On 1 January 2026, Nigeria began taxing businesses that keep no books. The Presumptive Tax Regulations, issued under Section 29 of the Nigeria Tax Act, 2025, set out how tax authorities can assess businesses whose income cannot be accurately determined, along with exemptions, digital payment requirements and new taxpayer protections. Qualifying businesses generally owe 1 percent of actual or estimated annual turnover, which the authority may infer from business activity, location, transaction patterns and other indicators. Nano businesses with annual turnover below N12 million are excluded.
One provision says more about the informal economy than the rest of the regulation combined. Tax must be paid through approved electronic channels such as USSD, POS terminals, mobile apps and licensed fintech platforms, and cash or roadside collection is expressly prohibited, in part to cut off illegal collections.
Governments do not ban practices that do not exist. The clause is a statutory admission that traders in Nigeria’s markets already hand over cash, on the street, to people with receipt books. Some of those people act for the state and some do not.
That admission is the thread worth pulling. Across the continent, formalisation policy starts from a premise of absence: no registration, no records, no tax, no rules. The evidence describes something else. The informal economy has its own employment contracts, credit markets, distribution networks, information stores and, as the Nigerian clause concedes, its own levies. Seen this way, formalisation is a merger between two operating systems. Each has users, revenues and enforcers. Mergers fail when the acquirer treats the target’s working assets as liabilities to be written off.
The scale makes the stakes plain. According to the ILO’s 2026 trends report, nearly nine in ten workers in sub-Saharan Africa are in informal employment. Kenya’s latest official figures make the same point in motion: the country created 822,100 new jobs in 2025, and the informal sector accounted for more than 87 per cent of that growth. Informal jobs have made up nearly nine in every ten new jobs over the past five years, a share that has not moved. When a system produces nine of every ten new jobs, it is the labour market.
A name for what the state could not count
The concept was born in Africa, and its birth explains its blind spot. The British anthropologist Keith Hart introduced it after studying, in 1971, the economic lives of rural migrants who had settled on the edge of Accra. His 1973 paper on informal income opportunities in Ghana, together with a 1972 ILO report on employment in Kenya, established the formal–informal divide and set off a wave of research and policy.
Hart’s own starting question was more open than the category it produced. He asked whether the urban unemployed and underemployed of cities like Accra were really a passive, exploited mass, or whether their informal activities could generate income growth on their own terms. The label survived. The question mostly did not. Informality came to be defined as income opportunities that escaped state enumeration, meaning by what the observer could not see.
This history matters because policy inherited the definition. If informality means “uncounted,” success means “counted.” So formalisation tends to be measured in registrations, tax identification numbers and digital trails, rather than in whether traders earn more, borrow more cheaply or enforce contracts more reliably. Nigeria’s reform fits that pattern. Under the Nigeria Tax Administration Act, a tax ID became mandatory from January 2026 for activities ranging from banking to business registration.
Six functions the state assumes are missing
Take the functions any economy must perform and look at how the informal one performs each.
Employment and skills: Southeastern Nigeria’s apprenticeship system is a labour contract, training programme and venture fund in one. Apprentices spend five to seven years learning a trade along with business ethics and customer handling. At the end, in a step called settlement, the master supplies capital and equipment for the apprentice’s own venture. The collateral is reputation. The enforcement is the network: a master who fails to settle a finished apprentice pays for it in standing.
Credit and trust: Kenya shows how misleading the formal–informal line can be inside a single household. FinAccess data from 2016 found that 41% of Kenyan adults used informal groups such as chamas and merry-go-rounds, while only 32% held traditional bank accounts. By 2024, formal access had risen to 84.8 percent, and the share relying on informal access had risen slightly, to 5.2 percent. The survey classifies each person by the most formal service they use. A chama member with a mobile-money wallet is therefore counted as formally included, and the headline number hides how much of the country’s credit still runs through groups. The two systems do not compete for the same customer. They serve the same customer for different needs.
Distribution: In Nigeria, consumer goods reach most buyers through open markets, kiosks and hawkers. Estimates vary with the consultancy doing the counting: around 90% of consumer goods sales in one widely cited figure, and 98% of all retail sales in a Deloitte estimate. No official series exists, and the true figure is uncertain. It is clearly very large. South Africa, with a far more formal retail sector, still shows the pattern. Trade Intelligence estimated its informal consumer-goods retail market at R197 billion in 2023, served through around 150,000 stores. Multinationals already route their mass-market revenue through this system and do not try to replace it.
Taxation: This is where the premise of absence fails most clearly. A study of 2,700 informal enterprises in Accra found that most operators pay a range of taxes and fees that together form a significant, skewed and regressive burden, heaviest for low earners, and that the burden tracks how visible a business is to the state. For operators at the bottom of the income range, taxes take a substantially larger share of earnings than they do for formal workers. The informal version also carries legitimacy the formal one often lacks. Research in Sierra Leone found that taxpayers rated informal levies as fairer than formal taxes, even though the levies were regressive, partly because the non-state actors collecting them delivered services the community could see.
