by Lindy Davies

Recently, Nigeria has completed a rather difficult program of government-mandated bank consolidation. This has been on the HGI’s radar screen because our website, having shown some passing interest over the years in the economic affairs of Africa, has been besieged with requests for information on Nigerian banking. The story that emerges is fascinating, and offers important lessons for the rest of the world at a crucial juncture in history.

Let me try to briefly sum up Nigeria’s banking situation. The recent reforms, under the acclaimed leadership of Central Bank Governor Charles Soludo, have required Nigerian banks to have a minimum capitalization of N25 billion (or about $190 million). (Capitalization, for those of us new to banking lingo, is not the same as cash reserves; it is defined as the sum of a corporation’s invested capital, and relates to the size of loans a bank is able to make.) Faced with this requirement, the number of banks in Nigeria has dwindled in the last three years from 89 to less than 24 (the “final” number will be less; mergers and acquisitions are ongoing). The purpose of this was to make it possible for Nigerian banks to become players on an international scale, helping to make Nigeria a financial capital, a sort of “Hong Kong of Africa”.

This would help to establish Nigerian economic policy as something less of a laughing-stock than it had been for the preceding two decades. Indeed, the banking recapitalization effort has enabled two recent developments which helped to send that message. Nigeria has at last been removed from the G8’s list of the world’s most notorious havens for money-laundering. (Although money-laundering must happen in other nations, as of now only Myanmar is brazen enough to remain on the list.) Second, the steps to strengthen Nigeria’s banking industry have been recognized as serious enough to merit debt relief from the Paris Club (a 19-member group of national representatives that brokers national debt-reduction deals on behalf of the IMF). But not without an incentive: this year Nigeria paid $12.4 billion to secure a deal that reduced its foreign debt by $18 billion. It had the money to do that because of the recent worldwide run-up in oil prices. Oil royalties are, essentially, Nigeria’s only source of public revenue; it maintains a large and growing trade surplus, due to oil exports.

For decades, Nigeria has been one of the world’s favorite examples of the “resource curse”. It is widely held that nations blessed with an abundance of natural resources are destined to become corrupt and backward, because development and stability are precluded by the irresistible temptation

to exploit quick profit and political gain from selling off the resources.

According to this argument, it’s better for a national government to preside over the lifeless wastes of the Sahara. Nigeria has seemed bent on fulfilling this prophecy. It has earned a worldwide reputation for abject malfeasance and corruption; it became what Wole Soyinka painfully described as “the open sore of a continent”.

If Nigeria was more corrupt than other nations in Africa, it was primarily because it had greater potential. Indeed, despite the pre-eminence of oil in everyone’s current calculations, this most populous country in Africa has an embarrassment of natural riches. There are abundant solid minerals, and there are vast expanses of fertile land. Pre-oil Nigeria was a net exporter of food, but last year it imported some $2 billion worth. There are tremendous marine riches; the Niger Delta is a bountiful fishery (or was, until oil spills and gas-flaring began to ruin it). Nigeria’s potential for very rapid economic growth has investors salivating. Given Nigeria’s astounding natural endowment, its hefty oil revenues and its large population, it ought the be an engine of fabulous profits in the near future. Its recent banking reforms are an attempt to position the country’s small community of investors for this. Oil royalties are enough to satisfy a short-sighted, post-colonial elite — but to start bringing in the real money, Nigeria needs numbers. It needs leverage. It needs, in other words, a world-class financial system.

It is far from having one. In 2003, an ad in Tell, a popular Nigerian newsweekly, showed a family struggling to recover bags of cash from a burning house, urging countrymen to put money in banks, where it would be safe. It may seem cartoonish, but it’s true: 84% of the money in Nigeria is still outside of the banking system. The businesses most of us think of as “banking” in the US — mortgages, small business loans, checking and savings accounts — are essentially nonexistent. Outside of a very small pool of highly credit-worthy multinational employees, there is no retail banking in Nigeria at all. Nigeria’s banks mainly deal with corporate clients, and yet the banks are too small — even after the recapitalization — to land the really big corporate-infrastructure projects. To build world-class financial viability, Nigeria must get itself a retail banking industry. Stabilized, monetized, brought into 21st-century accounting and financial practices, Nigeria would be poised to achieve China-like growth. All the nation must do is to tamp down the most egregious corruption, provide securely collateralizable land tenure, institute modern financial practices, and get out of the way.

That’s the conventional wisdom, anyway. But on examination, a few elements in the media’s picture of Nigerian finance start to strain credulity.

The first thing to wonder about is the debt-restructuring deal. Nigeria managed to deal away $18 billion of its foreign debt, offering its creditors cash payments of $12.4 billion. By spending some of its oil windfall, Nigeria avoided the debt relief offered under the “Heavily Indebted Poor Nations” program, which entails painful privatization and fiscal-control requirements. Nevertheless, Nigeria just spent $12.4 billion on debt relief, while the need for basic infrastructure, roads, power, medical care and education is painfully obvious everywhere one looks. And the debt is not fully retired! There is still an external debt of $19.5 billion (that’s on paper; creditors would probably accept a smaller amount in cash). Was that their best deal? Perhaps not for the people, but Nigeria’s leaders were happy with it. It must be admitted that all this matters little to most Nigerians. They struggle along with the informal economy, the AIDS, the Bird Flu, the astronomical price of gasoline, the lack of roads and schools — just as they have all along. It may be hoped that banking reforms will allow some benefits to trickle down, but that was also said of oil profits.

