We have a theory. It’s not original but it works: Fintechs and other lenders will significantly diminish loan losses as well as the risk of loan defaults if they take security over the movable assets of a borrower and if that fintech lender registers a security interest in accordance with the relevant laws (“Applicable Laws”). Here are 10 practical and strategic benefits of taking and registering a security interest in movable assets in Nigeria, simplified.
1. Right of Sale & Cost Recovery
A fintech lender has a legal right to sell any movable assets taken as collateral[1] towards recovering the principal and interest due on a loan, by giving a statutory 10-day advance notice to the borrower (“Statutory Notice”). Where the collateral is a perishable good or where a fintech lender believes that the collateral may lose some value before the expiration of the Statutory Notice, a fintech lender can sell the collateral immediately. A fintech lender can also sell the collateral immediately if it determines that the cost of storage and caring for the collateral exceeds the value of the collateral. If the monies recovered from the sale of a collateral does not cover the outstanding amounts due on a loan, a fintech lender may file a separate legal action against the borrower to recover the amounts due.
2. Right of Repossession & Sale Without Court Action
Often times, a bad actor borrower will try to obtain a court order against a fintech lender or throw up technicalities in court to delay or frustrate loan recovery efforts. The Applicable Laws permits a fintech lender to repossess and sell a collateral without filing a court action. If the collateral is a car, a phone, or some software-based collateral, a fintech lender may remotely lock or render that collateral inoperable until a loan is repaid or for the purpose of reselling the collateral.
3. Right of Repossession and Sale with the aid of the Nigerian Police
To aid the repossession of a collateral, the Applicable Laws mandate the Nigerian Police to support a lender who wishes to recover collateral tendered by a borrower to support a loan. All that is legally required for the Nigerian Police to be bound to take action, is for a fintech lender to provide evidence of collateral registration to the relevant Police Station, accompanied by a formal request. This is a big deal because policemen are generally prohibited from acting as debt recovery agents. With this provision, members of the Nigerian Police have a legitimate and legal backing to provide lenders with some support towards the recovery and sale of a collateral.
4. Priority between Creditors
“Priority” in this context means that, a fintech lender who has taken security and registered its security interest in a collateral will generally be the first in line to recover its exposure from the proceeds of a collateral sale ahead of other lenders. Where two or more lenders register their security interests in a collateral, the first lender to register its security interest, will generally be given priority ahead of other secured lenders. This is referred to as the first-in-time-rule (the “FIT Rule”). It is not unlikely that a borrower will use the same collateral to obtain multiple loans from 2 or more lenders. This is not unusual, in so far as the value of the asset being used as collateral exceeds that of the loans. Under the Applicable Laws, a fintech lender who has taken and registered its security interest in a collateral has priority over all other unregistered lenders including any unregistered lender that has gotten a favourable judgment against the borrower.
5. Priority of Purchase Money Security
If Lender A provides the purchase money which a borrower uses to purchase a collateral and which a borrower then uses as a security for a loan from Lender A, Lender A will generally have priority over Lender B who also provided another loan to the same borrower, if Lender B’s security interest, although registered, wasn’t used to purchase the collateral. This rule is an exception to the FIT Rule.
6. Due Diligence
Fintech lenders are able to search the official mobile asset registry to find out if a collateral has a security interest registered against it. If it does, this may mean that the collateral has money owing on it.
7. No Stamp Duty Taxes
Stamp duties are a type of document-based tax payable to the Nigerian government when registering a security interest in a real estate asset. Stamp duties are also payable in a vast array of commercial transactions. However, the Applicable Laws expressly outlaws the payment of stamp duty as part of the registration of a security interest in a movable asset.
8. Access to more Funding Sources
Taking security and registering a security interest in a collateral increases the value of a loan thereby making the receivables due on that loan more tradeable and attractive to sophisticated asset managers and investors. Based on our experience advising on fintech securitizations, we know that Fintech lenders that take and register security in a movable asset are more likely to access more sophisticated forms of financing like securitizations. The way we see it, unsecured loans are a form of double jeopardy for Fintech lenders. Firstly, there is a higher chance that those loans will not be repaid. Also, not many sophisticated investors will be interested in buying those loans.
9. Criminal Prosecution of Borrower
The Applicable Law provides a legal basis that allows for criminal prosecution of borrowers who provide false or misleading information relating to the registration of a security interest in a collateral.
10. Movable Assets
As a general matter, with the exception of ships and aircrafts, all types of movable assets can be collateralized and registered in Nigeria and the registration can be done online. These include but are not limited to cars, television sets, mobile phones, tricycles & motorbikes, tractors, equipment and all types of capital goods, laptops, chairs and household items, farm produce, livestock, fish stock, poultry and their unborn offspring, crops, seeds, cash & account receivables, inventory, raw materials, source codes, consumer or other products of all kinds, trees that have been cut, oil, gas & minerals that have been extracted, including intellectual property
Final Analysis
Credit reports are great but they do not always show the full picture and they offer little value from a corporate finance standpoint. Also, borrowers with a clean credit report may still default on their loans and sometimes, prioritise another lender or the purchase of a personal item, instead of repaying an unsecured loan, as and when due.
In our experience, nothing beats taking security. Fintechs issuing unsecured loans are very likely holding the shorter end of the stick, facing, not only a borrower but another lender who decides to take and register security. In the case of a loan default, that other secured lender will very likely enjoy priority. It is also useful to note that direct debit & point of sale arrangements, although helpful, are merely forms of repayment and not a form of or replacement for security.
Even with movable assets, taking security is a fairly complex area of law. The advice and guidance of an experienced technology and commercial lawyer cannot therefore be overstated. Fintechs looking to implement a “collateral” strategy will need to pay attention to a number of practical issues before rolling out such features. These include (a) change management issues (b) customer journey & product issues; (c) documentation issues; and (d) consent management issues, amongst others.
Balogun Harold provides this information as a service to clients and friends for informational purposes only. The foregoing information should not be construed or relied on as legal advice or assumed to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers. Kindly seek professional advice specific to your situation. You may also reach out to your usual Balogun Harold contact or via support@balogunharold.com for inquiries.
[1] Collateral is the term used to describe any asset offered by a borrower to a lender as security for one or more loans. If a borrower fails to repay the loan, the lender may sell the asset to recoup any amounts due and unpaid on the loan
