Financial Access Initiative (FAI) research center of New York University (NYU) together with the Nigerian National Bureau of Statistics (NBS) this week released the results of the Nigeria Small Firm Diaries (SFD) study. Supported by the Mastercard Center for Inclusive Growth (CFIG), the Bill & Melinda Gates Foundation (BMGF), and the Argidius Foundation, the global research project provides insight into the financial lives of small businesses in seven countries across Latin America, Sub-Saharan Africa and Asia.

Participants at the Small Firm Diaries Nigeria Research report launch at the Lagos Business School on Tuesday, 25th July 2023.

Results from the Nigeria study

In Nigeria, the study collected data from 161 small businesses in urban, suburban, or semi-rural areas surrounding three locations: Enugu, Kaduna, and Lagos, between August 2021 and August 2022. The study was focused on three industries—light manufacturing, agri-processing, and services—which all play a key role in Nigeria’s economic growth and development.

The study found that the Nigerian firms earn less than firms in the other countries studied. Half of the firms earned less than NGN 223,250 in monthly revenue (PPP USD 1,547) 1 . About half (46%) of the Nigerian firms reported holding a loan of any kind, most of these from informal sources, including suppliers, friends, and family. The research also concentrated on the welfare of employees in small firms, finding that the firms were not able to provide consistent income to workers.

Insights from the research illuminate how small businesses in Nigeria are faring when it comes to: 1 World Bank PPP Rates, NGN/PPP = 152.57

Volatility: The Nigerian small firms, like those in the other countries studied, experience volatile earnings: both revenue and expenses fluctuate from month-to-month.

Desire for growth and stability: When asked about their vision for their business, a large group of Nigerian firms (44%) said they wanted to both grow and gain stability. This population aspires to grow, but does not want to take on the additional risk (they already face a great deal of risk—for instance: fluctuations in demand, rising input prices, supply chain delays, employee issues) that is necessary for rapid growth. They want step-by-step growth that helps reduce volatility and risk.

Financial inclusion: Compared with other countries in the study, Nigerian firms have high rates of bank account ownership: 97% of small firm owners in Nigeria have bank accounts for business—more than in Kenya (79%), Colombia (70%), or Indonesia (65%). However, usage of accounts is less comprehensive, with only 20% of Nigerian firms moving more than three quarters of their transactions through bank accounts. Cash is still the dominant mode of transaction for this segment.

Digital financial services: Nigerian small firm owners use technology — three-quarters use either a smartphone or computer, or both for their business — as well as digital financial services, particularly debit cards, mobile banking, and ATMs. However, they use mobile wallets for business purposes at very low rates.

Credit gaps: Data from the study shows that working capital and liquidity are bigger needs to small firms than investment capital. Despite access to finance being a major barrier to firm owners’ vision for success, more than 40% of firm owners in Nigeria say they “rarely” or “never” need a loan, indicating that products in the market are not accessible or don’t meet their needs. Firms closely match revenues and expenses on a month-to-month basis, which also helps confirm that they lack working capital for day-to-day liquidity needs. Firms rarely take on any operating risk or expansion/growth opportunities that could result in negative monthly cash flow.

Job security: Employment at small firms is precarious. The number of jobs in a firm changes from month to month, and the individuals filling those jobs change frequently. Employee pay varies considerably even during the months they are working at a small firm. Only one-fifth of the small firm employees received their salaries continuously through the study; more than half of employees worked at the same firm for fewer than half of the months studied.

Employee welfare: Some 63% of employees in Nigeria reported difficulties with finances indicative of low-income status, including 51% who reported that a child in their household had not eaten enough in the past week. Both of these figures were higher in Nigeria compared to global sample averages.

In general, the study concluded that stability and growth is a priority for the entrepreneurs who participated in the year-long study. According to the research, these firms face high volatility in income and expenses. They cited “access to finance,” followed by “rising supply costs” as major barriers to achieving their vision of growth and stability.

About the Small Firm Diaries study

The Small Firm Diaries is a global research project conducted between 2021 and 2023 in seven countries: Kenya, Nigeria, Uganda, Ethiopia, Indonesia, Fiji and Colombia. The study aims to improve the understanding of how small businesses can overcome the barriers they face to prosper in the modern economy and contribute to reducing poverty.

In each country, a team of field researchers visited a sample of small business owners in low-income neighborhoods weekly for one full year to collect quantitative and qualitative data on their financial flows. This information sheds light on the economic decision-making, strategies, and constraints of small businesses as they navigate the effects of changes in local and global markets.

The Financial Access Initiative (FAI) research center of New York University, together with partners at the National Bureau of Statistics and the Lagos Business School, anticipate that study results will inform the design of future development policies, financial services and tools to help small businesses and their employees in Nigeria to prosper.

“As the premier agency for the collection, publication, and dissemination of official statistics on Nigeria, NBS was proud to collaborate with the international research team for the Small Firm Diaries project. This study is unique in Nigeria—it is the first large-scale project to gather high-frequency data from businesses of this size—and will allow policymakers to better understand and address the challenges facing these businesses,” said Statistician General Adeyemi Adeniran of the National Bureau of Statistics.

“At the Lagos Business School, we develop the next generation of business owners in Nigeria and Africa. This kind of data, which shines a light on the volatility facing small businesses and their working capital needs, is what we need to inform both government and private sector players who seek to develop policies, products, and services that reduce inequality and increase financial security amongst financially underserved communities,’ said Olayinka David-West, Associate Dean and Professor of Information Systems at the Lagos Business School.

“Small businesses have proved their resiliency in recent years, but still face many pressures to remain profitable. In our work to empower them across the globe as drivers of economic activity and growth, research like this is incredibly insightful. Knowing precisely what challenges small business owners are facing and how they see the future allows us to provide better and more tailored support, and ultimately, better and more meaningful outcomes. We’re proud to support this research, and we hope it can serve as a resource to small business support organizations in the public, private, and social sectors,” said Tania Kruger, Vice President and Head of SME Product & Commercialization, EEMEA at Mastercard.

“MSMEs are by far the biggest employer in low and middle-income economies. Despite decades of statistical research, fundamental questions remain about why some grow, and some stagnate. Our aim with this study has been to try to understand small firms from the bottom-up, by listening closely to how entrepreneurs and workers make choices on their own terms,” said Jonathan Morduch, Executive Director of the Financial Access Initiative and Professor of Public Policy and Economics at New York University.

“We hope the findings from the Small Firm Diaries will be used by others in their own research and initiatives to address the challenges facing small businesses in low- and middle-income communities in Nigeria, and around the world,” said Michelle Kempis, Associate Director of the Financial Access Initiative at New York University.

Uses and application of the study

The reports presented today—the Nigeria Country Data Overview and the Financial Services Report—will be followed by additional analysis and publications in the coming months. The research team will continue to analyze data and publish reports on the Nigerian small firms, including adding further global comparisons, as they seek to collaborate with partners in the public and private sectors to benefit small businesses in Nigeria.

The study aims to guide the policies and practices of a wide variety of players and stakeholders, and study results enable companies and governments to design or improve products and programs that increase the capacity and productivity of small businesses. It will also enable organizations to design financial services products, including digital financial services, that better meet the liquidity and investment needs of small businesses so that they can expand their businesses in terms of income, productivity, employment, and wages paid.