A Study on the Symbiotic Mechanism Between Informal Economy and Cultural Resilience: Taking Oral Contract-based Trade of the Yoruba People in West Africa as an Example

Abstract

According to World Economics’ 2024 Quarterly Informal Economy Survey (QIES), the informal economy in the Yoruba-inhabited areas of West Africa accounts for 58.2% of the regional GDP, equivalent to approximately 1.408 trillion US dollars (World Economics 2024). However, constrained by factors such as weak enforcement of formal laws and underdeveloped infrastructure, small and medium-sized enterprises in the region are plagued by a severe trust crisis in cross-border trade.

The core contradiction lies in the conflict between the lack of transaction trust under a weak institutional environment and the enterprises’ demand for expansion. To address this issue, a low-cost governance model can be constructed based on the Yoruba people’s religious beliefs, community norms, and oral contract traditions. This model not only adapts to the characteristics of the informal economy but also strengthens cultural resilience, thereby providing a localized business practice reference for policymakers and investors.

Ⅰ. Background: Characteristics of the Business Environment in Yoruba-inhabited Areas of West Africa

1.1 Policy and Institutional Environment

As indicated in the International Labour Organization’s (ILO) 2025 Research Report on Cross-border Trade Scale, about 93% of the employed population in Nigeria works in the informal sector (ILO 2025, 12). Informal cross-border trade in West Africa serves as the core pillar of the regional economy, with an average single transaction value ranging from 2,500 to 5,000 Nigerian Naira (approximately 3 to 6 US dollars). The scale of informal cross-border trade between Ghana and its neighboring countries alone reaches 86.27 million to 140.37 million US dollars, and around 60% of these transactions are conducted through oral contracts (ILO 2025, 15).

Nevertheless, the formal regulatory system faces significant shortcomings. On one hand, policies lack inclusiveness toward the informal economy. Customs procedures are cumbersome and lack gender-responsive mechanisms, leaving female traders—who account for a considerable proportion—exposed to institutional discrimination. On the other hand, the enforcement efficiency of formal laws is extremely low, with commercial dispute litigation taking an average of 18 months to resolve, far exceeding the endurance capacity of SMEs.

Consequently, Yoruba traders tend to rely on traditional customs rather than official laws to settle disputes. Meanwhile, the annual illicit financial outflows from the region amount to 50 billion US dollars, further exacerbating the trust deficit in the formal economic system (AfDB and OECD 2024, 28).

1.2 Cultural and Social Foundations

The commercial culture of the Yoruba people is characterized by “trust embedded in communities”. Their time-honored guild system (Parakoyi—a traditional merchant guild responsible for regulating trade and protecting members’ interests) is divided into general trade guilds (Egbe Alajapa), live commodity trade guilds (Egbe Alaro Obo), and professional guilds (such as the textile guild Egbe Alaso), which are responsible for regulating transaction behaviors and safeguarding the rights and interests of members (Falola 2021, 45).

Culturally, the Yoruba people believe in the supreme deity Olodumare and ancestral spirits. Oral commitments are regarded as “sacred contracts”, and breach of contract is believed to incur supernatural punishment. This cultural taboo forms a powerful psychological constraint. In addition, oral traditions such as the aroko (a symbolic communication system using objects to convey messages) and commercial proverbs serve as communication links for cross-regional trade, compensating for the lack of widespread literacy (Falola 2021, 48).

1.3 Infrastructure Conditions

Underdeveloped border infrastructure is a key factor restricting trade efficiency. For instance, border markets in West African countries such as Benin generally lack stable power supply, forcing nighttime transactions to rely on simple lighting. Poor logistics and warehousing facilities result in a cargo loss rate as high as 15% to 20%. Meanwhile, the cross-border payment system is inadequate, with cash transactions accounting for over 70% of total trades, increasing the risk of fund security.

According to a World Bank survey, border areas lack security facilities such as surveillance cameras and night patrols, exposing traders to harassment and theft risks (World Bank 2025, 22). Moreover, poor road conditions further push up transportation costs and delay probabilities.

II. Challenges: Specific Problems Faced by Yoruba SMEs

2.1 High Cost of Building Transaction Trust

The failure of formal contract enforcement mechanisms makes it difficult to establish trust between enterprises, especially in cross-border trade where the default risk of transactions between unfamiliar parties exceeds 30% (ILO 2025, 19). A female textile trader (Ms. A, anonymous) in Lagos, Nigeria, stated, “Written contracts are meaningless at the border. When the other party defaults, we can neither safeguard our rights quickly nor recover losses. Many peers are on the verge of bankruptcy due to a single breach of contract” (Anonymous Respondent 1, interview).

