On July 25th, 2023, the New York University team, together with partners such as the National Bureau of Statistics and Lagos Business School, and with the generous support of the Bill & Melinda Gates Foundation, organized a Private Sector Roundtable at the Lagos Business School in Ajah, Lekki, Lagos.

The purpose of this roundtable was to discuss the findings of the Small Firm Diaries Research conducted in Nigeria, with a specific focus on the private sector. Esteemed stakeholders from the commercial banking, microfinance, and FinTech sectors were brought together to hear and engage in discussions regarding the study’s results ahead of the official report launch on July 27th in Abuja, Nigeria.

Subsequently, on July 27th, 2023, the Small Firm Diaries Report was formally launched at the prestigious Transcorp Hilton in Abuja. The launch event included a panel session where experts deliberated on the practical implementation of the research, aiming to provide valuable insights for financial service providers, regulators, and policy makers.

In this article, we discuss key takeaways from the report and recommendations to further drive financial inclusion amongst small firms in Nigeria.

About the Small Firm Diaries

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. 

Published by Michelle Kempis, global research manager at Financial Access Initiative Research Center of New York University and Timothy Ogden, managing director at FAI in partnership with the Nigerian National Bureau of Statistics and the Lagos Business School, the report aims to better understand small firms in low-income neighborhoods of developing countries.

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.

Results from the Small Firm Diaries 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.

Here are five key takeaways from the Small Firm Diaries Nigeria Report:

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

2. 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.

3. 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.

4. 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.

5. 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.

How then can we improve the situation for small firms in Nigeria? The study further recommends the following:

1. Focused attention on small firms: Small firms, not just micro or larger firms, deserve specific attention. They are distinct from other types of firms, yet are a critical source of jobs and incomes for low-income groups, and make an important contribution to value chains and economic development.

2. Design Policies and Programs around achieving stability: The focus of policies and programs should shift toward reducing volatility and achieving stability. Public and private partnerships to reduce exposure to demand- and supply-side risks as well as training programs focusing on risk and liquidity management would help firms achieve greater stability.

3. Explore Liquidity and Working Capital Lending: New products focused on increasing liquidity are desperately needed. Explore models to increase access to trade credit and leverage information and assets (e.g. stock) to unlock working capital.

4. Develop Support Programs for Employees (Not just firms): While volatility is passed on to employees, there is no guarantee that greater stability for firms will be passed on to employees. Develop programs and policies that directly support the workers in small firms.

To view the full report click here.