Editor: This is the concluding part of a 2 part series on the challenges of bringing finance and land together in Nigeria. This part focuses on possible solutions. The first part is here
Now we have listed the problems, how do we solve them?
It’s all about the LAND USE ACT. Like the NYSC Act, Section 315(5) of the Nigerian Constitution makes the Land Use Act a provision of the constitution. This means any amendments to the Act must be ratified by the House of Assembly in all 36 states, before being presented to the National Assembly for passage. This is the major reason why simple amendments to the Act are almost impossible. If the states can suppress their narrow interests, the Land Use Act can be excised from the constitution, which will make the following amendments possible:
Governor’s Consent
There is no reason why the state governor needs to approve a lender’s interest on the borrower’s land. Apart from the time wasted, it also costs the borrower additional money which is totally avoidable. Instead of seeking consent, all such mortgages should only be registered with the Lands Registry and noted, so that interested parties have a repository where details of such lands can be looked up.
The Governor has enough work ensuring the state is secure, children go to school, hospitals are equipped etc. Please remove the onerous task of signing unnecessary documents from his/her job description. In my opinion, the state should only consent to a registration of title and a full transfer of that title to new owner; in such cases the Act should be amended so the Governor can delegate this task a nominated representative, not necessarily the Commissioner of Lands. There are examples of titles signed by a Commissioner of Lands that were invalidated when disputes occur; unless that section is amended, don’t bring any title to me, asking to borrow money, if it wasn’t signed by the Governor. If this task can be delegated, it will significantly reduce the amount of time needed to register titles in Nigeria, a big enabler of accessing finance.
Cost
The Act should be amended to explicitly state the cost of registering land. This cost should not exceed more than 5% of the value of the land, which will encourage more land owners to formalise their ownership. If the state wants to make money, it should focus on the property tax, which many states collect as both tenement rate and land use charge. If you increase the percentage of titled land, it will increase your annual revenues significantly. Remember, only 3% of Nigerian land has proper title documents.
Digitisation
This nonsensical approach of chasing files at the Land registry needs to go away. An amended Act must make it mandatory for all state governments to develop state-wide cadastral maps and provide an electronic register of land details. Why do I need to send a lawyer to the Land Bureau, wasting time and money, when I can enter the C of O details on a digital register, and pull up the needed details on my phone? Maybe in 2020…
I’ve had people ask me why collateral is such an important part of lending and why it’s one of the 5Cs of Credit. The answer is simple; collateral reduces the risk around lending significantly and is explained by this formula.
EL = PD * LGD * EAD
The Exposure at Default (EAD) is the amount outstanding on a loan at the time of default.
Let us assume ABC Nigeria Limited takes a loan of N10 million from the bank. If this loan goes “bad” from Day One, this is the exposure at default. The company provided collateral – a house worth N10m in the open market (Open Market Value) – but since it will be distress sale because the loan is now bad, the bank places a valuation of N6m on the house (Forced Sale Value). This means once the loan goes bad, the bank sells the house pledged as collateral for N6 million. This also means the Recovery Rate (RR), which is the proportion of the bad loan that can be recovered, is 60%. The Loss Given Default (LGD) is the portion of the loan that is not recoverable, which is calculated as 1-RR.
Using our example, the LGD of this loan is 40% (1-60%). Since the loan is already bad, the Probability of Default is 100%. So, when we calculate the expected loss from this loan, it looks like this.
100% * 40% * 10,000,000 = N4 million
Now imagine there was no collateral pledged, the expected loss will look remarkably different. Since we have no collateral, the Recovery Rate will be Zero, which means the LGD is 1-0 or 100%. If you calculate the EL now, it looks like this
100% * 100% * 10,000,000 = N10 million
That’s a huge difference for any lender – the comfort of reducing the risk associated with lending by 60%.
This is why land is an important tool for unlocking capital. So, when you rank 185 out of 189 countries on the land registration index of the Doing Business 2015 Report, it should set your alarm bells ringing. I don’t know what these governors think about, but if you know any of them, do them a big favour, and buy them a few books. You can start with How Asia Works, The Mystery of Capital or Land Reforms in Developing Countries, so they understand why the excision of the Land Use Act is necessary.
Hopefully, within the next four years, a proposal to review the Land Use Act will come to an assembly close to you; if it does, please blow your representative’s phone up with text messages supporting the review.
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Akin Oyebode is the head of SME banking at StanbicIBTC. He writes in from Lagos.