Bridging the Divide: Uniting Nigeria’s Formal and Informal Sectors for Prosperity By Dovish Okojie

Nigeria faces a stark economic divide between its formal and informal sectors. The formal sector encompasses registered businesses, government institutions, and large corporations, while the informal sector comprises unregistered businesses, street vendors, small-scale artisans, and daily wage laborers. This duality poses profound implications for Nigeria’s economic growth, employment generation, and poverty alleviation. Bridging the gap between these two sectors is a crucial challenge and an immense opportunity. Let’s explore ways and practical steps to bridge the gap between both sectors.

Understanding the Divide

Before we explore the ways and steps to bridge the gap between the formal and informal sectors, it is essential to understand the factors that contribute to this divide. Several key factors can be identified.

Regulatory Barriers: The formal sector in Nigeria is burdened with complex regulations, bureaucratic hurdles, and high compliance costs. Many informal businesses choose to operate outside the formal system to avoid these challenges.

Access to Finance: Informal sector businesses often lack access to formal financial institutions, making it difficult for them to obtain loans or access credit, hindering their growth potential.

Education and Skills: There is a significant disparity in education and skill levels between the formal and informal sectors. Many informal sector workers have limited formal education and may lack the skills needed to participate in the formal sector.

Infrastructure and Technology: The formal sector benefits from better infrastructure, technology, and access to markets, giving it a competitive advantage over informal businesses.

Taxation: Informal sector businesses often evade taxes, while the formal sector shoulders a substantial tax burden, creating an uneven playing field and discouraging formalization.

Social Protection: Workers in the informal sector typically lack social protection, including access to healthcare, pensions, and insurance, making them vulnerable to economic shocks.

Cultural and Social Norms: Cultural factors and societal expectations can influence individuals’ decisions to work in the informal sector, often due to the perception of job security and flexibility.

Bridging the Gap: Practical Steps

To bridge the gap between the formal and informal sectors in Nigeria, a comprehensive approach is necessary. This involves addressing the aforementioned factors and implementing a series of interconnected strategies. Let’s explore these strategies in greater detail:

1. Simplify and Streamline Regulations:

1. Review and Reform:
2. Comprehensive Regulatory Review: Conduct a meticulous review of all business-related regulations, identifying those that hinder formalization. Eliminate redundancies and simplify complex rules.
3. Stakeholder Involvement: Engage formal and informal sector representatives, legal experts, and regulatory bodies in the review process to ensure a balanced approach.

iii. Regulatory Impact Assessment (RIA): Institute a system of RIA for proposed regulations to assess their potential impact on both sectors.

1. Periodic Updates: Establish mechanisms for regular updates and revisions of regulations to adapt to changing economic conditions and technologies

1. Digitalization:
2. Unified Digital Platform: Develop a unified digital platform for business registration, licensing, and tax payments. Ensure it is user-friendly, easily accessible, and available in multiple languages.
3. Online Training: Offer online training and tutorials to guide entrepreneurs through the digital registration and tax payment processes.

iii. Data Security: Implement robust data security measures to protect sensitive business information, fostering trust in the digital platform.

1. Feedback Mechanisms: Create feedback mechanisms on the digital platform for users to report issues, provide suggestions, and seek clarification on regulatory matters.

1. Public Awareness:
2. Information Campaigns: Launch nationwide information campaigns through various media channels, including radio, television, social media, and community meetings.
3. Clear Communication: Use simple and clear language to explain the benefits of formalization, the steps involved, and the consequences of non-compliance.

iii. One-Stop Information Centers: Establish one-stop information centers in urban and rural areas where entrepreneurs can seek guidance and information about formalization.

2. Access to Finance:
3. Microfinance Initiatives:
4. Establish Microfinance Banks: Encourage the establishment of microfinance banks specifically designed to serve the informal sector. Ensure an extensive branch network, especially in rural areas.
5. Flexible Loan Products: Develop flexible loan products tailored to the needs of informal businesses, such as working capital loans, asset financing, and trade finance.

iii. Capacity Building: Provide capacity-building programs to help microfinance institutions assess and manage the risks associated with lending to the informal sector.

1. Credit Guarantee Schemes:
2. Government Support: Create a government-backed credit guarantee fund that covers a portion of the losses incurred by formal financial institutions when lending to informal sector businesses.
3. Risk Assessment: Implement a robust risk assessment system that considers the creditworthiness of informal sector borrowers based on alternative data sources.

iii. Collateral Alternatives: Explore alternative collateral options, such as group guarantees or movable asset registries, to make credit more accessible to informal businesses.

1. Public-Private Partnerships: Collaborate with private sector organizations and international development agencies to establish and manage credit guarantee schemes.
2. Financial Literacy:
3. Training Programs: Develop financial literacy training programs that cater to the specific needs of informal entrepreneurs. Cover topics such as basic accounting, budgeting, and loan management.
4. Local Trainers: Train local trainers who can deliver financial literacy programs in rural and underserved areas.

iii. Mobile Financial Services: Promote the use of mobile financial services for savings and transactions to improve financial inclusion among the informal sector.