2.2 Financing and Market Access Constraints

Financial constraints are the primary concern of regional traders. Yoruba SMEs generally face difficulties in accessing financing and high financing costs. A male electronic product cross-border trader (Mr. B, anonymous) in Cotonou, Benin, mentioned, “Bank loans require complex written documents and collateral. Our transaction records are mostly oral agreements, which fail to meet the application requirements. We have to rely on private loans with monthly interest rates as high as 5% to 8%” (Anonymous Respondent 2, interview). In addition, information asymmetry hinders enterprises from connecting with external markets, and female traders face additional market access barriers due to gender discrimination.

2.3 Border Regulatory and Security Risks

According to the Nigeria-specific data updated in March 2024 in the Joint Report on Illicit Financial Flows by the African Development Bank (AfDB) and the Organisation for Economic Co-operation and Development (OECD), oral trade is prone to various human factors (AfDB and OECD 2024, 33). For example, oil theft in Nigeria results in illicit financial outflows of 100,000 to 250,000 barrels of crude oil per day since 2013, worth 3 to 8 billion US dollars annually (AfDB and OECD 2024, 35). Tax evasion and smuggling in informal cross-border trade cause the government to lose approximately 1.2 billion US dollars in tariff revenue each year (AfDB and OECD 2024, 37).

In the oral contract-based trade of Yoruba areas, illicit funds account for about 8% to 12%, mainly transferred through “underground banks” and traditional Esusu(rotating savings and credit associations) (AfDB and OECD 2024, 40). Informal traders often encounter harassment and corrupt extortion by customs officials, and some border areas also suffer from security risks. An ILO survey shows that informal cross-border traders in West Africa are commonly exposed to corruption, harassment and insecurity, which increase transaction costs by an additional 10% to 15% (ILO 2025, 22). Meanwhile, the lack of secure dispute resolution channels further exacerbates the uncertainty of enterprise operations.

III. Cases: Analysis of Enterprise Success and Failure from the Perspective of Cultural Adaptability

3.1 Success Case: A Textile Trading Enterprise Relying on Oral Contract Network

Olokun Trading, a textile trading company founded by a Yoruba entrepreneur in Nigeria in 2018, focuses on cross-border trade between Nigeria, Benin and Togo. The core strategy of the enterprise is to deeply integrate into Yoruba cultural traditions. First, it joined the Parakoyi merchant guild, abided by guild ethical standards, and quickly established trust through community endorsement.

Second, it adopted a gradient oral contract ceremony based on transaction scale: small transactions are confirmed by handshake plus proverbs, while large-scale cross-border transactions involve the imule (soil-drinking ceremony) with the attendance of guild elders as witnesses.

Third, it relied on a family-townsperson agent network to solve cross-border logistics and settlement problems. Agents conduct business based on community identity without written authorization, yet maintain a zero-default record.

Through these strategies, the enterprise increased its annual turnover from 800,000 US dollars to 4.5 million US dollars within 5 years, with a customer repurchase rate of 85%, far exceeding the regional average level. The key to its success lies in the accurate adaptation to Yoruba cultural resilience, transforming religious beliefs and community norms into the underlying guarantee of transaction trust, and thus significantly reducing governance costs.

3.2 Failure Case: A Foreign-funded Retail Enterprise Ignoring Cultural Traditions

In 2020, a European foreign-funded retail enterprise entered the Yoruba-inhabited areas of Nigeria, insisting on adopting Western written contract models for procurement and sales. It refused to participate in local oral contract ceremonies and declined to join the Parakoyi guild. Despite investing heavily in marketing, the enterprise lacked cultural recognition, leading to insufficient trust from local suppliers and consumers.

Suppliers, worried about the unenforceability of written contracts, demanded 100% prepayment. Consumers, not recognizing its business model, showed a high turnover rate. In addition, the enterprise failed to establish an agent network, resulting in frequent delays and losses in cross-border logistics. Eventually, due to high operating costs and unresolved trust crisis, the enterprise withdrew from the market in 2022 with a cumulative loss of over 2 million US dollars.

The root cause of its failure is the neglect of the shaping role of Yoruba culture on business, the mechanical application of Western systems, and the failure to adapt to the local informal economic ecosystem.

IV. RECOMMENDATIONS: A REPLICABLE LOCALIZED OPERATION GUIDE

4.1 For Yoruba Local SMEs: Deepening Cultural Embeddedness

Join the Parakoyi Guild: Approach the local Parakoyi head (Olori Parakoyi) through a respected community elder or existing member. Present a kola nut and a small amount of palm wine as a traditional tribute, express commitment to guild ethics, and pay the membership fee (typically 5,000–10,000 Naira). Attend guild meetings regularly to build relationships and gain community endorsement.

Adopt Gradient Oral Contract Strategies:

Small transactions (< $1,000): Use handshake + commercial proverb, e.g., “A kì í fi ọmọdé mú owó, a kì í fi àgbà ṣeré” (One does not entrust money to a child, nor treat elders lightly) to signal reliability.

