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:
iii. Regulatory Impact Assessment (RIA): Institute a system of RIA for proposed regulations to assess their potential impact on both sectors.
iii. Data Security: Implement robust data security measures to protect sensitive business information, fostering trust in the digital platform.
iii. One-Stop Information Centers: Establish one-stop information centers in urban and rural areas where entrepreneurs can seek guidance and information about formalization.
iii. Capacity Building: Provide capacity-building programs to help microfinance institutions assess and manage the risks associated with lending to the informal sector.
iii. Collateral Alternatives: Explore alternative collateral options, such as group guarantees or movable asset registries, to make credit more accessible to informal businesses.