Bank loans

Bank Loans in Nigeria: Collateral Types and Loan Documentation – Securitization and Structured Finance

Bank loans are a very valuable tool for business growth and sustainability in Nigeria; especially since we’re not exactly a credit-driven society. It is important to understand that getting a bank loan in Nigeria does not necessarily mean that a person or business is in financial difficulty. In fact, a loan can be a powerful tool for raising capital and scaling a business, when used correctly.

From short term loans with low interest rates to long term loans with higher interest rates, there are a wide variety of loan options with different features available and a properly secured loan can be a nifty tool. to catalyze business growth.

Guarantees for bank loans

Before a bank makes a loan to a party, it will require some sort of protection/collateral for the money it lends; think of it as a safety net, a security that the Bank can keep, acting as an assurance that in the event of non-repayment of the loan by the borrower, there is something to look for in the settlement of the loan – c is called a COLLATERAL.

Title to the guarantee does not generally pass to the Bank when a loan is granted; instead, the collateral remains the property of the borrower. However, if the borrower fails to repay the loan as agreed by the parties, the Bank may be entitled to sell the collateral and use the proceeds to set off the debt.

Warranty Types

With the development of the banking sector in Nigeria, there is a wide range of acceptable collateral for bank loans:

  1. Real estate:

It can be undeveloped land, a partially constructed building, or a finished structure. Either way, the Bank will usually send real estate appraisers and surveyors to inspect the property and confirm that its value is sufficient to secure the amount to be loaned.

  1. Personal property:

This category covers tangible assets other than real estate; cars, appliances and other personal property of reasonable value; these are mainly used to secure small loans.

  1. Goods:

In the case of borrowers engaged in the business of manufacturing, importing, exporting, trading and generally trading in goods on a large scale, they can use these goods as collateral for bank loans.

  1. Equipment:

When a borrower operates with heavy equipment, machinery and factories; especially manufacturers, service providers, and oil and gas workers, valuable equipment can be used as collateral for bank loans.

  1. Investments:

Investments such as stocks and shares are acceptable collateral for bank loans; a person who has valuable investments can use them to secure bank loans. Previously, borrowers seeking to use shares as collateral had to deposit share certificates with the Bank. However, with the establishment of the Central Securities Clearing System and digitization of the shareholding system in Nigeria, parties need only request that the CSCS transfer the relevant shares into a reserved lien account in favor of the Bank. .

  1. Species:

Although it may seem counterproductive, there may be times when a borrower prefers to take out a loan, even though they have money in their accounts. This may be due to some advantages he gets from having these funds in his accounts; whatever the reason, cash is an acceptable form of collateral and in the event of default by the borrower, the Bank may use the cash to offset the loan amount.

Loan documents

Loan documentation refers to all the documents used by the parties (the Bank and the borrower) to specify the conditions and the nature of the loan transaction, in particular with regard to the securities and guarantees for the loan. It can be one or more of the following:

  1. Letter of offer:

This is a document from the Bank which sets out the terms and conditions which will guide the loan transaction and if the borrower finds the terms acceptable then he proceeds to sign the letter of offer and it works as a binding contract between the parties.

A letter of offer for a bank loan sets out the details of the borrower, the purpose of the loan, the duration of the loan, the type of security advanced, the terms of repayment as well as other necessary clauses.

  1. Legal mortgage :

When the borrower uses real estate as collateral, he may be required to contract a legal hypothec in favor of the Bank. This legal hypothec is then entered in the land register and the Bank’s interest in this property is duly registered. Ownership of the property is not immediately transferred to the Bank. However, if the borrower does not repay the loan, the Bank will have a multitude of remedies, including the sale of the property.

There could also be a Third-party legal mortgage when a third party, owner of the property, constitutes a mortgage in the name of the Bank in favor of the borrower. In this case, the borrower does not own the asset, but the Bank can use the asset to offset the loan in the event of default.

  1. Personal guarantee:

It is a document signed by a person standing surety for the borrower. By this document, the guarantor undertakes that in the event of non-reimbursement of the loan by the borrower, he (the guarantor) can be held personally responsible for the reimbursement either of the entire amount of the loan, or, s it appears in the Personal Guarantee, of such an amount that the guarantor has agreed to be liable.

  1. Debenture:

One collateral option available to corporate borrowers is a debenture. The borrower creates a charge on its assets in favor of the lender. This means that the lender receives an interest in an asset from the borrower, and in the event of default, the lender can track down the asset and apply the proceeds to settle the loan.

There are 2 types of debentures – fixed charge, which is created against tangible and identifiable assets such as land and machinery; and floating charge, which is typically created for non-constant assets such as stocks and stocks (i.e., their value may change over time). A floating charge can become fixed if the borrower defaults.

There could also be a debenture that combines the characteristics of the 2 types of debenture already discussed; this is called a fixed and floating debenture.

  1. Equity Mortgage:

This is generally used by people dealing with large quantities of goods; importers, exporters, manufacturers and wholesale distributors. The borrower uses his property (“stock”) as collateral for the secured loan and, in the event of default, the Bank may seize such property.

  1. Letter of privilege/compensation:

This is used when a borrower intends to create an interest in favor of the Bank in one of its assets. This may be a deposit in a bank account or other property of the borrower; the borrower simply signs a letter indicating that he gives the Bank a lien on the specified asset.

A borrower may also sign a document entitled “Authorization to Pledge and Set Off a Deposit with the Bank” when using money from his account with the Bank as collateral for the loan. This gives the Bank the right to deduct any amount owed by the borrower directly from the deposit in any account he holds with the Bank.

  1. Irrevocable standing direct debit order:

With this document, a borrower gives the Bank an “order” to periodically deduct an agreed amount from an account with the Bank and apply it to the settlement of the loan. With this standing order, the Bank authorizes the borrower to debit the client’s account at authorized intervals (usually monthly) until the full amount of the loan is settled.

  1. Negative commitment:

With this document, the borrower, usually a business, agrees that as long as the loan facility remains, it will not use the same collateral used to secure the loan in question to secure a facility from another lender. . Basically, this protects the lender’s interest in the collateral.

  1. Joint memorandum:

Used to secure shares as collateral, a joint memorandum is signed by the Bank and the borrower, the shares to be used as collateral are listed and then sent to the central securities clearing system for action. In addition, the CSCS moves the shares into a reserved lien account in favor of the lender and the shares cannot be moved without the written permission of the borrower.

  1. Trust receipt:

This is generally used in relation to goods. With this, title to the property vests in the Bank and, although the property is in the physical possession of the borrower, it is deemed to be held in trust for the Bank by the borrower. Upon repayment of the loan, ownership of the property reverts to the borrower.

These are most of the documents that one may come across in the process of getting a loan facility from a bank. Although this article has summarized the basic meanings and implications of these loan guarantee documents, it is important for someone applying for a loan from a bank to have an attorney review the documents to ensure that they do not There are no draconian terms and conditions that could be detrimental to the borrower.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.