In Nigeria, where access to credit is not common, bank loans serve as a practical way for individuals and businesses to grow and remain stable. Taking out a loan does not necessarily mean a business is struggling. Rather, when used wisely, it can be a smart way to secure capital and expand operations.
There are various loan options available, from short-term financing with lower interest rates to long-term loans that come with higher costs. However, before approving loans, financial institutions require borrowers to provide collateral as security. These securities come in the form of assets or property pledged by individuals or businesses to obtain a loan.
If the borrower defaults on repayment, the bank has the right to claim the pledged security as compensation for the unpaid debt. Securities serve as a safeguard for banks to minimize the risk of financial losses in cases where borrowers fail to meet their obligations. In this article, we discuss the types of securities that banks in Nigeria commonly accept for loan approvals.
Types of Securities for Bank Loans
A loan security is something valuable that the bank can hold as a backup in case the borrower is unable to pay back the loan. This is also known as Collateral. Nigerian law allows different types of collateral to be used for loans using both tangible and intangible assets. Depending on the nature of the security, collateral may take the form of a mortgage, charge, pledge, lien, or assignment.
Examples of securities acceptable for bank loans in Nigeria include:
1. Real Estate (Land and Buildings)
Real estate remains the most commonly used form of bank loan security in Nigeria. Banks accept various types of assets as collateral for loans, including land, completed buildings, fixed structures, and leasehold interests. To secure a loan with property, borrowers must provide relevant title documents such as a Certificate of Occupancy, Deed of Conveyance, Deed of Assignment, Deed of Gift, or Deed of Sub-Lease.
The security can be structured by creating either a legal mortgage or an equitable mortgage. A legal mortgage involves transferring ownership rights of the property to the bank as security, with the agreement that ownership reverts to the borrower upon full repayment.
On the other hand, an equitable mortgage does not transfer legal title but gives the bank a claim over the property, which can only be enforced through a court order. If the borrower defaults, the bank can perfect its title by converting the equitable mortgage into a legal mortgage through a lien on the property title.
2. Fixed and Floating Assets
Fixed assets are tangible resources such as land, buildings, vehicles, equipment, and machinery. Fixed assets are long-term, tangible resources that a business owns and uses in its operations. Since fixed assets retain value over time and are not frequently sold or replaced, they provide strong security for banks.
When a fixed asset is used as collateral, the bank places a fixed charge on it, meaning the business cannot sell or dispose of the asset without settling its debt. A floating charge refers to business resources that change over time, such as stock, inventory, account receivables (money owed to the business by customers), and cash.
These assets fluctuate as the company operates, and unlike fixed assets, they are not tied to a specific claim unless the business defaults on its loan. When this happens, floating assets can become “fixed,” meaning they are locked in as collateral.
3. Shares, Stocks, and Bonds
Shares in a Nigerian company can be used as collateral for a loan through either a mortgage or a charge. To secure a loan with an equitable mortgage or charge, the borrower must hand over the share certificate to the bank, either with or without a written agreement or memorandum of deposit. However, in an equitable mortgage, the ownership of the shares does not officially transfer to the lender.
For a legal mortgage, the bank must be registered as a shareholder in the company’s records. This comes with an agreement that once the borrower fully repays the loan, the shares will be transferred back to them. If the borrower fails to repay, the lender has the right to sell the shares to recover the debt.
4. Cash and Fixed Deposits
This type of security is one of the easiest ways to secure a bank loan, although it is not commonly used in Nigeria. Cash security involves using financial assets such as fixed deposits, treasury bills, current accounts, or savings accounts as collateral.
In simple terms, a borrower can obtain a loan from a bank where they have an active account. If they fail to repay the loan, the bank has the right to withdraw funds from that account to recover the outstanding amount. The interest rates applied to such loans vary from bank to bank. This security is usually structured as a charge on the deposited funds.
