Why Capital Is Scarce

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I read Hernando De Soto’s seminal book, The Mystery of Capital a few years ago. In that book, De Soto identified weak property rights (specifically land but extensible to other types of tangible and intangible property) as well as the odds stacked against getting these properties legitimately recognized by the authorities as two of the critical problems that must be solved in order to free up the critical capital that is required for the majority of the populace to pursue new economic activity which lifts the nation out of a 3rd World backward nation to the path of economic greatness. In other words, the degree of ease of ascertaining who should benefit from a property and the degree of enforceability of those rights determines how much of their efforts and energies people are willing to invest in creating value from those properties.

While this holds true for Nigeria (there is a need for example to remove that wretched Land Use Act), there is a more immediate and probably easier to solve problem that is gulping up the practically non-existent capital people try to etch out. A young man has been saving for three years now and he has managed to work up his savings to a little over One and a Half Million Naira (an equivalent of about Ten Thousand US Dollars) from his monthly salary of Eighty Thousand Naira and he is contemplating going into some business venture.

However, he has been staying with his uncle for these three years and he now needs to rent an apartment. In Nigeria, that young man would be required to pay rent a minimum of one year in advance if he is lucky. In most cases, he would end up paying two years rent in advance. But that would not be all. He would have to pay ten percent of that rent as agency fee and then another ten percent as agreement fee. He would then need to part with an arbitrary fee called the caution fee which is said to be refundable in theory, but is never refunded in practice.

The young man is not yet at the end of his rented apartment spending nightmare. The houses usually lack many of the things that would make them livable and he typically has to spend a good percentage of what he paid as rent to fix the apartment up so he can move in. By the time all this is done, his savings of three years is not only wiped out, he is probably neck-deep in debt which he will then spend another one or two years clearing up. By the time he is done paying the debt, his rent is due again and he will contend with two things. The first is that the landlord without spending a dime to improve the apartment or house will hike the rent. Secondly, the young man will have to cough up a full year’s rent in advance at this new rate to keep his apartment.

I do not know of any other economy apart from ours where ten thousand dollars is wiped out for renting an apartment and this is considered a normal thing. We are not even talking about the high-end apartments here; these are normal apartments for an upwardly mobile middleclass. It is this critical, young population that should be able to dare to pursue their dreams and create businesses and industries that will change the nation. Sadly, amongst many other challenges, much of the capital they should use to start these ventures up is locked up in the cycle of upfront rent payments. The only way most young people can meet up with rent payments is to either use their savings or borrow against future earnings. And in the scale of preference, cash will first go to a basic necessity like shelter before it goes to higher needs like capital.

The issue of rent cannot be solved by creating fiery laws however, as the case in Lagos State has shown. The law (still silly) states that you pay a year’s advance if you’re moving into a new apartment and six months advance if you are renewing rent. The practice is very different. Insist on paying one year and watch the house get snapped up before your eyes. There are factors that contribute to the advance rent nonsense and unless they are dealt with, no laws can change the practice.

The first thing that must be addressed is the cost of building. Cement costs in Nigeria are amongst the highest in the world. Omo Onile (or their variants across the country) costs are factored into building costs. Obtaining the necessary documents require huge bribes to be paid, right from the land documents to building plan approvals and other approvals. The landlords are therefore typically desperate to recoup their investments and it is the tenants that pay.

The government also seems to be out of tune with what the citizens need. Building Potemkin cities that can be afforded by only a select few without low cost housing that would create an alternative to the private landlords is at best a disconnect with reality and at worst arrant nonsense. Governments provide what their citizens need, not what will make them the “greatest city in the world.” If your citizens require low cost housing, for God’s sake provide this and quit claiming land from the Atlantic or building centennial villages. And please for heaven’s sake do away with that Land Use Act. We know it’s what allows you extract oil, but oil will finish, population will keep growing and the demand on our land will increase very dramatically. It will come to a head soon. The pressures are already high at our 150Million people. When we get to the range of 250 to 300million, the pressure will be crazy.

Third, the private investors in property too need to begin to build what the people need. It doesn’t make sense to keep building all those empty mansions which tie your money down, when there is a huge demand for low cost housing that would turn your money over faster. A drive through Lekki Phase 1 and Ikoyi to see the large number of unoccupied houses would show how disconnected with economic realities our investors are.

These issues need to be addressed since funds from the banking sector are too costly for people to startup their businesses. The only viable means to get low cost funds to start up a business in Nigeria today is from your savings, a family endowment or access to public funds. It is a small wonder that most of those who have viable businesses, when we dig down, fall into the second and third categories. The savings category capital is simply wiped out by the advance rent payment.

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7 thoughts on “Why Capital Is Scarce

  1. TL, I always admire your Friday thoughts and every time, you hit the nail on the head…if only our government can read your blog…as for the private investors, they are only concerned about the 10% rich of the society forgetting that people lower down the ladder, in their numbers would pay cumulatively what one the rich would pay… Well done again…

  2. Touche! TL u make sense die! May the Good Lord give us true and patriotic leaders in d real sense of d word in dis country. The issue of housing especially in Lagos State is a goldmine now. Getting housing documents is another kettle of fish with very corrupt workers in d ministry obtaining people before they part with documents they ought to ordinarily get without any hassles. What can I say: God bless Nigeria and all who dwell therein.

  3. The housing debacle in naija is indeed arrant nonsense.lets not mince words. Great write-up. ‘How will a young man start out his life?’..the nigerian government dont wanna give answers neither do they entertain any 4rm private ‘eyes’ that see.#pitiable

  4. @ 1st i wz trying to understand it but reAding on…its just awesome! soo much truth,the reality of housing issues n capital in the country…bless you,tunde

  5. Pingback: Financing Greatness | tlsplace

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