Dynamic Research Journals (DRJ)

Journal of Economics and Finance (DRJ-JEF)

Volume 2 ~ Issue 3 (March, 2017) pp: 26-29
www.dynamicresearchjournals.org

Challenges of Informal Sector Activities in a Developing

Economy: A Study on Sokoto State, Nigeria
Bashir Garba, PhD
Academic Planning Unit, Usmanu Danfodiyo University, Sokoto Nigeria

Received 20 March, 2017; Accepted 25 March, 2017; Published 31 March, 2017 The author(s) 2017. Published with open
access at www.dynamicresearchjournals.org

Abstract: - The main thrust of this paper is to assess the challenges faced by informal sector operators in
Sokoto state. Informal sector refers to legally unregulated process of income and employment generation
carried out in very small enterprises. The population of this study is based on administering a structured
questionnaire to informal sector operators in the study area. The results indicate that the most important
challenges faced by the informal sector activities in sokoto state are lack of education and managerial skills.
The informal sector is significant in poverty alleviation and it contributes to the development of human capital,
access to credits and business expansion among others.
Keywords: Informal Sector, Developing Economy, Challenges

I. Introduction
The world over, discussing the relevance and contribution of informal sector enterprises to economic
growth and development is an issue that cannot be over emphasised. Notwithstanding that detailed statistics on
the enterprises are hard to come by due to lack of extensive data, it is still evident that they play a crucial role in
national wealth creation. Evidences abound that the sector has provided multitude of jobs which could serve as a
launch pad to the industrialization of many towns, cities, nations or civilizations. The third national development
plan of 1975-80 was the first Government effort to focus on the role of the informal sector towards the
Development of the Nigerian economy. However, largely to the fall in employment and prices of agriculture,
formal manufacturing became more capital intensive and beyond the reach of average Nigerians (FGN, 1975).
Based on the potentials and contribution of the informal sector in Job creation and increase in earnings, it can be
claimed to have changed the fate of many Nigerians. It is one way that the government can easily reach out to
the poor; one sure way of private public partnership in poverty reduction in Nigeria. The sector possesses a
private sector development potential and this is where the poor people are found trying to earn a living. It is
based on this that this paper focuses on exploring the challenges of informal sector in Sokoto state Nigeria with
a view to proffering solutions to them.
There are studies on informal sector on how it could alleviate poverty and the inherent challenges therein.
Contributing on this are Mabogunje and Filani (1981) and Farinmade, (2012) all on the challenges of informal
sector, on the other hand, none of these studies are in the study area, in spite of all the interest. Consequently,
this study intends to fill the gap by studying the challenges of informal sector in Sokoto state.
The main objective of this paper is to examine the challenges faced by informal sector in the process of
carrying out their activities in a developing economy. The structure of the paper begun with introduction, then
followed by research methodology as section two, discussion of results is section three, then followed by section
four findings and lastly section five is the conclusion.

II. Literature Review

Recent evidence from a study on Brazil by Tulio and Adrian (2012) suggests that institutional failures have
made the size of Informal sector to be negatively associated with growth. As such, adopting good public
administration practices in education, health, and so on could go a long way in improving the sectors'
productivity. Similarly, some previous studies like Gangrade and Gathia (1983) reported problems of the
informal sector. Their study along with a similar study conducted by Romatet (1983), were on tailoring, tannery
and plastics. Though there was boom in the economic activities of the slum dwellers in Kolkata, they are
confronted with how to get bank loan and appropriate interventions to boost their productivity, curtailing
middlemen and exploitation by the formal sector. In Nairobi, Hepner (1985) also confirms that majority of the
operators started up with low capital, and this was considered a challenge.
Among theoretical supports on informal sector employment and poverty reduction is a study by Datta
(1989). Wherein the study uses a fixed coefficient of production and full capacity utilisation of factors. It
confirms an optimum equilibrium framework that permits shrinking of formal sector when the informal sector is