3. Education and Skills Development:
4. Vocational Training:
5. Curriculum Development: Collaborate with industry experts and formal sector employers to develop vocational training curricula aligned with the skills needed for formal employment.
6. Skill Assessment: Implement skill assessment and certification programs to validate the competencies acquired through vocational training.

iii. Public-Private Partnerships: Foster partnerships between vocational training institutions and formal sector companies to provide apprenticeships and on-the-job training opportunities.

1. Adult Education:
2. Community Learning Centers: Establish community-based learning centers offering adult education programs in literacy, numeracy, and basic life skills.
3. Flexible Schedules: Offer flexible class schedules to accommodate the working hours of informal sector participants.

iii. Incentives: Provide incentives, such as certification or access to microloans, to encourage adults to participate in these programs.

1. Apprenticeship Programs:
2. Industry Collaboration: Encourage formal sector enterprises to collaborate with vocational training institutions to offer apprenticeships.
3. Structured Programs: Develop structured apprenticeship programs that include mentorship, skill development, and stipends for participants.

iii. Recognition: Recognize and certify apprenticeship completion, enhancing participants’ employability.

4. Infrastructure and Technology:
5. Infrastructure Development:
6. Rural Development: Prioritize infrastructure development in rural areas to improve road networks, electricity supply, and access to clean water.
7. Special Economic Zones: Establish special economic zones in strategic locations to attract investment and create jobs.

iii. Logistics and Transportation: Enhance logistics and transportation networks to facilitate the movement of goods between informal and formal markets.

1. Digital Inclusion:
2. Affordable Internet Access: Collaborate with telecommunications companies to provide affordable internet access in underserved areas.
3. Digital Literacy: Offer digital literacy training programs to ensure that informal sector entrepreneurs can effectively use online platforms for marketing, sales, and financial transactions.

iii. E-commerce Training: Provide specialized training in e-commerce and online marketplaces to help informal businesses reach a wider customer base.

1. Market Linkages:
2. Market Access Hubs: Establish market access hubs or trading centers where informal sector producers can showcase their products and connect with formal sector buyers.
3. Value Chain Integration: Promote value chain integration by linking informal sector producers to formal sector suppliers and distributors.

iii. Market Information: Provide real-time market information to informal sector entrepreneurs to help them make informed decisions about product pricing and demand.

5. Taxation:
6. Progressive Taxation:
7. Tax Thresholds: Set reasonable tax thresholds that exempt small and micro-enterprises from certain taxes or provide reduced rates.
8. Taxpayer Education: Conduct taxpayer education campaigns to explain the tax system, exemptions, and incentives to informal businesses.

iii. Gradual Formalization: Implement a phased approach to increasing tax obligations as businesses grow, allowing them to adapt gradually to formal tax compliance.

1. Tax Education:
2. Taxpayer Clinics: Establish taxpayer clinics or help centers where informal businesses can seek guidance on tax compliance.
3. Mobile Tax Filing: Develop mobile applications and platforms that simplify the tax filing process and provide step-by-step instructions.

iii. Taxpayer Associations: Encourage the formation of taxpayer associations or cooperatives to collectively address tax-related issues and engage with tax authorities.

1. Simplified Taxation:
2. Flat Tax Rates: Consider flat tax rates for certain types of businesses, reducing the complexity of tax calculations.
3. Electronic Record Keeping: Promote electronic record-keeping systems that help informal businesses track their income and expenses, making it easier to comply with tax requirements.

iii. Voluntary Compliance: Institute a system of voluntary tax compliance incentives, such as discounts or access to government contracts for compliant businesses.

6. Social Protection:

1. Social Insurance:
2. Extension of Existing Schemes: Modify and expand existing social insurance schemes to include informal sector workers, providing coverage for healthcare, maternity, disability, and old age benefits.
3. Contributory and Non-Contributory Options: Offer both contributory and non-contributory social insurance options to accommodate the income variability of informal sector workers.

iii. Public Awareness: Conduct awareness campaigns to inform informal workers about the benefits and requirements of social insurance.

1. Community-Based Safety Nets:
2. Community Funds: Establish community-based funds that provide financial assistance to informal sector workers during emergencies, such as illness, natural disasters, or economic crises.
3. Collaboration with NGOs: Partner with non-governmental organizations (NGOs) experienced in social protection to facilitate the setup and management of community-based safety nets.

iii. Monitoring and Evaluation: Implement mechanisms to monitor and evaluate the effectiveness of these safety nets in providing timely support to those in need.

1. Labor Rights:
2. Awareness Campaigns: Launch awareness campaigns to inform informal sector workers about their labor rights, including fair wages, safe working conditions, and the right to organize.
3. Labor Inspections: Strengthen labor inspection mechanisms to enforce compliance with labor laws in both the formal and informal sectors.

iii. Dispute Resolution Mechanisms: Create accessible and efficient dispute resolution mechanisms to address labor-related grievances of informal sector workers.

