Last week we began discussions on this  aspect of getting bank loans under the title, ‘’How to Prepare your Business for a Bank Loan’’, which was essentially dealing with how a borrowing customer should prepare to have his loan application scale through what should ordinarily be a simple process but which has become almost a nightmare to most businessmen especially the small and medium scale entrepreneurs.

Our key focus was on the principles behind requirement of security for the loan and we also differentiated between the two related and very important concepts in bank borrowing, viz, security and collateral.

We ended last week’s edition on some key requirements for preparing a bankable security which we gave as follows: VALUATION STANDARD, LEGAL OWNERSHIP, CASHABILITY and DEPRECIATION/ APPRECIATION.

In this edition we shall be shifting our focus on forms of security usually common amongst almost all banks in Nigeria.

REAL ESTATE (LANDS and BUILDINGS)

Until recently in Nigeria property in form of real estate and in this instance lands and buildings are the most common and acceptable security for bank lending. Bankers believed it is most reliable and marketable coupled with the fact that the value appreciates over the years. If you check the key requirements for acceptable bankable securities you will see that once the appropriate legal ownership is ascertained this easily fits the best for the purpose of security for loans.

For the purpose of valuation equitable to the value of loan the property for loan security would be determined by its location and state of development. For just land you would consider whatever is attached to it, like buildings and trees standing on it and this would mean classifying if it is developed land or underdeveloped one.  Developed land is defined by the Land use Act of 1978(S 51) as “a land where there exist any physical improvement in the nature of road development, services, water, electricity, drainage, building, structure or such improvement that many enhance the value of the land for industrial, agricultural or residential purposes”

Undeveloped land is usually without the above physical improvements. Though bankers prefer developed lands as security for loans some well positioned land with developed surroundings will attract and qualify for bank loans. The value of the land must be well over the amount of the loan being considered for the bank customer. Note that though you may place a value on your property, the bank would still rely on its estate valuer for its own figures despite market value. In addition to this the bank would usually discount values on property pledged for loan despite the fact that the property in most cases would appreciate in value.

For your real property to attract loan it must have the appropriate title document (proof of ownership) that could be obtained, investigated and kept in the bank until the loan is repaid.  The acceptable title document is certificate of occupancy(C of O) which is issued by the state government as evidence of ownership.  Note that the bank has the duty to investigate the document before accepting it.

However, as good as real estate property might be for the purposes of loans there has been several downsides in recent years such us fraudulent documents, weak legal system for realization and taking possession of the assets amongst many problems. Hence for many banks the ownership or pledging of real property for loan would still require some other conditions which we shall discuss in subsequent editions of this topic.