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Challenges of Informal Sector Activities in a Developing Economy: A Study on Sokoto State, Nigeria

expanding, and provide jobs and reduce poverty. Therein, the informal sector expands while the formal sector
contracts, and with the boom, the informal has been found capable of meeting the subcontracting needs of the
formal sector.
In a study by Kundu (1993) using secondary data both at macro and micro levels, the study confirms that
informal sector has been able to make those survivalists to earn a living by enabling them to take up low
productive activities. The sector has also created some ties with the formal sector. A study also confirms that
most employment in the future will be in the informal sector. However, the study is quick to note that the sector
is beset with low earnings, poor working conditions and so on.
Numerous studies have attempted a discourse on the poverty characteristics of informal sector, for example
Bhagwat (1996) using a sample size of 254 confirms low earning, lack of social security and poor working
condition as a poverty challenge of informal sector operators. In the same line, illiteracy and high
unemployment has also been pointed out by Sultania (1994) as a poverty challenge of the informal sector
operators. Other evidences highlighted in this regard, is working in low paying hazardous jobs that could
jeopardise their chances of reducing poverty.
Similarly, Unni and Rani (2001) using evidence from a micro survey of households, stressed that the
insecurities of informal workers arise not only from random shocks but also from the structural features of the
household and the nature of their work.
Inability to get credit has also been considered by Oladimeji and Ajisafe (2003) as one of the poverty
characteristics of the informal sector operators, though the study quickly noted the challenge of getting credit;
hence, it recommended bringing down the cost of getting it.
Equally, using participatory method, Rajashekhar, Karnath, Madheswarn & Suchitra, (2005) conducted a
study in Karnataka, the findings reveal that there are some poverty challenges of informal sector operators that
are not mostly included in public policy interventions adequately. For example among the workers surveyed,
92.3 percent felt that benefits towards old age, unemployment, death, sickness and employment injury were
relevant to them but not freely available. Similarly, women in the reproductive age group also felt that maternity
benefits were important. In the same way, Henley, Arabsheibani & Carneiro (2006) discussed in detail the
various definitions of informal sector and its appropriateness (aptness). They are of the opinion that the most
common poverty challenge of informality is absence of social security
However, Harris-White and Anushree (2007) hold a different view on poverty characteristics of informal
sector operators who argue that they possess more dynamic features than the formal sector once given the
enabling environment. Furthermore, the study states that operators in the sector accumulate fixed assets, invest
and prosper and can be regarded and classified as entrepreneurs.
Farrell, John & Fleming (2000), and Ofori (2009) draw our attention to some of the poverty characteristics
of people engaged in the informal sector which include predominance of self-employment work, non coverage
by minimum wage legislation and social security, absence of trade union organization, low income and wages,
little or no job security. Accordingly, Yankson (1991) opines that a typical informal sector enterprise is
individually-owned and operated. It also has a low capital intensity and the entrepreneurs mostly use labour-
intensive technology, with the largest units having the most fixed capital per employee. Relatedly, Lawanson
(2011) also points out that operators of the sector are characterized by small scale operations, low-income
families, labour intensive techniques, private and indigenous ownership of enterprises that are largely
unprotected by government. Dhesi and Wadhwa (1983) attempts to analyse the characteristics of the participants
and enterprises in the informal sector. The study further points out that most of the entrepreneurs started with
little amount of initial capital and the source of investment for majority of them was their own savings or that of
relatives and friends.
On his part Barwa (1995) offers other poverty characteristics of the operators to include lack of capacity to
do offshore acquisition of resources- tools, raw material, human and financial resources for the running of the
business. Informal sector businesses are quite small in size and hence they tend to rely more, if not solely, on the
local resources. The resources are acquired from various sources, sometimes new or second-hand or self-
constructed but very rarely imported. So also for their raw materials, the informal sector entrepreneurs depend
largely on local resources, primarily from the formal sector units in the cities, labour intensive and adopted
technology (Ofori, 2009). In the same vein, the level of technology, employed in the urban informal sector
business units is low and in poor conditions (Yankson, 1991; Barwa, 1995; Ofori, 2009).
Exploitation through long hours of work has been identified by Saran and Sandhwar (1990) to be among the
challengess of the sector. This is because most of the operators are illiterate, and belong to families that do not
have elite status, they also suffer from cheating and in some cases sexual harassment in the case of women.
Guhan (1994) posits that absence of social protection such as old age pension, maternity leave and, poor
condition of work, low earning and lack of any social security are some of the challenges of the informal sector.
Therefore, the study recommends ensuring basic minimum measures of social security in the unorganised sector
to be an important concern of any public policy. This is because some of the targeted anti-poverty programmes
have remained unsuccessful because of the problems of centralised approach and review system.

