Preparing security/collateral for bank loan (6): Stocks and Shares

By Emeka Anaeto

LAST week we addressed the pledge of goods and other non-real estate property as security for bank loans for your business.

We noted that such properties as precious ornaments, cars, machinery etc with appropriate value can be deposited with the bank in lieu of loan security. And we also said that 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.

In today’s edition, we shall be focusing on Stocks and Shares as an acceptable security for bank loans. Stocks and Shares refers to share of ownership, equity interests or holdings in companies. They are generally regarded as evidence of financial assets of the holders.   Shares of companies on the Nigerian Stock Exchange, NSE, are more acceptable to banks as security for loans.

However there are some blue chip companies whose shares are not quoted in the NSE but are accepted by banks due to their corporate pedigree. Most of such companies are multinational corporations. For those quoted on 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.

However, 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 on 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.

 

 

 

 

 

 

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