Long term loans in Nigeria are usually associated with large capital-intensive projects with a tenor for more than five years. Merchant and development banks generally provide this type of facility and it represents a large proportion of their loans portfolio. It can be used to acquire fixed assets that have fairly long life such as major plant and machinery, and to fund the purchase or construction of buildings. It can also be used to provide semi-permanent working capital or to purchase other business. With long-term loans, the borrower usually has to provide comprehensive studies on his project, his past performance and future prospects. When granted, such loans will normally be secured against an existing fixed asset of the business.
These will qualify for long term loans in Nigeria, particularly those for residential buildings. The policy of the federal government is to facilitate the objectives of shelter for most people, and priority is in respect of housing loans for the low income group. In order to implement the objectives, the monetary circulars normally stipulated that a minimum percentage of a bank’s loans and advances should be allocated to residential buildings at a preferential rate of interest of 5% per annum.
In view of the social nature of such loans, repayment is often spread over a long period whilst the proposition for the finance may sometimes lack good commercial attraction. The federal mortgage bank in particular as well as other banks provide finance of this specialized nature.
Advance against produce
Nigeria is basically an agricultural country which explains the various incentives being given to agricultural projects. In most parts of the country where farmers are involved in producing primary inputs for industrial processing, e.g. cocoa, tobacco and rice, to mention a few, they could be provided financial assistance to meet their operational requirements. The rate of interest is often preferential in line with government’s incentive to farmers.
Licensed buying agents are registered with the Nigerian marketing or commodities boards, and are listed for each season. During the buying season, the official prices for the primary products are officially announced, after which these licensed buying agents proceed to inspect and grade their produce. Once graded and delivered to the marketing boards and upon an attestation certificate, payment will be effected to the farmers within four to six weeks of grading. To finance the farmers to reach either the grading level or the point at which they collect their receivables from the marketing boards, banks provide advances against produce which is more of a bridging advance nature. The risk element in this type of finance is low as the marketing boards often honour their obligations promptly.
However there Is the possibility of the farmers obtaining payment direct at source and diverting it to another bank, thus leaving the advance unpaid. A safeguard for this is to have the board execute the bank’s domiciliation of payment from which makes it imperative for them to pass the proceeds of the graded produce to the bank which advances the funds to the farmer.
In a similar vein, some companies, notably the Nigerian tobacco company, arrange to guarantee finance to farmers to grow tobacco which would subsequently be harvested and sold to the company. Upon receipt of such a guarantee, the bank advances the money to the farmer. When payment is eventually made by the guarantor, the advance is deducted from the amount paid and the balance credited to the customer. This type of arrangement has been practiced successfully for many decades.
Advance against trust receipt
The volume of business done through bills for collection and documentary credits has been substantial in recent times. The management of cash flow for companies involved in the importation of raw materials has continued to be a critical factor in the survival of major companies. In most cases, and except for the large multinationals whose parent company abroad could ship consignments to them on open account to facilitate continuity in production, the time lag between the time goods are ordered, received, processed and sold is very long. Goods in transit or even received into stock require time for processing, and until sales are made and cash received, the liquidity position of the company might be seriously affected thus preventing it from meeting its key operating costs.
Banks assist import-intensive companies by providing a trust receipt facility. Under it, documents are released to the customer to enable him to take delivery of the goods on trust. When they are processed and sold, proceeds will be paid to the bank to offset the advance. Depending on a well understood production/sales cycle of the company, the trust receipt can be allowed for 30, 60, 90 or 180 days as the case may be. The trust receipt is usually followed with a promissory note to be completed by the customer, promising to effect payment within the stipulated period. It is subject to stamp duty.
Considering the integrity required in this type of facility which in fact amounts to clean lending, having surrendered the goods to the customer, it is granted only to first class customers, i.e. of proven track record.
This facility is normally associated with trade transactions. Substantial inland bills business has been done using this facility which primarily assists companies with cash flow problems. To be acceptable to the bank for discounting, trade bills must comply with the following requirements:
- The acceptor, drawer and endorsers must be undoubted for the full amount of the bill.
- The bill must reflect a genuine trade transaction. Accommodation bills are unacceptable.
- The acceptance must be unconditional.
- The bill must be technically in order.
- Bills should be short-term, e.g. with maturities of between three to six mouths.
- There should be a good spread of acceptors.
- Bills should be sent to the acceptor’s bank to confirm the authenticity of the signature.
If the banker is satisfied with the foregoing requirements, the bill will be accepted for discount. The face value of the bill is credited to the customer’s account less the discount commission, and on due date the bill is presented for payment. Upon payment, bills discounted account entries are then reversed to close the transaction.
Direct credit facility
Some valued customers are given direct credit facilities up to certain limits for both local and out-of-town cheques. For borrowing customers this facility constitutes lending as their over-draft would have been reduced by the proportion of the direct credit utilized on a daily basis. It is thus regarded as an extension of their overdraft and the appropriate interest rates on their borrowing is applied by the bank.
Before considering a customer good for this type of facility, previous accounts operations and performances would have been assessed and the customer should ideally agree that his account should automatically be debited if a cheque is returned unpaid. The problem of what period to allow for clearance of out-of-town cheques used to be a difficult one. There had been instances when cheques were returned after an unreasonable length of time, sometimes ten weeks.
In practice, banks used to include in their offer to direct facilities to customers a clause to the effect that if proceeds of the cheques were not received within a specified period, say 28 days, the value of such cheques hitherto credited to the customer would be reversed. The reasons for this course of action are obvious.
- It gives the payee time to contact the drawer for rectification, otherwise it may be an opportunity to stop further business with him in order to advert possible risks.
- It affords the payee time for swift action before substantially altering his financial position to his own detriment. However, with the new clearing rules, the above considerations would no longer apply.