A news correspondent once asked a Somali nomad how much his house cost. The nomad found the question slightly baffling. He explained that he had built it himself, with materials he had on hand. The walls were made of sticks, woven together and curved into a dome. For protection against rain and sandstorms, he had laid animal hides over the top and lashed them down. He could not say how much the dwelling was worth, because it would never have occurred to him to sell it. When he moved away in search of better pasture, he simply dismantled his house, loaded it onto a camel’s back and took it with him.
Hernando de Soto (De Soto), a famous Peruvian economist known for his work on the informal economy, defined dead capital as “an asset that cannot easily be bought, sold, valued or used as an investment”. De Soto’s work showed that even those who live in slums possess far more capital than anyone realizes. These possessions, however, are not represented in such a way as to make them fungible assets i.e. exchangeable assets. These assets therefore cannot create value for the owners thus they are ‘dead capital’.
De Soto in his book titled “The Mystery of Capital” revealed that most people in third world countries are not as impoverished as portrayed. He found out that the total value of untitled real estate (land) held by the poor of third world and former communist nations is at least US$9.3 trillion. Furthermore, De Soto estimated that the total value of Africans’ informally owned houses and farmland in 1997 was roughly US$1 trillion. These assets are not captured in any land registry known to the legal or financial system in those countries. They are only in possession but not legally recognized to be owned by them. Therefore, these peasants are unable to exercise transferable (ownership) interests and rights in these assets as financial capital in the form of collateral/guarantee for loans, secured assets (asset securitization) or as capital contribution to a partnership.
In the same way, SMEs in Nigeria invest a lot of capital in the form of factors of production (land, labour, financial and intellectual capital) into their business, however they still do not generate as much value (profits) as the capital invested. This is because the capital employed in the business is dead and has not been activated. Some SMEs are afraid to approach a financial institution for a loan because they are not even aware of the capital they possess that they can exchange as collateral for the loan. Some entrepreneurs are selling their business/companies for far less than it is worth because they are not aware that the value of a business is not only the cash in the bank and the business premises. Client list, business name, softwares, equipments and even employees are all capital of a business that has value and can be sold. On the other hand, how can you sell what you do not know exist?
Recently, the Acting President Yemi Osinbajo signed into law, the Secured Transactions in Movable Assets Act, 2017 (otherwise known as Collateral Registry Act). The Act ensures that Micro, Small and Medium Enterprises (MSMEs) in Nigeria can register their movable assets such as motor vehicle, equipments and accounts receivable in the National Collateral Registry and use same as collaterals for accessing loans. This, in turn, will increase their chances at accessing finance and thereby tackle one of the major obstacles faced by MSMEs. However, the question remains – how many SMEs are ready to tap into this potential? That is, how many SMEs have properly documented capital to register at the Registry?
In order to ensure that you are generating value from your capital, you must ensure that it is formally or legally represented and traceable to a functional institution, department or agency recognizable at law. Dead Capital is any form of capital without formal or legal representation. Capital is given life only when it is represented in writing by a recognised authority established by law.
Some practical ways of ensuring your capital is titled or formally represented to enable your business have access to incentives and financial capital include the following:
1. Business name registration with the Corporate Affairs Commission;
2. Software/Intellectual property/Patent registration with the Trademarks, Patents And Designs Registry, Federal Ministry Of Industry, Trade and Investment;
3. Product registration with the National Agency for Food and Drug Administration Control (NAFDAC) and Standard Organization of Nigeria (SON) for product imported into Nigeria;
4. Certificate of Occupancy or registered Deed of Assignment with the Land Registries in all States;
5. Motor vehicle registration with the Federal Roads Safety Commission;
6. Equipment registration (with value above NGN 500,000) with the Industrial Inspectorate Division of the Federal Ministry Of Industry, Trade and Investment;
7. Preparation of a statement of affairs such as cash flow, profit or loss and statement of financial position; and
8. Bank Verification Number
Remember as faith without works is dead so also capital without legal ownership is dead. Therefore, in order to create that confidence in investors to invest in your business and financial institutions to make credit available to you, you must bring to life every capital in your business no matter the size or type.