Legal Considerations for Nigerian Business Start-Ups – Part 3: Demystifying Loans

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In the first and second Parts of the series, business forms and financing considerations were discussed; this third and final part will focus on bank loans (a form of debt finance). I singled loans out for further discussion because I think that this is one area that some people find somewhat challenging in terms of understanding loan documents, as well as the general concept of loans. I will therefore aim to simplify the concept of loans and hopefully, after reading this, each reader would find it much easier to grapple with the idea of loans, especially as it is written to address some borrower-specific issues.

I would like to state, first and foremost, that there is nothing wrong with taking out a loan – there is nothing to be ashamed of. In certain circumstances, taking out a loan is the smartest decision in terms of financing for personal or business needs; where it becomes an issue is where the borrower becomes unable to repay the debt.

I should also state that this article should be helpful in the context of personal loans as well as business loans because the basic principles and concepts are practically the same – the main difference is in the purpose of the loan. Whether it is a term loan or a revolving loan (see Part 2), the basic principles are also practically the same, with a few minor differences to cater for the cyclical peculiarities of a revolving loan.

For ease, this article will be divided into three sections:

  1. Jargon buster – this section attempts to explain and simplify some of the jargon used in the context of loans.
  2. Loan agreement anatomy – this section covers some of the key clauses/provisions typically seen in loan agreements.
  3. Danger areas – this section covers some of the issues that anyone considering taking out a loan should give deep consideration and if possible, separate legal and/or financial advice should be sought before committing to the loan.

 

Jargon Buster

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Source: Adobe Spark

  • Loan amount / principal: this is the actual total amount borrowed from the lender.
  • Interest: this is the extra charge that the lender would levy on the borrowed amount (expressed as a percentage payable per annum); it is one of the means by which the bank makes its profit from loan arrangements (after all, nothing is really free and lending is a business).
  • Basis points: this is often used in reference to percentage figures. To express such figures in percentage, simply divide by 100. So, 500 basis points simply means 5%, while 235 basis points simply means 2.35%.
  • Utilisation / drawdown: means the step taken by the borrower to withdraw or collect the money from the lender. Utilisation usually takes place by the borrower submitting a utilisation request / drawdown request, which typically contains payment instructions to the lender as to how much the borrower needs to drawdown/borrow on a particular date, what account(s) the amount(s) should be paid into and the purpose of such drawdown.
  • Bullet repayment: means that the borrower will repay only the interest amount(s) due on a regular basis (e.g. monthly, quarterly, etc.), then the principal will be paid at once with the final repayment. bullet-repaymment-e1516216654905.pngFor example, for a loan of N1,000,000 with interest payable every month at 10% per annum for a period of 1 year, the borrower will be expected to pay approximately N8,493 per month for 12 months, but on the 12th month, the borrower will pay N1,008,493 (see example).

 

  • Amortisation /amortised repayment:  this means that the borrower will repay the loan amount plus interest at the same time, over the life of the loan. amortised-repaymment-e1516216799487.pngUsing the same example given in relation to bullet repayment above, if the repayment is amortised, it means that the borrower will repay approximately N91,666 every month (see worked example for breakdown).

 

