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Title deeds can unlock bank loans for business

Published Feb 2, 2012

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In 2001 Hernando De Soto estimated that the worldwide value of the property of the poor was about $93 trillion (R723 trillion at yesterday’s exchange rate). The main characteristic of this property is that those who live on it, or anyone else for that matter, has claim to the title deeds of ownership of this land.

What would be the implications if this was different? How important is property ownership? The main economic failing in this situation, as De Soto points out, is that without official ownership of the property it cannot be used as collateral to take out a loan. This means that prospective township business people do not have the access to secured credit.

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Take a local spaza shop owner, who wishes to invest in a new freezer so that she can offer frozen foods and thus increase profits. If she had a title deed to the land the shop was on, let’s say worth R20 000, she would more than likely be able to take out a loan at a local bank for the R4 000 she needs to buy a freezer.

Without this collateral, however, she would either need to save for months, possibly years, to put together enough money or she would need to turn to local loan sharks whose annual interest rates can be thousands of time higher than the formal banks.

De Soto argues that by unlocking this dormant capital the developing world would see a significant increase in business activity and ultimately increases in economic growth and wealth among the poor. By bringing this sector of the population into the formal sector the government would also unlock a new source of tax revenues and information.

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There is another side to the benefits of property ownership, although it is unquantifiable and therefore disliked and discounted by economists and politicians. This is the change to people’s attitudes that can be inspired by a confirmation of ownership. To take this out of the realm of the abstract, think of the last significant improvement, effort, or investment you put into the place where you live.

Would you have done the same if you did not own, or at least have a long-term lease of, the property where you live?

People who feel a sense of ownership of what they have feel a greater desire to improve it. This can be seen as a fluffy human emotion, or as a simple return on investment; you only sacrifice effort or money now if you are sure that you will be there to enjoy the future benefits.

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Those who own their property are more likely to improve it, thus increasing its value and their net wealth. This loops back, allowing them higher access to credit and greater ability to improve their wealth.

De Soto himself admits that property ownership is no once-off solution but rather a crucial link in the chain. Low-value property may not be enough to incentivise banks to lend to such a high-risk segment of the population and loans may find their way to conspicuous consumption rather than effective capital growth.

That said, in South Africa, where lack of access to credit, poor living conditions, and low levels of entrepreneurship are often identified as leading problems, ownership of property could be a relatively simple support to other policies.

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Much credit needs to be given to the provision of low-cost housing since 1994, but perhaps these policies need a forerunner that simply arranges to grant ownership to what the poor already have, allowing them the means to improve it.

Pierre Heistein is the course convener of the UCT Applied Economics for Smart Decision Making course. Visit www.getsmarter.co.za.

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