Financial institutions require security as collateral before granting loans to borrowers. Securities are collaterals in form of assets or property offered or pledged by individuals or corporate entities for the issuance of a loan from a bank and when the borrower fails to repay the loan, the bank can take steps to repossess the security given as a way of compensating for the unpaid loan. Securities are ways to protect the interest of the bank against any potential loss in event of the default of the borrower to repay the loan. This article aims to briefly discuss the types of securities that can be accepted for bank loans in Nigeria.
Types of Security Acceptable for Bank Loans
The Nigerian law recognises different types of collaterals for loans, which may be created over tangible or intangible assets in Nigeria. They can be taken in form of a mortgage, charge, pledge, lien, or assignment depending on the type of security. The security for the loans can either be equal to, less than or greater than the value of the loan applied for. Apart from considering the viability of the borrower's source of repayment, the bank will also assess the quality of the borrower's security to determine whether it possesses adequate net worth for the loan applied for. Some of the securities that can be used for bank loans in Nigeria include the followings:
- Real Estate- landed properties; constructed buildings; fixtures on land; leasehold on a property (intangible rights) are acceptable securities for bank loans in Nigeria. Real estate is the most recognized and widely used form of security for loans. The borrower will be required to deposit the title document such as Certificate of Occupancy, Deed of Conveyance, Deed of Assignment, Deed of Gift, Deed of Sub-Lease, and any other title deed to the bank. Security can be created either by legal or equitable mortgage or a charge. A legal mortgage involves a transfer of the legal title of the property to the bank as a security for the repayment of a loan. The transfer is subject to the condition that the title will revert to the applicant when the loan is repaid.
An equitable mortgage creates a personal right against the borrower (mortgagor), which cannot be exercised without an order of the court. The bank can hold the title deeds as an equitable mortgage on behalf of the applicant and in the eventuality of the borrower's defaulting in the repayment of the loan, the bank can perfect the title document by placing a lien on it in form of a legal mortgage.
- Shares, Stocks, and Bonds- security can be in form of shares of a company incorporated in Nigeria by a way of a mortgage or a charge. To perfect an equitable mortgage or charge over shares, the borrower (mortgagor) must deposit the share certificate with the secured lender (mortgagee) with or without a memorandum of deposit. While to perfect a legal mortgage, the mortgagee must be registered as a shareholder in the register of company members with an undertaking for a re-transfer of the shares to the mortgagor if the loan is discharged. An equitable mortgage is created by depositing the shares certificate with the bank or a security trustee appointed by the bank, and where it is created, the legal title to the shares is not transferred to the bank or security trustee.
- Cash Security- this form of security is the simplest form of security for bank loans, it is however not a common form of security in Nigeria. Cash security can be in form of cash deposits, fixed deposits, treasury bills, currents accounts, or savings accounts. This simply means that an individual can take a loan from the bank where an active account is maintained and in the event of default to discharge the loan, the bank can liquidate the account to recover the disbursed loan. The interest accrued on the loan usually differs from one bank to another. The security is granted in form of a charge on the money.
- Lien on Asset- it is also referred to as a joint registration of assets such as equipment, machines, automobile in the bank and customers' name. A lien is placed on assets that have been jointly financed by the bank and its customer until the loan is fully paid up.
- Domiciled Payment- this form of loan security is not popular in Nigeria. It is a form of security where bank customers involved in contracts with multinational companies or well-known companies used their Local Purchase Order or contract agreement to secure a loan. It is secured on the basis that the multinational company or known principal is ready to make payment upon completion of the contracted job.
- Machinery and Equipment- security for a loan can be granted over machinery and equipment in form of a mortgage, charge, or pledge. It is created by a transfer of title to the asset on the condition of re-possession upon discharge of the loan facility or sold if the applicant defaults in the loan repayment.
- Receivables- security can be granted over receivables such as insurance policies proceeds, debts, charges, mortgages, assignment of receivables by way of security, and contractual rights. This form of security granted can be by way of an assignment or charges.
- Intellectual property- security can be taken over intellectual property such as patents, trademarks, copyrights, or industrial design, by way of a fixed charge or an assignment, mortgage, or floating charge. The bank and borrower are required to execute a deed of agreement setting out the terms and conditions on which the security is to be granted. It is not a popular form of security in Nigeria.
- Stock Hypothecation- this is a form of security for a bank loan that is utilized mostly by traders and wholesale distributors of consumer goods. For this type of security, a special agreement is entered between the bank and the customer to have the goods financed warehouse and release to in bits either in exchange for the cash equivalent of the goods worth or cash equivalent of goods released previously to the customer's bank account before more goods are released.
- Documentary Credit- this is a form of commercial lending where a seller of goods deposits the documents of shipping such as bill of lading to the bank to access credit granted to the buyer. To initiate this type of lending, the buyer will apply for a letter of credit from its bank in favour of the beneficiary, the seller. The bank can fund the letter of credit through a loan granted to the buyer where the bill of lading will serve as the security for such a loan. In this circumstance, the bank may be listed as the consignee of the goods contained in the bill of lading deposited with it.
In closing, granting loans to borrowers are ways by which banks can increase profitability and also satisfy the credit needs of their customers. In taking out loans, the decision of the borrower is oftentimes influenced by factors such as the risk involved, the lending policy of the bank, and the interest rate. The important considerations for the lender before giving out a loan are usually security for the loan and viability of repayment source or bankability of the lending.
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.