Types and importance of loan security in Nigeria are necessary information to get acquainted with. For, financial institutions require security as collateral before granting loans to borrowers. The question then is how do we understand the meaning of loans and how does loan security draw identifies with businesses, individuals, and entities.
Loan security means all assets now or from time to time hereafter encumbered or subjected to a security interest or charge (or intended or required so to be pursuant to any other loan agreement to secure the payment or performance of any of the loan obligations. It also means a security held solely for the purposes of a moneylending agreement.
Securities are then 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.
Loan security 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.
What are Bank Loans Useful for?
Bank loans can be used for a variety of purposes such as:
- Financial Emergencies
- Major Expenses
- Building up your Credit History
Approval for bank loans is generally dependent on your overall financial profile, including your credit score.
Banks that Offer Loans in Nigeria
Some Nigerian Deposit Money Banks (DMBs) are pushing for unsecured lending, a loan that does not require collateral. Some Nigerian Deposit Money Banks (DMBs) are pushing for unsecured lending, a loan that does not require collateral, as demand rises among small and medium enterprises (SMEs) and households. Some of these banks which give loans to their customers without stress are:
- First City Monument Bank
- WEMA Bank
- Stanbic IBTC
- Zenith Bank
- Fidelity Bank
- First Bank
- United Bank for Africa
- GTBank
- Access Bank
Loan Rates In Nigeria
Nigeria Bank Lending Rate was reported at 11.840 % pa in Mar 2022. This records an increase from the previous number of 11.780 % pa for Feb 2022. Nigeria Bank Lending Rate data is updated monthly, averaging 16.610 % pa from Jan 2006 to Mar 2022, with 195 observations.
Types and Importance of Loan Security in Nigeria.
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 settles to discuss the types and importance of loan security in Nigeria that can be accepted for bank loans in the same country:
1. Shares, Stocks, and Bonds
Loan 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.
2. Intellectual property
Loan security is also considered as 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.
3. 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.
4. Real Estate
Another one of the types of loan security is real estate. Landed properties, constructed buildings, fixtures on land, leasehold on a property 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.
5. 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.
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Is Loan Security that Important?
The importance of loan securities in Nigeria includes:
- The ability to earn additional income through the fee charged to the borrower to borrow the security. It could also be viewed as a form of diversification.
On the side of the own who is granted the loan, which you, another importance is that it allows you to:
- Take positions like short selling
- Gives investors more options to take different views on the market.
- It helps to increase liquidity as increasing liquidity in the market tends to also tighten spreads, which is beneficial to all market participants as the gap between the bid and the ask decreases.