  • Tenor / maturity: this refers to the time within which the loan should be repaid and the agreement terminated. This is different from availability period, which refers to the time within which the loan will be available for the borrower to drawdown. Usually, there will be a window for the borrower to comply with the conditions precedent (discussed below) with a set deadline for utilisation – this is so that the loan becomes activated and to avoid a situation of the money being kept on hold for the borrower indefinitely. To cater for the period before drawdown, some lenders would charge the borrower a commitment fee as compensation for keeping that money aside for just the borrower, until the borrower is in a position to drawdown.
  • Security: this is another term for what is commonly known as “collateral”.
  • Credit support: this refers to the package of extra items that a lender might ask the borrower to provide in support of the credit (loan) being granted to the borrower e.g. collateral, guarantees, etc. – these are meant to give the lender more comfort that the borrower is credit-worthy and that there will be options available to the lender to receive its money back.
  • Irrevocable: if something is expressed to be irrevocable, it means that such thing cannot be taken back once it is given. For example, a utilisation request is usually expressed to be irrevocable once submitted to the lender – as such, technically, the borrower cannot change its mind once it has submitted the utilisation request.
  • Defaults / events of default: these are specific scenarios / circumstances which could lead to the lender exercising certain rights against the borrower, should they occur. The occurrence of a default and/or event of default does not necessarily mean that the borrower has breached the contract as some of these circumstances are not even contractual and often have nothing to do with the loan – it is just that if they occur, they could be a signal to the lender that the borrower is experiencing certain difficulties, which could affect the borrower’s ability to repay the loan e.g. the borrower fails to make an interest payment, the borrower becomes insolvent/bankrupt, the borrower is sued by a third party for a large sum, the borrower loses his/her job (if it is a personal loan) or a major contract (if it is a business loan), etc. Depending on the nature of the default/event of default, the lender may be willing to grant the borrower a “grace period” to remedy the default. See examples of events of default in the sample loan agreement and term sheet discussed below.

 

Anatomy of a loan agreement

Before delving into some of the key parts of a loan agreement, I would like to mention a key theme – the lender’s motivation is profit. No bank lends money for free because a bank is not a charity – the bank will aim to make profits one way or another, even with interest-free loans. These profits take the form of interest (or margin), charges, various fees, fines, penalties, etc. This theme is the driving force behind most of the commercial terms of a loan agreement and is more visible in some clauses than others. For example, a high interest rate is obviously profit-driven but why would a bank be willing to lend for a shorter time at a lower interest rate? The simple profit-driven answer is that the sooner the bank can get repaid, the sooner it can divert/recycle the repaid amount to another borrower (or borrowers), probably at a higher interest rate or for a shorter tenor – I understand from seasoned bankers that in fact, whereas the banks would be willing to lend for a short term, they would usually charge a higher rate unless there are mitigating business reasons such as relationship establishment/maintenance; another reason would also be the business principles in relation to the “time value of money” (hence, whereas there would typically be penalties/fines for late repayment by the borrower in the loan agreement, there may not be any cost savings / benefits to the borrower for early repayment).

It would be nice and neat if all the terms of a loan were documented in a single document. However, this is not always the case, as often, banks would have separate documents which need to be read together as forming the “loan documents”. For example, there could be one document called the “loan agreement”, which would set out the terms of the loan, while another one could exist on the side such as an “offer letter”, “term sheet”, “indicative offer”, “standard terms and conditions”, etc., incorporated into the signed loan agreement. These documents would need to be read together in order to identify the complete and comprehensive agreement of the parties as far as the loan is concerned. In this article, references to “loan agreement” should be construed as references to the loan documentation whether or not all terms are contained in a single document.

See, for example, a sample loan agreement downloaded from the website of First Bank of Nigeria Plc (for ease, I will refer to this as the “FBN Loan”). This document makes several references to a certain “Letter of Offer”, which appears to contain some of the key commercial terms. In this section, I will be using this template as a starting point and where relevant, I will fill in the gaps with terms that may be covered in the offer letter, indicative offer, etc. – examples of such terms can be found in this sample term sheet, which was used for a South African transaction but the principles are aligned.

WARNING: PLEASE DO NOT USE ANY OF THESE DOCUMENTS AS TEMPLATES – THEY ARE PROVIDED FOR ILLUSTRATION PURPOSES ONLY!!!

  1. Parties:

Every agreement should state who the parties are and this is usually at the beginning of the document. Where the borrower is a business name, it should state the name(s) of the proprietor(s) and the business name e.g. Emeka Daura Akin (trading in the name and style of Wazobia Enterprises) – this is because generally, business names do not have legal personality and cannot contract in their own names unless there is a statute expressly conferring such capacity on them. This section is also the first port of call, to identify who has the primary rights, obligations and liabilities in relation to the loan.

  1. Recital:

This is the part that says “Whereas” – it is simply meant to provide a snapshot/summary of what the document is about and what the parties have agreed.

