How to secure loans with your financial securities

Ghana’s Domestic Capital Market (DCM) is evolving, and this has been made possible by the continuous awareness creation by stakeholders as well as various market players and participants.

In fact, the latest reports from the February 2021 monthly bulletin of the Central Securities Depository (CSD) showed that out of the GHS158.4bn financial securities held as Bonds, Notes and Bills, A total of GHS124.3bn, representing 78% were held by domestic investors and the remaining 22% were for foreign investors.

On the domestic front, in terms of the various securities types, investments in Bonds stood at GHS74bn (59.63%), Investments in the 1y and 2yr notes stood at Ghs15.8bn which represented 12.53% and investors investing in various Bills stood at GHS34.6bn (27.84%). Compared to peers in the Africa sub-region, the development is quite remarkable.

However, the Bank of Ghana`s Monetary Policy Report on Banking Sector Developments released in January 2021 suggests that Growth in gross loans and advances during the year was marginal, ending the year at 5.8%, a sharp decline from the 23.8% growth last year.

Adjusting gross loans for provisions and interest in suspense, net loans and advances grew by only 4.6% to GHS41.8bn in December 2020 compared with 25.7% in December 2019. The moderation in credit growth in 2020 was due, in part, to weak credit demand as well as increased repayments, which offset the increase in new loans and advances during the period under review.

Again, 2020 audited financial statements published by some of the commercial banks showed overall industry loans and advances growing by 5% from GHS39.95bn in 2019 to Ghs41.8bn in 2020.

There is clearly a show of the demand for credit by both public-private sector and clients as some lenders continue to take a tight credit stance. Even though Financial Institutions are lending, there is generally low appetite to lending to certain individuals and even some sectors of the economy.

Lenders continue to be conscious of managing and monitor the levels of their Non-Performing Loans which has an underlying impact on financial performance. So, the question is, with all the levels of securities on the market, should Lenders begin to rethink their lending approach both at the corporate and retail level?

This is where securities-based lending can be a game changer for Commercial and Non-Bank Financial Institutions. The good news is that an International Bank in Ghana has taken a giant lead to offer such innovative services to their clients. Their financing cover is such that you can secure a loan up to a maximum of 70% for clients with securities and 90% for fixed deposits.

Security Based Lending, what is it?

In simple terms, Securities-Based Lending (SBL) or Securities-Backed Lending refers to the practice of Financial Institutions making loans available to customers using securities as collateral.

This basically provides ready access to capital that can be used for almost any purpose such as buying real estate, purchasing a property like a car, or investing in a business. What it means is that you exchange investment instruments for cash.

Today, many people hold some of these securities and are not aware they can secure some form of funding to manage their liquidity at a much flexible rate.

But wait, there is some good news! CSD has provided some guidance to the general public on how one can pledge such securities to secure some form of funding.

Pledging here refers to an activity in which you the borrower of funds uses securities as a form of collateral to secure the funds it borrows or takes from the lender (Pledgee) as an Individual and institutions holding securities in the CSD system. Thus, anyone who owns securities in the CSD system can use that to secure the loan.

In other words, it is a secondary market activity in which securities such as Bonds, Bills etc. are provisionally moved from your securities account into the financial securities account to back a debt facility as a form of collateral.

It is important to mention that, whenever securities are pledged, the lender maintains possession of the pledged securities; however, the Financial Institution says a bank does not have full ownership or title to the pledged securities unless default takes place.

Two major classes of local Bonds in Ghana

Rationale for Pledging Securities.

The main purpose of using your securities as collateral is to motivate the Banks and investors to easily do lending and borrowing guaranteed or backed by securities as a way to deepen transactions or activities in the securities market. Today, most banks have recorded high non-performing loans in their books largely due to loosened credit processes and procedures. This may in a way help provide some level of comfort to both parties of the transaction.

How to pledge Securities

Usually, when one doesn’t work in the financial sector, certain basic concepts look complex but, they are easier than imagined. I am sure you may be imagining how to carry out such activities. The process is simple and straightforward. The steps are that;

1.) You the investor or holder of securities must first contact a financial institution say a Bank to put in an application for a debt facility such as loans and to agree on the terms of reference for the facility. You need to also check if the lender offers such services.

2) Securities are then set up as pledged securities upon relevant information (such as particulars of the pledgee & pledgor, securities description, term of the pledge, etc) are submitted to CSD by either of the parties involved in the transaction. And

3). CSD then moves or freezes the securities from the debtor’s/pledgor’s securities account into the debtor’s/pledgee’s securities account.

The CSD will reject any pledge if there is an insufficient balance in your securities account. To avoid any rejection by CSD it is recommended that you verify in advance if the client has sufficient balance in his or her securities account to secure the financing facility.

More often than not, you hear a lot of people asking if they can use pledge securities to secure another form of financing. The answer is simply no.

This is because even though the securities have been moved into the lender Financial Institution securities’ account they will be encumbered during the term of the pledge.

Thus the securities will not be available in the Lenders account hence restricting its usage for other transactions. Another important thing to take note of in assigning your securities is that you will continue to receive your coupon payment during the term of the pledge and not the creditor any time corporate action such as interest payment is executed on the pledged securities.

CSD shall release the pledged securities only when the Financial Institution requests CSD to release the pledge imposed on the securities. In this case, a request asking CSD to release the pledge must be sent to CSD by the lender

What happens in the event of default?

Ordinarily, no lender will expect you to default on your loan terms. However, in the case of fund or loan default by the borrower, the lender shall inform CSD accordingly and a non-judicial foreclosure will be carried out to move the pledged securities into the account of the Bank/Lending Institution.

This is to allow the Financial Institution to have complete ownership of the securities that have been pledged as collateral. At this stage the lender can sell the security to defray the value of the loan defaulted by the borrower.

It is expected that before the creditor informs CSD for a possible foreclosure to be exercised on the pledged securities, the Bank or the Lending Financial Institutions would have given enough notices to the pledgor to pay the facility in due time. CSD will also seek the consent of the defaulting party concerning the foreclosure in question.

The importance of this arrangement to the Financial Institution cannot be underestimated, loans backed by securities as collateral provide a level of comfort to the lenders.

Since this inevitably reduces the potential default rate, banks who embrace such types of arrangements will further see a drop in non-performing loans. This form of Collateral can enable banks to consider offering lower interest rate on loans.

This also provides banks the opportunity to grow their loan book. For clients, this provides a better financing option as compared to traditional loans. Extending such loans to private sector will further boost economic activities.

Credit: Central Securities Depository, Ghana Stock Exchange, Bank of Ghana, Miriam Amoako

Disclaimer: The views expressed are personal views and doesn’t represent that of the media house or institution the writer works