largely self-employment activities. Most of them are traditional occupations and methods of production. Others include such financial and economic endeavours of subsistence nature as: retail trade, transport, restaurant, repair services, financial inter-mediation and household or other personal services (Adamu, 1996). Activities in the informal sector in Nigeria are difficult to measure; they are highly dynamic and contribute substantially to the general growth of the economy and personal or household income.


The informal sector in Nigeria may be cate gorised into the following sub-sectors:- (i) Produc tive; (ii) Service; and (iii) Financial

(i) The Informal Productive Sub-sector: This sub-sector encompasses all eco nomic activities involving the production of tangible goods. They include agricul tural production, mining and quarrying (excluding petroleum), small-scale man ufacturing, building and construction. Specifically, they manifest in food pro duction, woodwork, furniture making, garment making, welding and iron works, among others.

(ii) Informal Service Sub-sector: This sub-sector includes repairs and mainte nance, informal education services, health services, counselling services as well as labour for menial work. Repairs and maintenance services include tai loring, vehicle repairs and maintenance, tinkering, carpentry and servicing of var ious household and commercial tools. Informal health services, especially in the rural areas, include traditional birth attendants, herbalists and other tradi tional medical practitioners. There are also traditional spiritualists who offer counselling services. These services are rendered for fees paid to those who render them.

(iii) Informal Financial Sub-sector: The activities of this sub-sector are mostly underground, unofficial, irregular, infor mal, shadowy, and parallel. The most predominant type of informal finance in Nigeria is the Esusu. Among the Yoruba, it is called either Esusu or Ajo. Among the lgbo, it is called lsusu or Utu while the Edo call it Osusu. The Hausa call it Adashi', the Nupe Dashi, the Ibibio Etibe, while the Kalahari call it Oku (Okorie and Miller, 1976). Some Esusu groups operate with written laws while others operate with unwritten laws but on oath of allegiance and mutual trust. The general practice is that esusu associations contribute a fixed amount periodically and give all or part of the accumulated funds to one or more member(s) in rotation until all members have benefited from the pool.

In Nigeria, there are also informal money lenders, saving and credit associations and credit unions. Money lenders are believed to be highly exploitative with high rates of interest through which they extract economic surplus provided by peasant labour, capital and land. The saving and credit associations as well as credit unions operate in more formalised ways than the esusu associa tions. They may or may not be registered under any legislation. However, savings and credit co operatives must be registered under the Co-opera tive Association Act. Credit societies often come together to form larger units called credit unions, when they modify their operations to include sub scription of share capital, deposit-taking and lend ing. Credit Unions are the precursors of the People's Bank.


The Nigerian government at various levels, has adopted policies aimed at enhancing the per formance of the informal sector. For instance, policies have variously been designed to promote small and medium scale enterprises. Some of the policies include the following:

(a) Entrepreneurship Development Policy: Over the years, the Federal and State gov ernments have played significant roles in entrepreneurship development. The Federal Government in the late 1980s initiated the Entrepreneurship Develop ment Programme (EDP) run by the National Directorate of Employment (NDE). Under this policy, the Federal Ministry of Labour sought to address the gra duate unemployment problem through the NDE programme which provided participants with the opportunity to acquire entrepreneurial skills and secure loan capital to enable them establish and operate their own small scale enterprises. The Federal Ministry of Industry has been in the forefront of efforts to pro mote the development and acquisition of entrepreneurial skills as part of its efforts to support Small and Medium Enterprises (SMEs). To this end, the Ministry established Industrial Develop ment Centres in various parts of the country with the mandate to:

(i) promote small-scale enterprises through the provision of exten sion services;

(ii) train entrepreneurs and staff;

(iii) assist with product design;

(iv) process loan applications; and

(v) render, free of charge, technical and managerial services includ ing advice on quality control, product improvement, etc.

