Editor: This is the first of a 2 part series explaining the link between finance and land in Nigeria. This first part focuses on the problems while the next part will identify possible solutions that can bring finance and land together in a way that can spur economic growth.
I have dedicated the last five years of my banking career to one problem, providing finance to the small businesses. So, when I was asked to document my experience as a lender who depends on land to unlock capital, it was impossible to say no; especially when the person asking bought my copy of De Soto’s Mystery of Capital.
Land is the biggest driver of capital in developing economies like Nigeria. From my experience in Nigeria, at least 70% of all business loans are secured by a legal mortgage, which is a charge on the land and building of the company or its promoters. When you remember the Surveyor-General of the Federation here saying that only 3% of Nigerians have Certificates of Occupancy, it is a clear sign of the huge opportunity to unlock capital in Nigeria. Think about this; only 3% of Nigeria’s landowners have proper titles, yet 70% of all loans are secured with property owned by this 3%. This is why the central theme of De Soto’s book – how we transform land resources from dead to live capital – is critical to Nigeria. Many times, when a lender walks away from a loan discussion, you can trace the difficulty to a lack of collateral, or an inability to unlock capital from the borrower’s land, since it has not been formally registered with the state.
Land Is Not Groundnut
You pay about 20% of the property value to register it in Nigeria, compared to 5% in OECD countries. With such exorbitant costs, most property owners simply cannot afford to register their land, and this prevents such land from being pledged as collateral when it’s time to borrow.
If you check the Land Use Act, you won’t find a section that specifies how much land registration should cost, and that is the real problem. Since the Act doesn’t specify an amount, most states simply hide behind the Stamp Duties Act to lay exorbitant charges on hapless land owners. In some countries, registering land is as cheap as buying sacks of groundnut; but not our dear country. Little wonder Nigeria ranks 187 on the Ease of Doing Business rating on land registration. This is a major reason why just 3% of Nigerian land is titled; registering land is not as cheap as buying groundnut.
No Title, No Money
Some wisecracks decided only state governors, or at best a land commissioner can sign those precious certificates of occupancy. This means you can wait 5 years for the Governor to consent to your registration. Since most of our Governors didn’t choose the baby boy life, nobody told them their job includes signing hundreds of certificates for random land owners they don’t know. This is a big problem for those of us who lend people money.
A client tells you s/he spent N60 million building a house, and wants to use it as collateral for a N30 million loan. Sounds simple eh? When it’s time to do a search, the client then shows you a right of occupancy and says this is the only title document s/he has. Of course, that’s where the discussion ends. Simply put, the right of occupancy only signifies intent to formally own the land; and does not confer any ownership rights on the holder, since the state has not formally allocated the land to him/her. In many states, this is the “title” being held by land owners, which simply means all that capital is dead.
Yet, most of the governors don’t realise the simple task of signing those certificates might be the biggest driver of commerce in their states. By providing proper registration for land, banks and other lenders can unlock capital from those assets and create the lifeblood for business.
Blessed are the Governors
Nothing irritates me more than this Governor’s Consent.
Imagine you buy a piece of land and spend 5 years getting your title document after paying almost 20% of the land’s value to the state. I’m sure you’re thinking how good it feels to be rid of the state, right? Sorry, I’ve got bad news for you. A few years later, you want to borrow N5 million using that same property and you approach a bank. For that bank to register a legal mortgage on your land, it still needs to seek the consent of the Governor. While I understand the state should be informed when land is transferred, I don’t understand why the Governor should consent to a use of your land as collateral. Of course, apart from delaying the time it takes to register a mortgage, it also increases the cost of the transaction, since the mortgage registration is not free.
I’ve Got 99 Problems …
One more reason why many people retain their customary charge on land is simply to ensure their freehold on the land is not converted to leasehold. Once you formalize your land title, the price you pay is huge – the land you could have held for centuries on a freehold is converted to leasehold which gives you rights for 99 years.
Why is it a problem? If the leasehold on that house you are buying expires in 30 years, very few banks will give you a mortgage for 20 years. The reason is simple, the land becomes less attractive as the lease runs down, and especially when we know the state can simply allocate that land, and the property on it, to a new owner without recourse or compensation to you. It might not be a huge problem now, but fast forward 20 years when many leases will be close to expiration, that’s when the cookie starts to crumble.
Imagine you own land, given to you by a generous parent. One day, your business needs N10 million and you approach a bank for a loan, using your land as collateral. The bank will immediately tell you that you need to formalize the registration of that land, so you drive to the Land Bureau. The first thing that shocks you, the land is valued at N50 million, so to register it, you will end up paying N10 million (remember it costs 20% of the land’s value in many places to formalize registration). So, you see the problem? If you had N10 million, you won’t have gone to the bank in the first place.
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Akin Oyebode is head of SME banking at StanbicIBTC. He writes in from Lagos.