5. Lien on Assets
A is a form of security where a borrower gives a bank the right to claim certain assets if they fail to repay a loan. This can apply to various types of assets, like funds in a bank account or other valuable property. To establish this, the borrower signs a formal letter authorizing the bank to hold a lien over the specified asset, meaning the bank can seize or sell it if necessary to recover the loan.
When a borrower chooses to use funds in their bank account as security, they may sign a document titled “Authority to Exercise Right of Lien and Set-Off Over Deposit with the Bank.” This agreement gives the bank the right to automatically deduct any outstanding loan amount from the borrower’s account balance.
6. Trust Receipt as Loan Security
A trust receipt is commonly used as security for loans involving goods or merchandise. Under this arrangement, the legal ownership (title) of the goods is transferred to the bank, while the borrower retains physical possession of the goods. However, the borrower is considered to be holding the goods in trust for the bank and is expected to use or sell them in a way that ensures loan repayment.
Once the borrower repays the loan in full, the ownership of the goods reverts back to them. If they fail to meet their repayment obligations, the bank has the right to seize or sell the goods to recover its funds. This type of security is commonly used in trade finance, especially for businesses that need funding to import, purchase, or distribute goods.
7. Debentures
A debenture is a financial instrument issued by a company to a bank, which serves as an acknowledgment of debt. It acts as a form of security for loans, particularly for corporate financing. Debentures can be categorized into Fixed Debenture which is secured against a specific asset like property, or machinery, and Floating Debenture which covers all company assets, including inventory, receivables, and movable property.
The borrower can continue using and trading these assets under normal business operations. However, if it defaults on the loan, the bank can crystallize the debenture, meaning it becomes a fixed charge over all assets.
8. Stock Hypothecation
Stock Hypothecation is commonly used by businesses that handle large quantities of goods, like importers, exporters, manufacturers, and wholesale distributors. Instead of using fixed assets like property or machinery, the borrower pledges their stock (inventory) as collateral for the loan.
Under this arrangement, the borrower retains possession of the goods and can continue business operations, but the bank holds a security interest over the stock. If the borrower fails to repay the loan, the bank has the right to seize and sell the goods to recover the outstanding debt.
This form of security is particularly useful for businesses involved in trade and supply chain operations, as it allows them to access working capital while keeping their inventory in circulation. However, because the value of stock fluctuates due to market conditions, banks may require regular assessments to ensure the collateral maintains sufficient value to cover the loan.
9. Documentary Credit
This type of loan is common in international trade. It allows a seller to use shipping documents, like a bill of lading, as collateral to access credit from a bank. The buyer would request a letter of credit from their bank in favor of the seller. The bank can grant the buyer a loan to fund the letter of credit.
Then the bill of lading (shipping document) is deposited with the bank as security for the loan. In some cases, the bank may be listed as the consignee (receiver) of the goods, giving it legal control over the shipment until the loan is repaid. This arrangement helps both the buyer and seller complete transactions smoothly while ensuring the bank is protected from financial risk.
10. Agricultural and Moveable Assets
Agricultural businesses often require financial support to expand operations, purchase equipment, or manage seasonal fluctuations. To secure these loans, banks accept farm-related assets like livestock, crops, and farm equipment as collateral.
Additionally, movable assets like trucks, tractors, farm transport systems, inventory, agricultural produce, stored goods, and receivables can serve as collateral for loans. By using these assets, smallholder farmers, agribusinesses, and agro-processors can access funding, to improve productivity and growth in the agricultural sector.
The kind of loan security you provide depends on factors such as your financial profile, the purpose of the loan, and the specific requirements of the lending institution. The suitability of a particular type of security is determined by the bank’s risk assessment and the borrower’s ability to meet repayment obligations.
In conclusion, the value of the security provided can be equal to, lower than, or higher than the loan amount being requested. In addition to evaluating the borrower’s ability to repay, banks also assess the quality and worth of the collateral to ensure it is sufficient to cover the loan if necessary.