The State Governments have also been involved in providing support to SMEs. Many states have Small Scale Credit Schemes which provide SMEs with financial and technical support. In the late 1980s, the Federal Ministry of Industry supported efforts by the states to build functional industrial estates for SMEs by way of partial reimbursement of money actually spent on the provision of industrial estates for SMEs. The "Work for Yourself Programme" (WFYP), a scheme introduced by the Federal Ministry of Industry and assisted by the International Labour Organisation (ILO) and the British Council, which aims to develop entrepreneurial skills in the sector, is one of such schemes being implemented with international assistance.

(b) International Financial Assistance: International organisations such as African Development Bank (ADB), World Bank and the United Nations Development Programme (UNDP) have also supported efforts to aid the informal sector. In other cases, the Federal or State Governments, as the case may be, co-finance small-scale businesses which benefit from external financial assistance. Loans under the World Bank - Nigeria Small and Medium-Scale Enterprises development programme provide financial and technical assis tance to these groups of entrepreneurs. For example, the Technology Incubator Scheme was promoted and executed by the Lagos State Ministry of Commerce and Industry, with UNIDO's financial and technical assistance and supported by the organised private sector in Lagos State and the Federal Government. The scheme was designed to promote the development of technology based SMEs in Nigeria. This objective could not be realised essentially because of the man agement style of the Abacha regime. It is most desirable that the scheme be revived.

(c) Family Economic Advancement Programme: The Family Economic Advancement Programme (FEAP) was initiated in 1997 as a catalyst to stimu late and encourage the growth of the informal sector. The programme is intended to harness the potentials in the local areas to establish viable enterpris es and projects that would ensure eco nomic empowerment of the rural and urban poor. The programme was aimed at capacity building and providing credit support especially to its target group of the rural and urban poor. In order to ensure effi cient management of FEAP's credit scheme, People's Bank and some com mercial banks were chosen to partici pate in the scheme. To encourage the participation of the banks in the scheme, Government granted them certain fiscal incentives. A tax exemption on interest income received on loans granted under the scheme was one of such incentives. PEAP is one of the programmes which the Obasanjo Administration intends to abolish as part of its restructuring of the institutional framework for the support of SMEs.

(d) Monetary Policies: The monetary authorities prior to the introduction of the Structureal Adjustment Programme, directly managed and determined inter est rates and sectoral allocation of cred it by the banking sector. This generally, at least in theory, was favourable to SMEs since the interest rates were rela tively low and stable. However, with the introduction of the Structural Adjust ment Programme and the deregulation of the banking sector, interest rates and sectoral allocation of loans have become increasingly market deter mined. SMEs, therefore, no longer ben efit from preferential monetary policies. The Federal Government, in response to this, has continued to provide support for the informal sector by programmes designed to enhance the access of SMEs to credit and the availability of credit. Thus the People's Bank and FEAP were established essentially to service the credit needs of the informal sector. In order to mobilise savings in local communities to finance the infor mal sector, the Community Bank scheme was also introduced in the late 1980s.

The Role of the Informal Sector in Nigeria's Economic Growth:The informal sector plays the following important roles in the growth and develop ment of the Nigerian economy:

(i) Provides productive outlets for a large number of people who prefer or have to be self employed. This sector therefore contributes to the national economy in terms of output and employment;

(ii) Provides competition in the economy;

(iii) Provides outlets for experienced spe cialist manpower from the medium and large scale enterprises who wish to be self-employed, using minimal capital;

(iv) Reduces the level of unemployment, though many such employed could be underemployed;

(v) Stimulates and enhances innovation and adaptation; and,

(vi) Helps in the mobilisation of capital and human resources which would other wise have been laid waste and idle thereby increasing the utilisation of virgin reuseable materials.


The contribution of the informal sector to growth the of the Nigerian economy is quite significant.The informal sector is better placed to absorb unutilised resources which the public sector and the organised private sector are not willing or able to use. Moreover, through linkages with large-scale enterprises, informal sector enterprises have the production base of the economy.

The informal sector contributes significantly to national economy in terms of output and employment. The government must encourage and empower the informal sector through the provision of conducive policy and physical conditions. The informal sector in Nigeria has no tendency to wither; it must be sustained for optimum contribution to the growth of the economy.