Information: Every function above depends on the same asset: knowledge of who pays, who defaults and what sells, held in relationships and ledgers that outsiders cannot read. Converting that knowledge into data is now a business model. OmniRetail digitises informal retailers’ transaction data so lenders can offer collateral-free loans, works with 130 manufacturers, reached profitability in 2024 and raised a $20 million Series A. Nigeria’s tax regime wants the same data, with assessment based partly on transaction patterns. In practice, the contest over formalisation is a contest over who reads the ledger.
What formalisation has delivered so far
The best evidence on converting informal firms comes from next door. Benin and 16 other OHADA countries created a new legal status, the entreprenant, for micro and small businesses. Registration is free and takes one business day. A randomised trial across Cotonou tested whether extra support would draw firms in. Information alone persuaded few firms to register. The full support package raised formalisation by 16.3 percentage points, but those firms saw no gain in sales or profits, and the cost of formalising them exceeded the additional tax they would pay over the following decade. The firms that did formalise tended to be larger and already resembled formal firms.
The strongest objection to this piece’s argument comes from economists who read that evidence differently. Rafael La Porta and Andrei Shleifer argued in the Journal of Economic Perspectives in 2014 that informal firms are overwhelmingly small, low-productivity businesses run by less-educated owners. In their view, development comes from new formal firms displacing informal ones, not from converting the informal sector. On this reading, informality is poverty’s footprint, not an alternative system.
Our reading is that the two views converge more than they collide. Both conclude that pushing survival-level traders into formal status yields little for them or for the treasury. Nigeria’s ₦12 million threshold reflects that lesson: it aims the new regime at the upper tier of informal businesses, the ones Benin’s trial found most likely to formalise. The targeting is defensible. The risk lies in what the upper tier finds when it arrives.
Who the merger serves
Every structural change redistributes money and power, and this one has identifiable beneficiaries. Payment platforms become the mandatory channel for a new tax stream. The Nigeria Revenue Service gains a transaction record it never had. Upper-tier traders may gain real protection, since the cash ban targets roadside extortion. The regulations also recognise the Tax Ombud as a channel for complaints about tax administration. If that works, it is the first thing formal status has offered many of these traders that their current system cannot.
The losers are less visible and better organised: whoever collects today. Local revenue officers, market associations and transport unions draw income and authority from cash levies. A federal regulation on presumptive income tax does not, on its own terms, dissolve the fees and dues those bodies charge, and they will not give up the revenue without contest. The danger is stacking. A trader keeps paying association dues and local fees, then adds 1% of turnover on top. The Accra evidence suggests that for substantial parts of the informal sector there is little room for further taxation or contributions.
The burden will not fall evenly. A survey of 451 traders in 12 Nigerian markets found that flat taxes penalised women, who earned less than men but were charged the same, and that male collectors harassed traders more often. Assessment on “estimated turnover” also hands officials discretion. The Ombud’s effectiveness will decide whether that discretion is disciplined or monetised.
There is also a second-order risk, and this is our analysis, not yet an observed outcome. The regime ties tax visibility to digital payments. A trader who learns that every POS transfer can feed an assessment has a reason to insist on cash. Taken too far, the tax drive could slow the digital-payment adoption that Nigeria’s financial-inclusion policy has spent a decade encouraging.
What to watch
Three outcomes are plausible, and they are not mutually exclusive.
- Stacking: The new tax layers onto existing levies. The heaviest burden then falls on those just above the threshold, who respond by under-reporting or retreating to cash.
- Brokered integration: Market associations and platforms become intermediaries, and their records serve lenders and the tax authority alike.
- Parallel rivalry: Informal collection persists beside formal collection because it still buys services the state does not provide.
The indicators that will tell them apart are concrete:
- whether the Nigeria Revenue Service publishes registrations and collections under the presumptive regime by state;
- whether roadside cash collection actually stops;
- whether POS and transfer volumes among market traders hold up relative to cash;
- the volume and outcome of complaints to the Tax Ombud;
- how the large market associations position themselves in the first assessment cycle.
The strategic questions follow. Founders building on informal transaction data should ask whether that data is now an asset or a liability, since its value to lenders and to the tax authority can no longer be separated. Investors in route-to-market and merchant-payment businesses should price in the chance that tax visibility dents transaction volumes. Policymakers face the hardest question: what does a trader receive for the 1%?
Five decades ago, Hart asked whether Accra’s informal workers had their own capacity to generate growth. Policy has largely behaved as if the answer were no. The evidence since, from apprenticeship settlements to chamas to the market levies Nigeria has just banned from its own collectors, says the answer was yes. That capacity came with rules, enforcers and a tax base already claimed. Formalisation is therefore a negotiation between systems. The state wins that negotiation only by offering what the existing system cannot: contracts a court will enforce, credit at scale, and protection from the person holding the receipt book. What the 1% buys will decide which system traders choose.
