According to renowned development scholar Hernando de Soto “Dead capital” is the term for an asset that cannot easily be bought, sold, valued or used as an investment or collateral for accessing finance.
If one is to take the literal meaning of the foregoing definition and Nigeria’s rankings with regards to poverty, it would only be fair to state that we have a chronic symptomatic case of dead capital. Nigeria despite the various developmental plans and initiatives continues to grapple with increasing levels of poverty, unemployment and an epileptic industrial and manufacturing base.
This developmental challenge is also hinged on the Country’s low access to credit by majority of prospective borrowers including small and medium enterprises. This lack of credit access has been noted by financial services practitioners and advocates in Nigeria to have links with the inability of most borrowers to provide assets that can be valued or used as an investment or collateral as per Soto’s economic prognosis.
The prevalence of dead assets and lack of access to credit as a critical issue is symptomatic of Nigeria’s developmental challenges and no more pronounced than in the state of its housing and property markets. According to information from the Centre for Affordable Housing in Africa, Nigeria has one of the lowest home ownership rates amongst its emerging market peers. Nigeria’s home ownership rate is currently 25%, lower than that of Indonesia (84%), Kenya (73%), and South Africa (56%).
The prevalence of dead capital is also linked with other major issues that continue to affect housing in Nigeria such as constraints related to the high cost of securing and registering secure land title, inadequate access to finance, slow administrative procedures, and the high cost of land. As at 2018 Nigeria had a little over 24,000 mortgages which is equivalent to a Mortgage book value of 1% of its towering Gross domestic product (estimated at almost or over US $400 billion).
Regarding international standards, the global mortgage market is projected to be valued at over $31 trillion with over 30% of South Africans having a mortgage on their homes while 66% and 70% of Americans, British and Chinese households respectively have a first or second mortgage on their homes. Mortgages are a critical aspect and source of funding within financial markets, households, and the economy at large.
For instance, the average mortgage closing costs and associated property taxes for countries with higher Mortgage to GDP ratios would typically vary between 1% and 3% of the price of the property, including broker fees, loan origination fees, underwriting fees, surveyor fees, legal fees, and title fees.
However, with regards to Nigeria, mortgage and property taxes on the average account for anywhere from 25%-30% of the cost of the property. While this situation is not surprising and a clear disincentive to property acquisition and home ownership, property acquisition and home ownership still lend itself as the most viable means of accessing credit for individuals as well as a means of tax revenues for the government.
In view of the foregoing and the fact that less than 3% of property and mortgages in Nigeria are registered or have a transferable title (Certificate of Occupancy), it is only expected that credit access, property ownership and by extension government revenues will continue to subsist at low and unsustainable levels. This further shows that Nigeria’s inefficient tax administration and overall lagging development may continue to persist without verifiable data. Even in the face of these challenges, mortgage and property taxes although easy to collect and enforce for tax purposes, inefficient identification and assessment of value and lack of records continue to hinder the growth of credit and revenue at personal and national levels.
If per our argument that there is the prevalence of dead capital, it, therefore, presupposes that Nigeria has significant wealth, tax revenues and equity trapped in unidentified and unregistered assets (including immovable assets like untitled land and housing).
These unregistered and unidentified assets present an opportunity for economic growth and development if between 15% and 30% of the value of Nigeria’s Gross Domestic product in relational terms of unrealized property or asset equity can be unlocked via collateralize lending. In terms of property or mortgage to GDP ratios, these unrealized assets could add an extra US $120bn or the equivalent of between N20 and N30 trillion Naira to the economy if the current levels of registration and identification grow from 3% to between 15% – 20%.
Nigeria’s current property recognition, ownership and mortgage systems and processes are heavily centralized and permeated with too many middlemen. These middlemen each add their own mark-ups and cost to the overall process, but the application of technological innovations (an e-Innovation) could change the narrative.
Electronic asset registries powered by blockchain technology as an e-Innovation could position the Nigerian property, financial and mortgage industries as targets for the much-needed disruption that would positively unlock dead capital required for growth and development. According to McKinsey “Propertytech with Blockchain applications can significantly alter the traditional process of buying and maintaining a home, in addition to as the method applied by financial institutions in processing and managing mortgages.
Blockchain could drive down cost and remove friction from credit processes, create watertight transaction records and transaction settlement The current mortgage application process in Nigeria is largely paper-based, labour intensive, time-consuming, and expensive. This is in most part due to a long line of 3rd party service providers that all have an input into the process, such as surveyors, valuers, lawyers, credit agencies, and government land registry offices.