7. Cultural and Social Norms:
8. Community Engagement:
9. Community Leaders: Engage community leaders, religious institutions, and traditional authorities to promote the benefits of formalization and challenge negative perceptions.
10. Role Models: Showcase successful individuals and businesses that transitioned from the informal to the formal sector as examples of the benefits of formalization.

iii. Cultural Sensitivity: Recognize and respect cultural practices while emphasizing the importance of formalization for economic stability and individual empowerment.

1. Peer Networks:
2. Business Associations: Support the formation of business associations or cooperatives among informal sector entrepreneurs, creating peer networks that facilitate knowledge sharing and mutual support.
3. Training and Mentoring: Offer training and mentoring programs within peer networks to help informal businesses improve their operations, marketing, and financial management.

iii. Advocacy Groups: Encourage the emergence of advocacy groups that represent the interests of the informal sector and engage with policymakers on their behalf.

8. Data Collection and Research:

1. Data Gathering:
2. National Surveys: Conduct regular national surveys to collect data on the size, composition, and economic contributions of the informal sector.
3. Segmentation: Categorize informal sector businesses based on their activities, locations, and characteristics to tailor interventions effectively.

iii. Informal Finance Data: Collaborate with financial institutions to gather data on the financial transactions of informal sector clients, which can inform credit assessments.

1. Research Grants: Allocate research grants to universities and research institutions to conduct in-depth studies on the informal sector’s dynamics.
2. Evidence-Based Policies:
3. Policy Research Units: Establish policy research units within relevant government departments to analyze data, evaluate policy effectiveness, and provide evidence-based recommendations.
4. Data Sharing: Encourage data sharing and collaboration among government agencies, research institutions, and NGOs to create a comprehensive database on the informal sector.

iii. Regular Reporting: Publish regular reports and updates on the state of the informal sector, policy initiatives, and their impact on economic growth and social well-being.

9. Government Coordination:

1. Interagency Collaboration:
2. Task Forces: Create interagency task forces or committees to coordinate efforts related to formalization, ensuring that all relevant government departments are aligned.
3. Information Sharing: Facilitate the sharing of information and resources among different agencies to avoid duplication of efforts and improve efficiency.

iii. Unified Strategy: Develop a unified national strategy for bridging the formal-informal divide, outlining specific roles and responsibilities for each agency.

1. National Strategy:
2. Multi-Stakeholder Consultations: Involve stakeholders from the formal and informal sectors, civil society, and academia in the development of the national strategy.
3. Clear Goals and Timelines: Define clear, measurable goals and timelines for achieving formalization targets and monitor progress accordingly.

iii. Flexible Adaptation: Allow the strategy to be flexible and adaptable to changing economic conditions and emerging challenges.

10. Monitoring and Evaluation:
11. Key Performance Indicators:
12. Quantitative Metrics: Establish key performance indicators (KPIs) to measure progress, including the number of informal businesses formalized, increased tax revenue, and job creation.
13. Qualitative Assessments: Conduct qualitative assessments to understand the impact of formalization on the livelihoods and well-being of informal sector participants.

iii. Baseline Data: Collect baseline data before implementing interventions to accurately assess their impact over time.

1. Regular Assessment:
2. Periodic Reviews: Conduct periodic reviews, at least annually, to evaluate the effectiveness of policies and programs related to formalization.
3. Mid-Term and End-Term Evaluations: Implement mid-term and end-term evaluations of the national strategy to identify successes, challenges, and areas for improvement.

iii. Feedback Loops: Establish feedback loops with stakeholders, including informal sector representatives, to gather input and adjust policies and interventions accordingly.

1. Transparency: Ensure transparency in the monitoring and evaluation process, making findings and reports publicly accessible.

The transformation of Nigeria’s economy hinges on its ability to bridge the gap between the formal and informal sectors. This presents a profound opportunity to unlock the untapped potential of millions of entrepreneurs and workers currently operating in the shadows of the economy. The practical steps outlined above provide a comprehensive roadmap for policymakers, civil society organizations, and the private sector to work together in creating an environment where the formal and informal sectors can coexist harmoniously and contribute to the overall development of Nigeria.

It is important to recognize that formalization is not a one-size-fits-all solution, and strategies should be tailored to the diverse needs and circumstances of different informal sector businesses. This process will require long-term commitment, adaptability, and collaboration to ensure these policies and interventions are effective and sustainable to navigate the unique challenges and opportunities presented by Nigeria’s diverse and dynamic economy.

With the right strategies Nigeria can pave the way to a future characterized by economic inclusivity, prosperity, and sustainable development for all its citizens. The journey to bridge the divide between the formal and informal sectors is a journey toward a more equitable and prosperous Nigeria.

Dovish Okojie is a Management Consultant and Public Affairs Commentator. He writes from Abuja and can be reached through dovishokojie@gmail.com