  1. Loan Amount:

This provision states the total amount being loaned to the borrower. In the sample loan agreement, this can be found at clause 1 (Loan and Terms). In the term sheet, it is the “Amount of facility” (ZAR 65 million). Sometimes, the loan amount will be included in a separate section as a defined term.

  1. Purpose:

This provision dictates the exact reason that the loan is being granted to the borrower. The borrower should not use the funds for any other purposes unless approved by the lender otherwise, it would amount to a breach of contract and possibly an Event of Default. In the term sheet, see “Use of funds”, while in the sample loan agreement, this is stated in clause 1 (Loan and Terms), as “for the purpose of acquiring the equipment described in Schedule 1.” If you are wondering how the lender would know what exactly the funds were used for, you would be (dis)pleased to know that there will likely be a provision in the loan documents requiring the borrower to send the lender evidence that the funds have been used for the agreed purpose – in the FBN Loan, such evidence could be copies of invoices and receipts from the equipment supplier, purchase orders, etc. and some lenders may even go as far as inspecting the items apparently purchased.

Trap: Ensure that the purpose clause is clear and if needed, wide enough to cover the immediate (and any other) purpose for the loan. For business loans, it is common to see descriptions like “general corporate use” and for personal loans, “general personal expenses”. This is to avoid a situation whereby the purpose provision is so specific (such as we have in the FBN Loan) that it leaves the borrower restrained – being specific is not an issue, provided that this is deliberate and has been thought through.

The “Use of funds” provision in the sample term sheet is vague (borrower’s ordinary course of business expenditures) but it is restrictive in the sense that the lender must approve such expenses before the borrower can spend the loaned amount. If the loan is needed to pay school fees but there will be some “change” after paying the school fees, make sure there is additional wording that allows you use the extra e.g. something along the lines of “… for the purpose of paying the borrower’s children’s school fees and other personal expenses.

  1. Covenant to pay:

This is the part of the loan agreement where the borrower basically says that it agrees to pay the loan (and all associated amounts). In the FBN Loan, this can be found in clause 1 (Loan and Terms), where it states that “… the Borrower hereby covenants with the Bank subject to the terms and conditions hereinafter contained to pay all the sums which shall for the time being be due and owing to the Bank…”

  1. Tenor:

This was explained earlier. However, I would add that, before agreeing the tenor, the borrower needs to ensure that the time period is sufficient to enable the borrower repay the loan – there is no need to be overambitious because it does not always end well where the borrower agrees to a shorter term than is realistic.

Trap: Because the lender senses desperation in the borrower, it may try to impose a shorter tenor on the borrower e.g. the lender knows that realistically, the borrower needs 2 years to repay the loan but the lender will say that it can only grant the loan for 18 months. For it to agree a compromise for a tenor of 2 years, the bank could increase the interest rate, reduce the loan amount that it is willing to lend, add a clause in the loan agreement to the effect that the lender will extend the tenor for an additional 6 months if after 18 months the borrower has been unable to repay the loan in full (of course the bank would charge the borrower an “increase fee” for this), etc. All these are negotiation tactics, aimed at giving the lender more profits. So, every borrower should be mindful of what compromises are being made and the cost of such compromises.

  1. Repayment:

The repayment clause(s) will set out the terms on which the borrower has to repay the loan – this may be either bullet repayment or amortised repayment. Quite often, the loan agreement will have a schedule setting out specific dates (and expected amounts) for the loan repayment. Sometimes, the repayment clause may state that the loan is to be repaid on the occurrence of certain specified events, for example, “Repayment Term” in the term sheet.

Tip: The borrower needs to understand the repayment terms i.e. what needs to be repaid, when, how and to whom. If it is an amortised repayment, the numbers should be predicted in advance to the extent possible (and confirmed / verified independently by the borrower). If there are fees, charges, commissions, etc. that need to be repaid on each repayment date, these also need to be clear – any penalties for late repayment should also be clear and understood.

