OUTLINE

Introduction

Why do Financiers/Banks ask for securities

Qualities of a good security Different types of securities Procedure for taking securities Procedure for security realization
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Why take Securities?

Primary Security: Cash flow from the financed business is always the primary way out Secondary Security Way out. Lending is risky. Banks needs to have a second way out in case the credit fails Borrowers commitment to the credit/business Instill sense of confidence in the borrower To meet regulatory requirements
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Security Qualities
Key ones Value: should be sufficient, easy to determine and stable preferably appreciating

Ownership: Documentary evidenced, can be legally verified, transferable and no encumbrances (attachments)
Realization: Easy to convert into cash
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SECURITIES
NOTE THAT: SECURITY IS NOT A REPLACEMENT TO A CRITICAL EVALUATION OF A BORROWERS CREDIT WORTIHNESS A BORROWER WILL NOT BE CREDITWORTHY BY SIMPLY TAKING A SECURITY BANKS ARE NOT LENDING AGAINST A SECURITY SECURITY REALISATION CAN BE FUTILE IN TERMS OF LITIGATION COSTS AND BAD PUBLICITY STATUS OF A SECURITY NEEDS TO BE EVALUATED PERIODICALLY
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TYPES OF SECURITIES
i) MORTGAGE: IS A CONVEYANCE OF LEGAL OR EQUTABLE INTEREST IN PROPERTY ON CONDITION THAT OWNERSHIP SHALL REVERT BACK TO THE DEBTOR ONCE THE DEBT IS FULLY REPAID CAN BE LEGAL (FIRST CHARGE), SECOND CHARGE (INFERIOR CHARGE) OR EQUITABLE MORTGAGE (MERE DEPOSIT OF THE TITLE DEEDS) POSSESSION OF PROPERTY REMAIN WITH THE BORROWER (MORTGAGOR) WHILE THE LENDER (MORTGAGEE) OBTAINS OWNERSHIP RIGHTS

TYPES OF SECURITIES Contd 1) 2) 3) 4) 5) LEGAL MORTGAGES OFFER BETTER REMEDIES TO THE MORTGAGEE Right to sue the borrower/debtor Right to appoint a receiver of rents Right to sale the property Right to enter the property Right to apply for foreclosure These rights are not available to holder of Equitable or Second mortgage
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TYPES OF SECURITIES Contd

ii) LIEN: THE RIGHT OF ONE PERSON TO RETAIN THE ASSET/PROPERTY WHICH IS IN HIS/HER POSSESSION BELONGING TO ANOTHER UNTIL CERTAIN DEMANDS OF THE POSSESSOR ARE MET E.G. FIXED DEPOSIT RECEIPT, TREASURY BILL, DEPOSITORY RECEIPT LIEN CAN BE GENERAL, PARTICULAR BANKERs LIEN IS SPECIAL BECAUSE CONFERS POWERS OF SALE ON THE BANK

POSSESSION OF THE PROPERTY REMAINS WITH THE BANK/CREDITOR WHILEOWNERSHIP REMAINS WITH THE BORROWER
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TYPES OF SECURITIES Contd

iii) PLEDGE: A DELIVERY OF AN ASSET/NEGOTIABLE INSTRUMENTS/GOODS BY A DEBTOR TO HIS CREDITOR/LENDER AS A SECURITY FOR THE DEBT E.G. LIFE POLICIES, NEGOTIABLE INSTRUMENTS, TITLE DOCUMENTS POSSESSION OF THE PROPERTY/GOODS REMAINS WITH THE LENDER (PLEDGEE) WHILE OWNERSHIP REMAINS WITH THE BORROWER( PLEDGOR) THE PLEDGEE HAS THE RIGHT TO SELL AN ITEM HELD UNDER PLEDGE IN CASE THE BORROWER DEFAULTS DIFFERENT FROM MORTGAGE WHERE POSSESSION OF THE PROPERTY REMAIN WITH THE BORROWER MOSTLY USED BY BANKS WHEN LENDING AGAINST GOODS THAT HAVE BEEN BOUGHT OR SOLD IN INTERNATIONAL TRADE
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TYPES OF SECURITIES Contd

(IV) LETTER OF HYPOTHECATION GOODS OR DOCUMENTS OF TITLE BECOMES SECURITY WITHOUT TRANSFERING POSSESSION OR OWNERSHIP ITS A PROMISE THAT GOODS WILL BE PLEDGED ONCE AVAILABLE

MOSTLY TAKEN ON TRUST BECAUSE BOTH POSSESSION AND OWNERSHIP REMAIN WITH THE BORROWER
NOT COMMONLY USED IN TANZANIA

TYPES OF SECURITIES Contd

V) GUARANTEES AN UNDERTAKING BY ONE PERSON TO BE LIABLE FOR A DEBT OF OTHER PERSON THE GUARANTOR MUST FULLY UNDERSTAND THE LIABILITY

BANKS MOSTLY ACCEPT GUARANTEES BASED ON THE CREDIT WORTHINESS OF THE GUARANTOR
BANK MAY ASK FOR THE GUARANTEE TO BE SUPPORTED BY SOME VALUABLE ASSET BANK GUARANTEES ARE MOSTLY PREFERED BECAUSE THE RISK IS TRANSFERRED TO THE BANK ISSUING THE GUARANTEE
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TYPES OF SECURITIES Contd

VI) DEBENTURES AN ACKNOWLEDGEMENT OF DEBT BY A COMPANY NOT BY AN INDIVIDUAL CAN BE TAKEN ON FIXED OF FLOATING ASSETS (SOCKS & DEBTORS) ATTACHES SPECIFIC ASSETS THAT ARE VALUABLE CAN BE FIRST CHARGE OR SECOND CHARGE. BANKs PREFER FIRST CHARGE

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TYPES OF SECURITIES Contd

KEY CONSIDERATIONS WHEN TAKING DEBENTURE

MARGIN ABOVE THE CREDIT-VALUE MAY FLUCTUATE SPECIFIC COVENANTS STOCK LEVELS, FINANCIAL RATIOS ETC

STOCK VERIFICATION
MONITORING OF VALIDITY OF LAND RENT AND INSURANCE

PERSONAL GUARANTEE OF THE DIRECTORS OF THE COMPANY

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TYPES OF SECURITIES Contd

V) CASH MOST LIQUID TYPE OF A SECURITY CASH IS HELD IN A BANK ACCOUNT THAT IS RING FENCED. THE BORROWER HAS NO LEGAL RIGHT ON THE CASH UNTIL THE LOAN IS FULLY REPAID CASH CAN BE 100% OR LESS OF THE CREDIT AMOUNT BANK CAN EXERCISE ITS RIGHT BY SIMPLY APPLYING THE CASH TO LIQUIDATE THE BARROWING DOCUMENTATION MUST BE WATER TIGHT
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SECURITIES

Q&A
THANKS

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