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Challenges of Informal Sector Activities in a Developing Economy: A Study on Sokoto State, Nigeria

Osarenkhoe (2009) ) opines that it is not in all cases that the challenges of the operators portrays poverty,
because sometimes the equipment used by informal sector entrepreneurs are self-crafted or bought locally with
subsequent improvements made by the entrepreneurs. The informal sector displays technological ingenuity by
using locally made equipment. Notwithstanding, the operators lack adequate financial resources to import more
advanced technology, and the sector mostly relies on labour for its production.
Ofori (2009) mentions that the operators in the informal sector cannot afford to purchase quality building
materials due to the high cost involved. They tend to put up structures that are of poor standards resulting from
the poor quality of the materials used. The end result of these structures is that slums will spring up in the urban
centers. This situation possesses environmental and health challenges to the governments at various levels
(local, states or federal) especially in the developing countries.

III. Methodology
The paper started with a literature search from which it developed the research instruments and structuring
the questionnaires administered on the operators of informal sector activities in the study area. Also a cross
sectional survey was conducted; that is collecting information at one point in time. In addition, a stratified
sampling method was used in the selection of respondents. This was because the sampling population for the
study is heterogeneous. The study, therefore, had clusters from the strata.
The paper selected Manufacturing, Wholesale and Retail as economic activities for investigation. The
choice of the factors was based on CBN/FOS/NISER (2001) survey of Informal sector, which identified them as
major economic activities in the informal sector and thence, their adoption.

IV. Discussion
Challenges faced by the Informal Sector Activities in Sokoto State
Challenges faced by the Informal Sector Activities in Sokoto State is the issue to be presented in
Table 1.
Table 1: Challenges faced by the Informal Sector Activities in Sokoto State
Variable Response Ranking
a) Low Patronage by Customers 5
b) Lack of Education and Managerial Skills 1
c) Displacement, Demolition and Re-allocation and Harassment 6
d) Excessive Trading fees/Taxes 6
e) Excessive charges on Electricity 8
d) Lack of and/or increasing Cost of Inputs and Equipment 2
e) Lack of and/or increasing Cost of Finance and Credit 9
f) Lack of and/or increasing Cost of Raw Materials 3
g) Inflation and Price Instability 4
h) Lack of Access to Land 10
Key: a scale ranging from 1-10, indicating 1 as the highest obstacle level and 10 as the lowest level of obstacle
Source: Author's computation using SPSS
Table 1 presents the distribution of respondents according to most important obstacles to the future
operation or expansion of business. From the results in table 1 it shows a summation of the response which
indicates lack of education and managerial skills as the most critical obstacles encountered by the operators of
the informal sector. This is in line with previous studies that have confirmed the lack of education and
managerial skills as the major hindrance to the flourishing of the sector.
An examination of the important remedy to problems faced by the informal sector is presented in Table
2.
Table 2: Important Remedies to the Business
Variable Response Ranking
Access to Credit Facilities 6
Access to Education 1
Access to Infrastructural Facilities 5
Certainty and Stability of Economic and Political Policies 4
Recognition and Protection of Business by Government 7
Involvement of Operators in Government Policies 8
Availability of Raw Material at Low Cost. 3
Availability of Equipment and Inputs at Low Cost 2
Key: a scale ranging from 1-10, indicating 1 as the highest solution level and 10 as the lowest level of solution

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Challenges of Informal Sector Activities in a Developing Economy: A Study on Sokoto State, Nigeria

Table 2 proffers solutions to the business, and from results on Table 2, it could be deduced that
provision of education, skill acquisition and training are at the fore front of solutions to those entrepreneurial
problems.

V. Findings
The results revealed that the entrepreneurs are living in deplorable conditions, even though there are
variations from one part of the state to the other. However, some places are better off than others in terms of
living conditions and social amenities such as portable water, garbage disposal, hygienic conditions and so on,
and it is based on this that the study categorised most people as poor in Sokoto State. Whatever measure is used
to assess living conditions, the study revealed that majority of the operators in the study area have challenges of
one or more operational factors in their enterprises.

VI. Conclusions
It can be said that the sector is beset with challenges that include access to credit facilities to purchase
modern tools and inability to borrow from banks due to lack of collateral. They also use out-dated tools and
technology in their operations, and do not keep records of the business transactions. In addition, the impact of
government policy is hardly felt by operators in the sector. Accordingly, there is need for provision of finance to
the Informal sector through the microfinance banks through a holistic poverty reduction strategy involving all
tiers of government. Due to the challenges of the sector there is the need for competition-enhancing reforms.
This is because policies are required that improve the competitiveness of the operators by putting in place
appropriate policies that mitigate the challenges facing them.

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