Another important point to consider is that to the extent possible, the repayment dates should align with dates on which the borrower expects to have funds for the purpose of repayment – for example, if the equipment purchased with the FBN Loan will be rented by the borrower to third party contractors who pay rent for the items every 4 months (30 April, 30 August and 30 December) and the expectation is that the loan will be repaid using these rental payments, the repayment dates for the FBN Loan should be some time in the first week(s) of May, September and January; this will give the borrower some time to use the rents to repay the loan right after the contractors pay the borrower and if there is any delay from the contractors, the borrower will have a window (however slim) to source for funds in order not to breach the covenant to pay, or if necessary, ask the lender for a grace period.

  1. Interest payments:

This is the provision that deals with the interest payable by the borrower. Interest can be at a fixed rate (i.e. specified) or a floating rate (i.e. not fixed on day one, but ascertained from time to time by reference to certain criteria / benchmarks e.g. Monetary Policy Rate, NIBOR, etc., which can usually be found online e.g. click here for CBN’s) or a combination of both. Examples can be found in clause 4 (Interest Payments and Capitalisation) of the FBN Loan and “Interest Rate” in the term sheet. The FBN Loan is a combination of fixed and floating rates, while the term sheet is a classic example of a floating interest provision as it refers to “… the prime rate published by the Standard Bank of South Africa at the start of the relevant monthly interest period plus 200 basis points.” An interest rate is floating by virtue of its flexible nature and is often dependent on market forces hence, it is usually preferred by lenders (so that they do not find themselves behind the market, if for example, interest rates go up generally) – a lender would want to ensure that it always has some room to make its profits (and also because often, banks borrow from each other – called interbank lending – at benchmark rates, so they want to be able to match any such dealings).

Tip: Unless the borrower has strong bargaining power, there is really not much that the simple ordinary borrower can do in terms of interest rates because the lender will often always “follow the market” to the extent allowed by law; this is because certain laws stipulate the maximum amount of interest chargeable in certain circumstances e.g. for certain ‘specialised loans’ like agricultural loans, 9% is the highest interest rate permitted by law. However, the borrower can [try to] negotiate what amount the interest will be payable on.

The term sheet states that interest is payable on the outstanding principal only which means that if all goes according to plan and the interest rate does not fluctuate until the end of the tenor, the monthly interest payments ought to keep reducing (see example in the working). On the other hand, the FBN Loan requires interest to be paid “… on the balance outstanding and on all monies whatsoever at any time owing to the Bank.” Automatically, one can see how the interest payments under this loan can spiral – this means interest could also be payable on fees, penalties, fines, charges, etc.; the clause is also drafted in a manner that could expose the borrower to extra unforeseen interest payments because of the highlighted wording. If I reviewed this clause during the drafting process and was representing the borrower, I would have added “arising out of or in connection with this Agreement” at the end of the sentence i.e. after “the Bank”; this will limit the scope of interest payments otherwise, as drafted, if the borrower is owing the bank N1,000 for ATM card charges (totally unrelated to the FBN Loan), the bank can argue that the interest is also payable on this N1,000 because it is money of “whatsoever” nature owing to the Bank at some point in time. This may not have been the intention of the parties at the time of the negotiations, but it is clearly a drafting defect that could lead to an absurd interpretation by the courts.

  1. Capitalisation:

This provision would essentially state that if an interest amount is not paid as at when due, it will be added to the outstanding balance of the loan and interest will then also be payable on that unpaid amount. So, using the worked examples for the South African term sheet interest payments, if, for example, the borrower did not make the interest payment in Month 2, then ZAR 533,904 would be added to the outstanding balance of ZAR 58 million leading to a total outstanding balance of ZAR 58,533,904 – it is on this new amount that interest would then be payable in Month 3. See the sample highlighted wording below. The rationale for this type of provision, of course, is to enable the lenders to make more profit and to avoid their money losing value while it remains unpaid.

  1. Conditions precedent / subsequent:

These are certain conditions that need to be provided by the borrower before the lender would either sign the loan documents or release funds (and sometimes both). These would vary from borrower-to-borrower and are requested by lenders for various reasons such as regulatory compliance, internal compliance, the nature of the borrower, purpose of the loan, etc. Every borrower should ensure that the conditions imposed can actually be met within the time frame stated (if any) before signing the loan documents – this is because once the documents are signed, the lender may charge a fee before it grants a request for an extension of time or waiver of a condition. 