Property and Mortgage application processes in Nigeria as a clear example is heavily paper-based, manpower intensive, time-consuming, and expensive. This is of cause due to the already highlighted involvement of third-party service providers with inputs. A preliminary survey of mortgage and property development firms in Nigeria indicated that the average property purchase and mortgage application documents involve anywhere from 400 to 500 pages. In addition to lengthy documentation, mortgage and property transactions in Nigeria usually involves intermediaries who add 1% to 2% of the property’s value of their own fees as an addition to the overall cost.
Furthermore, intermediaries also add extra days of processing time, leading to delays in the process . In terms of transferring the gains of e-Innovation towards unlocking value, it is essential to understand that structuring credits, creating mortgages or carrying out property related transactions, financial institutions require accurate information from intermediaries such as surveyors, law firms, etc.
In the situation where a substantial portion of the needed information is stored in a registry supported with a blockchain technology, each intermediary will be able to update its part seamlessly. This would make it easy for financial institutions to retrieve the various pieces of information required from the system, without having to rely on individual, paper-based applications from third-party intermediaries, e.g. digitized copies of legal documents, property valuations, and title deeds.
In an earnest evaluation of the status quo, it is improtant to recognise the Central Bank of Nigeria’s efforts geared towards unlocking dead capital via the introduction of the National Collateral Registry though there is need for improvement. This is in consideration of the fact that the current collateral registry is punching heavily below its weight. The current registry as it exists focuses on only movable assets .
The National collateral registry could become a quintessential tool if it is also restructured to handle immovable assets (mostly landed property). Where this adjustment becomes necessary, e-Innovations such as Blockchain can be used to create a digital Imprint for any property (movable or immovable including traditional, customary or untitled land), therefore making landed property in Nigeria trackable and verifiable on a network supported and enforced by a super-regulator like the Central Bank akin to what was successfully achieved with the Bank Verification Number and Nigerian Uniform Bank account Number.
This proposed adjustment or addition to the National collateral registry apart from making the mortgage and property market more liquid by unlocking dead capital from a credit and mortgage perspective, the proposed digital Imprint would include a chain of ownership, transfers and current market valuation. Getting this done will allow financial institutions to verify ownership status and confirm market value, and in so doing potentially mitigate the need of going through different intermediaries and substantially cutting cost in the process for credit applicants and financial institutions while also mitigating the risk of fraud.
According to industry analysts, Moody’s by automating mortgage lending processes, through blockchain agents and intermediaries are identified and removed with cost savings on operational costs, fees, and fraud for financial institutions. Moody’s estimates savings as much as $1.7bn (the equivalent of over N600 billion Naira).
While regarding timing, Blockchain is expected to shrink transaction time throughout the lending and mortgage value chain by 25%. This means If the Central Bank of Nigeria can adjust or upgrade the National Collateral Registry into a blockchain-based collateral registry with room for immovable assets, this is expected to further improve financial inclusion by improving the timing and access to credit for the informal sector (largely small and medium enterprises). The proposition of an e-Innovation is not meant to gloss over the inherent challenges that come with the introduction of tech innovations to traditional channels (property ownership and financing), such as data protection, fraud and general jurisprudence.
It is, however, important to note that the security of blockchain technology is robust and should be regulated with an interagency partnership outlook on its policy to manage its weaknesses better. As such rather than oppose e-Innovations like Blockchain and Fintech, regulators should consider collaborating towards the evolution of technology-driven legal frameworks, that will facilitate and ensure the security of transactions and data. India, Ghana, Singapore, China, Canada and the United States of America have several successful use cases which in turn reflects in the level of credit access, home ownership and mortgage to GDP ratios of these countries in comparison to Nigeria. These successful cases could form the basis of galvanising the required interest for the government and Central Bank of Nigeria to enhance our current systems through e-Innovation towards resurrecting the nations collective dead assets for sustainable long-term growth and development.
Writers Profile Abel Owotemu is an Alumnus and Doctoral Degree Candidate of Salford Business School and the London School of Business and Finance (LSBF) as well as the prestigious University of Nigeria (UNN) with a career spanning over a decade in Commercial, Retail and Investment Banking across Nigeria’s Financial Services Sector. Abel is an avid Business Analyst with specific interest in the areas of Innovation, Global Business trends, Public Private Partnerships, Private Equity, Project advisory, Corporate Finance and Strategy.