Regional wholesale ($1,000–$10,000): Employ aroko symbols (e.g., sending cowrie shells to confirm an order) and have two guild members witness the agreement.

*Large cross-border deals (> $10,000)*: Organize an imule or majemu(calabash-drinking ceremony) presided over by elders, where parties drink from the same calabash to invoke ancestral blessings and curses on defaulters.

Build a Trusted Agent Network: Recruit agents from extended family or hometown associations, verify their community standing through the guild, and use oral references rather than written contracts to reinforce mutual obligation.

4.2 For International Investors and Foreign Enterprises: Culturally Intelligent Market Entry

Pre-entry Cultural Training: Invest in immersive training on Yoruba business etiquette, including the significance of proverbs, greetings, and gift-giving. Hire a local cultural consultant from within the Parakoyi system.

Partner with Local Firms: Form joint ventures with established Yoruba SMEs that have guild membership. Use the local partner to handle oral contract negotiations while foreign partner focuses on formal compliance.

Respect Sacred Rituals: When engaging in large transactions, participate respectfully in imule or majemu ceremonies. Never dismiss them as superstition; instead, view them as trust-building mechanisms.

Mitigate Risks:

Cultural misunderstandings: Always clarify terms orally before formalizing, and have a bilingual interpreter fluent in Yoruba and English present.

Biased dispute resolution: Include an arbitration clause that allows either party to request external mediation by a neutral chamber of commerce if guild elders are perceived as partial.

Documentation gap: Keep detailed records of oral agreements (audio/video with consent) to complement traditional forms.

4.3 For Regional Policymakers: Bridging Formal and Informal Systems

Recognize Oral Contracts Legally: Amend commercial codes to grant limited legal recognition to oral contracts witnessed by registered guilds or traditional leaders, with a maximum value threshold (e.g., up to $10,000).

Establish a “Cultural-Legal” Certification Mechanism: Create a joint certification board comprising Parakoyi elders and judiciary representatives to authenticate oral contracts and provide expedited enforcement.

Support Guild-Based Financial Inclusion: Partner with the African Development Bank to allow guild collective guarantees as collateral for microloans, reducing reliance on predatory private lenders.

Improve Border Infrastructure: Install solar lighting and security cameras in key border markets, fund night patrols with community participation, and involve guilds in managing these facilities.

4.4 Risk Awareness and Mitigation for All Entrepreneurs

While oral contracts offer low-cost trust, they carry inherent risks:

Risk of Cultural Misappropriation: Outsiders may unintentionally offend by misusing symbols or rituals. Mitigation: Always seek guidance from guild elders before engaging in any ceremonial practice.

Risk of Elite Capture: Guild elders might favor well-connected members in disputes. Mitigation: Establish a multi-tiered dispute resolution process where unresolved cases can be escalated to a council of elders from different guilds.

Risk of Memory Decay: Oral agreements can be forgotten or disputed over time. Mitigation: Supplement with written summaries in local languages, signed by both parties and kept by guild elders.

V. Conclusion

This study demonstrates that the Yoruba oral contract system, rooted in religious beliefs, community norms, and traditional institutions like the Parakoyi guild, provides an effective low-cost governance mechanism for informal cross-border trade. By embedding transactions in cultural resilience, it reduces reliance on weak formal institutions and fosters trust among SMEs.

The success of Olokun Trading and the failure of the foreign enterprise underscore the critical importance of cultural adaptability. The findings offer practical lessons for entrepreneurs and investors across Africa: integrating informal institutions into business models can unlock economic potential while preserving cultural heritage.

For policymakers, recognizing and bridging formal and informal systems can enhance regional integration and sustainable development. Future research should explore how such indigenous mechanisms can be scaled and adapted in other African contexts facing similar institutional voids.

REFERENCES

AfDB and OECD. Joint Report on Illicit Financial Flows. Updated March 2024, OECD Publishing, 2024.

Anonymous Respondent 1. Personal interview. Assisted by Nigerian Development Research Centre (NDRC), Dec. 2025.

Anonymous Respondent 2. Personal interview. Assisted by Nigerian Development Research Centre (NDRC), Dec. 2025.

Falola, Toyin. “The Guild System and Its Role in the Economy of Pre-colonial Yorubaland.” Arabian Journal of Business and Management Review, vol. 11, no. 3, 2021, pp. 42–55.

ILO. Research Report on Cross-border Trade Scale. International Labour Organization, 2025.

World Bank. Summary of Small-Scale Cross-Border Trade Survey in Benin. World Bank Publications, 2025.

World Economics. Quarterly Informal Economy Survey (QIES). World Economics, 2024.

Author

Wei Xuanyu is a researcher focusing on the informal economy and cultural resilience in West Africa, with a special emphasis on Yoruba oral contract-based trade. Her work explores how indigenous institutions can inform sustainable entrepreneurship in African contexts.