  1. Negative pledge:

An example of this provision is in the term sheet. The essence of such clause is to limit the borrower’s disposal of assets or the use of certain assets as collateral with other lenders, for example. The idea is that the lender would want comfort that in the event that the borrower cannot repay all amounts outstanding in full, there will be some assets that it can have recourse to. If the Offer Letter in the FBN contained such clause, it would probably be to the effect that the borrower is not allowed to use any of the equipment purchased with the loan, as collateral with another lender and also, the borrower will probably not be allowed to sell any of such equipment without the lender’s consent. The central theme behind such clauses is the lender’s need to exercise some degree of control, to avoid any surprises as well as comfort in the credit-worthiness of the borrower.

Tip: Every borrower should ensure that this clause is not too restrictive and ensure that it is both realistic and practical. For example, if the borrower has a shop and the loan is to buy goods for sale in that shop, it would be unreasonable for this clause to say that the borrower cannot sell the goods purchased with the loan, without the lender’s prior consent because this would mean asking for consent almost daily, which is an administrative (and unnecessary) burden on the lender and borrower alike. On the other hand, it would be reasonable if the clause restricts a change in the list of the borrower’s suppliers/vendors if, for example, the lender relied on such list before approving the loan – imagine the borrower is into construction and asked for a loan to pay its engineers (Julius Berger); the lender probably trusts Julius Berger because of its reputation and maybe previous dealings but if the borrower decides to drop Julius Berger as an engineer to be replaced by a random company nobody has heard of, the lender would want to have a say because whereas it may trust Julius Berger’s credibility that it will deliver if paid, the same cannot be said of the new random engineer.

  1. Representations and warranties:

Representations are statements of fact given by the borrower, confirming that certain things are as the borrower says that they are – the idea is that if any of such representations turns out to be untrue, the lender may suffer a loss. As such, the lender would want to have a remedy against the borrower e.g. to be able to claim against the borrower, or worst case, call it an event of default. The borrower’s agreement to indemnify/protect the lender if a representation is false, is called a warranty. For companies (e.g. see the sample term sheet), a common representation is that the company is validly existing and incorporated and that the person that signs on behalf of the company is duly authorised to enter into the loan documents on behalf of the company – if the representation turns out to be false, it could mean that there is no valid contract between the lender and the “company”, meaning that the lender may not be able to claim its money back (because it basically means that there was no valid agreement in the first place). 

  1. Indemnities, costs and expenses:

These are usually separate provisions but they can be addressed together. An indemnity is simply a promise by the borrower to take responsibility for any loss that the lender suffers (with certain exceptions, of course) as a result of the occurrence of an event of default or some other result attributable to the borrower. Costs and expenses provisions typically state that the borrower will be liable to reimburse the lender for costs and expenses incurred in relation to the loan agreement e.g. lawyers’ fees, registration costs, agents’ fees, etc. So, for example, if the borrower fails to pay an amount due under the loan documents and the lender gets a debt collector to chase the borrower for the debt, these provisions will apply in the sense that the borrower will be liable to pay any fees charged by the debt collector. 

  1. Set-off:

An example of a set-off provision is in 7 (Set off and Lien) of the FBN Loan.  This clause usually provides that if an amount is due and outstanding under the loan, the lender can use any other funds owned by the borrower but in the control of the bank, in order to satisfy the borrower’s debt. For example, if N520,000 is due under the loan agreement but the borrower has not paid the bank, if the borrower has an account with the lending bank and that account has a balance of N520,000 or more, the bank can effectively use the money in this account to repay the outstanding amount under the loan – it does not matter that the money in the account was meant for something else and has no relation to the loan in question. More so, the bank does not need to inform the borrower before exercising this right of set-off. Likewise, if the account has less than the outstanding amount, the bank can still use the money in the account e.g. only N300,000 is in the account, the bank can take it all, so that the balance outstanding from the borrower would become N220,000. 

