Legal Framework Of Lending Transactions In Ghana

Introduction

Lending transactions are at the heart of modern banking and commerce, and in Ghana, these transactions are shaped by a combination of statutory law, common law, and evolving regulatory frameworks. For legal practitioners and banking professionals alike, a solid understanding of the applicable laws, transaction structures, and documentation requirements is essential to mitigate risks and enhance compliance.

This article outlines the legal and regulatory context governing lending in Ghana, discusses the practical steps involved in loan transactions, and highlights the pivotal role of guarantees in credit risk management.

Applicable Laws

The primary statutes governing lending transactions in Ghana include:

1. The Contracts Act, 1960 (Act 25): This governs the formation and enforceability of financing agreements.
2. The Borrowers and Lenders Act, 2020 (Act 1052): It provides borrower protections, mandates disclosure requirements, and establishes a regulatory framework for secured transactions.
3. The Companies Act, 2019 (Act 992): It regulates corporate borrowing and registration of charges.
4. The Stamp Duty Act, 2005 (Act 689): It prescribes stamping requirements for admissibility of financial documents.
5. The Mortgages Act, 1972 (NRCD 96) and Land Act, 2020 (Act 1036): These Acts apply to mortgages over immovable property.
6. The Banks and Specialized Deposit-Taking Institutions Act, 2016 (Act 930): This Act regulates exposure limits and related-party transactions for banks.

Borrower Capacity and Approval

Lawyers, internal or external, must ensure that borrowers, especially corporate and public entities, have the legal capacity to borrow. The company's constitution, shareholders' approvals (if required under section 189(9) of Act 992), and establishment legislation for public institutions must be carefully reviewed. The purpose of the loan must align with the borrower's authorized business as required by Act 992. When a company contracts a loan for a purpose which is unrelated to its business, it is deemed to be ultra vires the directors of the company.

Structure of Lending Transactions

Secured vs. Unsecured Lending

Secured lending is predominant in Ghana, especially in commercial finance. Security may be created over assets through mortgages, fixed or floating charges, pledges, or security assignments. Conversely, unsecured lending carries higher credit risk and is used selectively.

Types of Lending

Lending transactions may be:

• Bilateral, between one lender and one borrower.
• Syndicated, involving multiple lenders. Syndication is typical for large facilities that exceed single-lender prudential limits. A lead lender usually acts as the agent and security trustee.

Documentation and Process

After a credit application is approved, the process usually involves:

1. The issuance of a term sheet to the borrower;
2. The provision of a Pre-lending Disclosure Agreement to the borrower (mandatory under section 57 of Act 1052);
3. The execution of the Facility Agreement and Security Documents; and
4. The satisfaction of conditions precedent to the disbursement of the facility such as board resolutions, compliance certificates, evidence of registration and stamping.

Taking and Perfecting Security

Security documents must be stamped under the Stamp Duty Act and registered at the appropriate registry (e.g., Companies Registry, Lands Commission, and Collateral Registry). Failure to comply with the two-month stamping window or 45-day registration period renders the documents inadmissible or void as security.

Types of Security Interests

1. Mortgage: A mortgage is a charge over any immovable property without transferring ownership to the mortgagee ie. the lender.
2. Pledge: A pledge is where the lender takes possession of movable assets of the Borrower until the loan is paid off.
3. Fixed Charge: This is security over a specific asset with usage restrictions.
4. Floating Charge: This is a general charge over changing assets. It crystallizes into a fixed charge upon default or insolvency.
5. Security Assignment: This security encumbers legal rights (e.g., receivables) without title transfer.

Priority and Enforcement of charges

Fixed charges rank above floating charges. However, where the terms of creation of the floating charge prohibit the company from granting a later charge having priority over the floating charge, the fixed charge will not have priority if the grantee had actual notice of the prohibition. Once registered, security interests serve as actual notice to third parties, a key protection in enforcement proceedings.

Role of Guarantees in Lending Transactions

A guarantee is a promise by a third party (the guarantor) to fulfill the obligations of a borrower if the borrower defaults in the repayment of the loan. Under Ghanaian law, a guarantee is treated as a contractual obligation governed by general principles under the Contracts Act, 1960 (Act 25). It provides additional assurance to lenders and may supplement or stand in place of asset-based security.

Legal Nature and Enforceability

1. A guarantee must be in writing and signed by the guarantor.
2. It is considered a secondary obligation, enforceable only upon the borrower's default.
3. Guarantees may be corporate (by an affiliated company) or personal (by directors or shareholders).

Strategic Importance

Guarantees serve as credit enhancement tools, particularly for high-risk borrowers or start-ups with insufficient collateral. They reduce reliance on asset enforcement and simplify recovery processes. Lenders may still proceed against both borrower and guarantor concurrently or choose to sue the guarantor directly.

Regulatory Considerations for Banks

Act 930 prohibits banks from:

1. Lending against the bank's own shares or those of its affiliates.
2. Creating excessive exposure to a single obligor exceeding 25% of net own funds.
3. Granting unsecured credit to directors or related parties without Bank of Ghana approval.
4. Granting employee credit exceeding two years' salary on an unsecured basis.

These prudential standards aim to prevent insider lending abuses and ensure sound credit risk management.

Conclusion

For lawyers and bankers operating in Ghana's credit market, it is crucial to navigate the legal and regulatory environment with precision. Proper structuring, documentation, and perfection of lending transactions protect against default and insolvency risks. Additionally, guarantees remain an invaluable risk mitigation mechanism when used alongside traditional forms of security.

With evolving borrower rights under Act 1052 and increasing regulatory scrutiny, legal and banking professionals must work collaboratively to ensure that credit transactions are not only profitable but also legally sound and compliant.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.