Borrowers, lenders embrace new collateralisation
A new trend is emerging in the financial market, where an increasing number of borrowers and lenders prefer to use their holdings equities and debt securities such as shares, bonds and treasury bills as collateral for loans from the banks.
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Known as pledging, the resort to securities as collateral for credit has caught on well with both borrowers and lenders as the two sides find innovative ways of eliminating the challenges that tangible collaterals such as landed properties and automobiles collateral come with.
Although the practice started about five years ago, it has easily gained momentum in recent times, with transactions in debt securities alone rising from GH¢376.1 million worth of bonds and treasury bills in 2011 to GH¢5.4 billion as of August, this year.
Data from the Central Securities Depository (Gh) Limited (CSD), which facilitates pledges, showed that the GH¢5.4 billion worth of debt securities was used in 507 transactions by corporate and individual investors to secure various sums of monies from financial institutions nationwide.
The Managing Director of STANLIB, Mr Alex Asiedu, confirmed in an interview that more lenders were now opting for pledges of fixed income instruments over physical assets as collateral.
"The growth in pledges is a good thing. It shows that the market is deepening and I think it is all because the CSD is there and is able to keep records of securities and their owners," Mr Asiedu, who manages Stanbic Bank's investment wing, added.
The Chief Executive Officer of CSD, Mr Stephen K. Tetteh, attributed the strong growth in pledges to the ease of transaction, security and value for money that the activity offers the pledgor (borrower) and the pledgee (lender) alike.
Unlike tangible assets which are difficult to dispose of in the event of a default, Mr Tetteh said the CSD was empowered by law to use the collateralised securities to defray the loan whenever the borrower defaulted.
"If the lender informs us that the borrower has defaulted, we will contact the borrower and give him or her some time to make arrangements for payment."
"If after that time we do not hear from the borrower, we will move the securities into the lender's account as indicated in the CSD's Operational Rules on default. This way, the lender does not need to go to court to retrieve the funds," he said.
Challenges with collateral
Access to collateral is one of the thorny issues slowing down credit creation in the country. This limited availability of collateral has also impacted negatively on cost of credit, which continues to feature prominently in the list of challenges facing businesses in the country.
This is because although many businesses yearn for funds to finance their businesses, not many have enough assets that can be used to secure such funds and the few that have, lack the appropriate documentation to cover them.
Mr Tetteh said the depository's resort to pledges was aimed at addressing these challenges, which militated against credit and business growth.
He also explained that the presence of the CSD as a third party meant that neither the pledgee nor the pledgor could sell or use the securities during the term of the pledge.
Credit creation
Mr Asiedu of STANLIB further admitted that pledging of securities was helpful to the banks and financial intermediation in general, explaining that the activity helped to remove the hurdles lenders faced in collateralising loans.
‘’It also reduces the risk of bad loans, thereby improving the loan books of banks,’’ Mr Asiedu said.
"Banks have seen that it is a good way of creating credit and borrowers have also seen that it is the easiest way to get credit from the system. Either way, it is a win-win thing for both sides," he said.
Growth pattern
The data from the CSD also showed that the face value of pledges in debt securities grew by 1,435.8 per cent within the past five years.
The data, which is available to the Daily Graphic, indicated that after ending 2011 with GH¢376.1 worth of securities from 635 transactions, pledges in debt securities rose sharply to GH¢3.1 billion in 2013. In that year, the number of transactions was 683.
In 2014, however, 666 transactions valued at GH¢3.3 billion were registered, compared to the GH¢5.9 billion worth of debt securities used in 735 transactions to secure funds in 2015.
It is now estimated that the face value of pledges in debt securities would exceed GH¢6 billion by the close of this year.
Pledging explained
Pledging is a secondary market activity, where borrowers agree with their lenders to instruct the CSD to use a designated amount of their holdings in securities at the depository as collateral against a loan they have taken from the lending institution.
Once the two sides -- the pledgor and the pledgee -- agree on the terms and conditions, the CSD blocks the designated securities in the pledgor’s account temporarily, pending the full repayment of the facility by the pledgor.
The blocking of the security ensures that the pledgor has no access to those securities for any form of transaction.
Once payment of the loan is completed, the CSD unblocks the securities in the borrower's account to ensure that he/she can use them for normal transactions.