  1. Assignment:

In general terms, an assignment is a legal process by which a person transfers its rights under a contract to another person i.e. as far as the transferred rights are concerned, this other person steps into the shoes of the person that was originally a party to the contract. Assignments are very common in practice and very often, they operate behind the scenes. In the context of loans, every lender would like to have an unrestricted right to assign its rights and powers under the loan documents to another person (most likely another bank, or an affiliate of the original lender itself, or even a random third party). Using the FBN Loan as an example, if FBN assigns all its rights and powers under the FBN Loan to XYZ, XYZ would be entitled to step into the shoes of FBN and act as if it is the lender under the loan documents (including the right to receive the repayments) – the catch is that for XYZ to be able to do this directly and effectively, the borrower would need to have been notified of the assignment.

Some lenders prefer not inform the borrower because it might affect the relationship between them (as the borrower would be asked to deal with a “stranger”, the borrower may feel that the lender does not really care about them, etc.). If FBN decides not to inform the borrower of an assignment to XYZ, FBN would need to continue acting as lender on record but will in reality, be acting on behalf of XYZ. Assignments are a useful tool in the loan market because they give the lender the opportunity to leave a loan transaction much earlier than reflected on paper because if the bank can assign its rights under a loan of 10 years few months after it signs the loan agreement, it will get its full money back with profits immediately (from the person that it assigned its rights to – because this person will pay the bank for technically selling the loan to them, but at a lower price). So, if for example, the bank loaned N1,000,000 to the borrower and expects that at the end of the tenor the bank would have made N1,300,000, the bank will be more than happy to assign its rights under the loan to XYZ, who in turn will pay the bank N1,150,000 – although there is a discount, the bank would at least get the principal it loaned, some of the profits it projected, and will leave the borrower’s risk of non-payment with XYZ; if the borrower ends up being unable to pay all amounts and a loss is suffered, that would be XYZ’s problem (not the original lender’s).

Tip: It is no surprise that a lender will not want the borrower to be able to assign its rights under the loan, without the lender’s consent and in fact, some lenders make it an absolute prohibition on the borrower to assign. As such, every borrower should at least attempt to negotiate that the borrower can assign its rights under the documents, with the prior consent of the lender (such consent not to be unreasonably withheld). The words in bracket are important, so that the lender does not deny consent for an unreasonable ground – the borrower should, however, expect to pay a charge for the lender to grant such consent. In addition, the borrower could negotiate that the lender’s right to assign under the loan documents should be with the prior consent of the borrower unless, for example, the bank is assigning to its subsidiary or affiliate; this approach is very common and is indeed the market standard. 

  1. Notices:

The notices provision should clearly state the address details for notices to be sent to each of the parties, by what means, deemed date/time of delivery, etc. For example, in clause 11 (Notices) of the FBN Loan, these have been specified.

Tip: In view of the advancement in technology, however, it is highly recommended that notices clauses should also include delivery of information by electronic means such as e-mails. These are arguably more reliable, as they can be tracked, they are received almost immediately and more accessible.

 

Danger areas

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Source: Adobe Spark

Of course, unforeseen events happen, leading to a borrower’s inability to repay debts. However, there are some events that are foreseeable and preventable with proper legal/financial advice at the outset, which should lead a borrower to make an informed decision in terms of the loan terms – I call these danger areas, some of which are briefly discussed below and are in addition to the tips and traps flagged in the previous section.

  1. Income currency mismatch: If borrowing in foreign currency, ensure that the source of income i.e. funds for the repayment of the loan, will also be in the same currency. This is to avoid issues with currency mismatch, where the borrower takes out a dollar loan, but has only naira coming in – the result is that there is a chance that the exchange rates will not be favourable at the time of conversion, leading to shortages and additional non-payment issues under the loan agreement. The Etisalat Nigeria debt crisis is a case in point. I would mention, however, that this issue of currency mismatch can be addressed by way of currency swaps; swaps are expensive and complicated and as such, not a feasible or suitable option for all types of borrowers – especially personal borrowers and businesses looking to borrow a small loan.

