Preparing Security / Collateral for Bank Loan

In place of real estate property a prospective bank borrower can pledge goods or other properties to secure a loan from a bank.

Pledge of goods or property

This involves the deposit of physical goods or documents of title to the goods with the bank to be held as security until the loan is fully repaid or discharge of some other obligations upon the express or implied understanding that the subject matter of the pledge is to be restored to the customer/ borrower as soon as the debt or other obligations is discharged.

The goods could be in form of warehoused or stored cargoe imported or locally produced which may or may not be directly linked to the purpose of the loan. However this is usually for importers who would have to pledge and turn in the import documents and in most cases hands over the clearing of the goods to the bank who in turn take control of the warehouse where the goods are delivered and by extension the sales/ disposal of the goods to the tune of the amount outstanding in the loan portfolio. For locally produced goods the warehoused or delivery is pledged to the lender bankers who controls the disposal of the goods to the tune of the amount borrowed.

Again as in the case of the real estate it is not sufficient to have the goods pledged but the bank would want to know how established and knowledgable the borrower is in that line of business before advancing the loan. The customer must be seen to have sufficient experience in business and must command good market share that will enhance easy sale of the product.

In some banks and some cases it would be required the goods must have be imported in the name of the bank to facilitate easy documentation of the pledge. Where the goods are imported in the name of the customer on clearance from the ports the goods must be warehoused in the name of the bank.

In some other scenarios properties other than goods may be pledged for loans. Such properties as precious ornaments, cars etc with appropriate value can be deposited with the bank in lieu of loan security. All the key requirements of a good security would apply in all cases of pledge of any form of property or goods as security for loan.

Stocks or Shares

Stocks and Shares refers to share of ownership, equity interests or holdings in companies. They are generally held by individuals and organizations and are regarded as evidence of financial assets of the holders. Generally quoted company shares on the Nigerian Stock Exchange are more acceptable to banks as security for loan and companies not quoted in the stock exchange are hardly acceptable. However there are some blue chip companies whose shares are not quoted in the Nigerian Stock Exchange but are accepted by banks due to their corporate pedigree. Most of such companies are multinational corporations.

For those quoted in the Nigerian Stock Exchange the market prices of the shares determine the value of the asset being pledged as security for the bank loan. Invariably the value would also determine the amount that could be granted by the bank as loan.

It is important to note here that the current market price of the said shares would only be a benchmark for determining the loan amount while the bank applies a mark-down (discounting) to hedge against depreciation in the price of the shares pledged as security. What this means is that the borrower should not expect to get exactly the amount equivalent to the market value of his shares he has surrendered to the bank for the loan. Instead he will get something lower even though the price of the pledged shares may also appreciate.

It is also important to note that banks do not accept shares of all companies quoted in the stock exchange for the purpose of loan security. They select only those with good track record of stock market performance and in particular shares of companies known for strong financial position. Related to this is that the discounting or mark-down would be more adverse for shares of less reputable companies. The implication of this is that the prospective borrower should invest in blue chip companies for the purpose of bank loans.

However to make-up for inadequacies of shares as security for loans most banks would request for additional security in forms other than shares.

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