Then there is the emphasis on “retail banking”. The asset-generators of retail banking fall into two general categories: consumer lending via credit cards, and home mortgages. Nigeria suffers from the typical “third world” holdups to establishing these businesses. Identities are less secure than one might like; forged passports are easily acquired. There is little incentive to trust a credit card issued by a Nigerian bank.

Also, the lack of a central registry of land titles makes real estate less secure than investors would like it to be. But this could be dealt with relatively quickly, because the potential mortgage market is the really exciting thing. Home mortgages are the Faustian genius of the US economy, providing some 66% of American families with a perceived stake in the nation’s prosperity. The potential for growth in a Nigerian home-mortgage market is stupendous. It would be starting from, basically, zero. Provide secure land title and a sufficiently competent banking system, and ZOOM!

To get clear on why this is such a tantalizing prospect, we will need to review some basic economic facts. One is that land, unlike the products of labor, does not have value per se. It is useful in production (and necessary for survival) whether there is economic demand for it or not. Lots of people in Nigeria right now are using land that has, nevertheless, no market value under current conditions. Two factors that would profoundly affect the state of that market are the security of land title, and the availability of mortgages. Providing those things would create a vast market demand for land — and hence a vast amount of value, out of thin air — which would provide the asset base for Nigeria’s new banking system.

This process would most likely bring Nigeria a world of pain. But— one might ask — how could things really get much worse? Don’t something like 70% of Nigeria’s people already live on less than $1 a day?

I must ask the reader to endure a tangent on why that conventional definition of poverty, “living on less than $1 per day,” is in fact destructive, misleading rubbish. No one can subsist solely on the buying power of one dollar per day (regardless of how the figure might be contorted in purchasing-power-parity formulae). It simply cannot be done — has the reader tried it? Yet these Nigerians are subsisting — they’re not starving by the millions; they wear something; they sleep somewhere. Therefore, the statistic of “people living on less than $1 per day” has a nebulous relation (if indeed it has any relation at all) to the number of people living in the condition that people recognize — when they see and feel it — as poverty.What that number actually tells us is, roughly, the number of people whose economic activities are “informal” — or in other words, unleveraged, uncollateralized, unbanked. — L. D.

Yes: about seven out of every ten Nigerians actually subsist (as opposed to rapidly dying off) on less than $1 per day, and they are doing so on land whose market value is nil. This will not be the case for long, if the banking modernization goes forward as envisioned. The availability of loanable funds and the formalization of land titles will put price tags on land parcels that had none (and in many cases, have been apportioned through traditional village-clan systems). A new middle class might benefit, if it can find employment. But many people will be displaced and have nowhere to go — we can ask the Delta’s Ijaw and Ibo people how that feels. Nor would the phenomenon be strictly — or even primarily — rural. Displaced peasants head for cities looking for jobs — and that is precisely where the freshly-primed real estate market would be pumping up values the fastest. Soon the call would go out (as it did in Zimbabwe) to bull-doze the shantytowns that stand in the path of progress.

But what’s the alternative? The fact is that Nigeria faces a profound opportunity to achieve strong economic growth while avoiding the economic mistakes of the 20th century. That is because Nigeria is poised to take the step toward becoming a developed, modern economy, but it has not really done so yet. In this way its opportunity resembles that squandered by the Russian Federation after the dissolution of the Soviet Union. Yet Nigeria’s opportunity stands in clearer relief, because it is not burdened by the political inertia of a vast centrally-planned production-and-distribution system. Nigeria’s production-and-distribution system is, in the main, entirely informal — and therefore it can adapt rapidly to changing conditions, and take advantage of opportunities.

Nigeria should go ahead with creating its national land-title registry, and Nigerian banks should proceed to modernize in order to provide the economy with much-needed liquidity. But — these things can be done without creating land-price bubbles, and without driving an economic wedge between the rich and the poor. How? The government can take land rent out of play. The rent of land can be collected for public revenue (this is actually provided for in Nigerian law already, although loopholes allow for conventional sales of land-rights). No other taxation would be needed, and the rent fund (including the copious oil royalties) would amply provide for creating much-needed economic and social infrastructure. The reform would allow import duties to be utterly abolished. With free trade, no taxes on productive labor or capital, and a growing fund for social investment, Nigeria’s business climate would be bullish. Its new world-class banking system would find a great many outlets for profitable lending, without needing to step on the greasy roller-coaster of real estate. Nigeria could indeed become the leader in building a sane and prosperous economic future for the entire continent.

Under this plan, what would happen to all those peasants, working informally on un-valued land? There would be no sudden wrenching shift. Rural land would gradually acquire market value; informal economic activities could remain informal, and unmolested, until they grew to levels at which formal collateralization would actually benefit them. The growing domestic markets created by free trade, and public investment in infrastructure and education, would create a booming market for small-business loans. The formalization of the economy would happen gradually and organically, and would not require the creation of a class of losers.

The key to beating the “Resource Curse” is clearly understanding what it is. It does not apply only to “big ticket” “strategic” resources like oil. Given the power of modern finance capital, it comes to apply to all natural opportunities — to land itself. When land values become the basis of a financial system, the Resource Curse becomes institutionalized, creating an irresistible temptation to inflate those values into bubbles — causing volatility, lost opportunity, inflation/unemployment: in a word, pain. This is the kind of “world class banking system” that Nigeria is rushing to embrace — but everyone needs to know that a much better alternative is available.