Moreover, Nigerian banks are currently prohibited by CBN regulations from lending foreign currency to parties that do not generate income in foreign currency as well.

  1. Overcollaterisation: Quite often, the collateral provided by the borrower in support of the loan will be worth more in value than the loan collected – sometimes, this is deliberate (and is actually preferred by banks) so that in the event that the asset needs to be sold, the expectations is for more than enough income to be generated from the sale, for the satisfaction of the debt. So, to the extent that there is a risk of overcollaterisation, it is important that the loan documents are clearly drafted so that the borrower is free to reduce the security package if necessary or substitute the collateral for something more commensurate with the credit provided by the bank – the bank may refuse to agree to this term, but it is worth a try.
  1. Tax issues: Certain payments may be subject to taxation such as VAT or withholding tax. If any repayment is subject to such tax, the bank would want the borrower to bear the financial burden of paying that tax (unless this is prohibited by law). As such, provisions would usually be included in the loan agreement to the effect that if tax is payable on any payments to the bank, the borrower would need to “gross up” such payment – in simple terms, top-up the payment to the bank so that once the relevant tax is paid to the tax collector, the bank will still have the full amount that it expected to receive, if there was no requirement to pay/deduct/withold tax. Whenever there are tax provisions in a loan document, it is often recommended that the borrower obtains tax advice from an independent tax expert if one can be afforded because the consequences could be dire.
  1. Catch-all provisions: This is more of a general health warning, applicable to any documents to be signed. You need to read every word carefully and ensure that certain extra items are not added because they seem “harmless”. See, for example, the additional wording in relation to interest in clause 4 of the FBN Loan. Such catch-all phrases can be easy to spot such as “including…”, “and all…”, “… and any”, “whatsoever“, etc. These are not necessarily traps but ensure that what they attempt to capture is reasonable and acceptable.

An article I also found quite useful on this point can be accessed by clicking here – it briefly highlights 10 tips to know before seeking a bank loan in Nigeria.

Conclusion

I find loans quite interesting, so it is no surprise that I have found myself practising in this area as a finance lawyer. Personally, I think that once you understand some of the ideas behind the key clauses in a loan agreement, the concept of loans would make more sense. As a borrower, it also helps if you understand some of the lender’s concerns as this would make negotiations much smoother, easier and reasonable.

The terms that the parties end up agreeing to ultimately boil down to bargaining strength. Every (potential) borrower needs to understand that terms can be negotiated – do not simply sign the “standard terms and conditions” or other loan documents once your application for a loan has been “approved” by the bank. Every borrower needs to understand what it is they are agreeing to; if anything is unclear, ask for clarification and if borrowing on a personal basis, it is your right by law for the bank to explain the terms of the credit in a manner that you can understand. If, however, you are borrowing as a business, the bank may not owe you the same level of protection afforded to “consumers” so it is advisable to seek independent legal and/or financial advice before entering into loan documents.

I hope you have enjoyed reading this as much as I enjoyed writing it. Most importantly, I hope this has been insightful and helpful and the concept of loans would be less daunting for you, going forward.

Thanks for your time!!!

 

Useful links

Case briefing on business names and land ownership documentation

http://www.oseroghoassociates.com/articles/180-business-names-and-land-ownership-documentation?print=0&download=1

10 tips to know before seeking a bank loan in Nigeria

https://nairametrics.com/10-tips-you-must-know-before-seeking-for-a-bank-loan-in-nigeria/

G Elias & Co article on loans and secured financing in Nigeria

https://gettingthedealthrough.com/area/79/jurisdiction/18/loans-secured-financing-nigeria/

CBN money market data & statistics

https://www.cbn.gov.ng/rates/mnymktind.asp

Nigeria interest rates

https://tradingeconomics.com/nigeria/interest-rate

CBN Prudential Guidelines (2010)

https://www.cbn.gov.ng/OUT/2010/PUBLICATIONS/BSD/PRUDENTIAL%20GUIDELINES%2030%20JUNE%202010%20FINAL%20%20_3_.PDF

CBN Consumer protection information

https://www.cbn.gov.ng/Supervision/cpdconedu.asp

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