Understanding Bank Lending is inspired by a conversation/chat I had yesterday with a friend. It might benefit the general public so I thought to share.

More to come...
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Some minutes past 10am yesterday, a friend from school who studied Theatre Arts and is currently in the movie industry featuring in epic films and slowly rising as an upcoming star actor called me to request for my bank's partnership with him for a movie he's planning on shooting.

Bank, partner with an individual ? An individual who hasn't registered his company name with Corporate Affairs Commission (CAC). A young graduate in his 20s who is still trying to find his feet in the entertainment industry wants us to fully sponsor his film project. That's funny. I told him to chat me up as the conversation was going to be a long one. Then we began.

I decided to share the history of that chat here because there are a lot of people complaining that Banks don't encourage SMEs, banks don't encourage entrepreneurs, banks don't give loans to retail customers and so on. Not quite true. I'll explain why.

When you accost your account officer or walk into any of your bank's branches on a beautiful day after returning from your dreamworld, you are full of ideas, so much fire in your bones, very optimistic about your dream of being your own boss and an employer of labour but you need to understand what we see when we listen to your big dreams.

The loan/overdraft/import financing/LPO or whatever it is you're requesting for when you approach your bank will come at a cost. Why? Because banks don't print money. We take from areas of surplus (depositors) and give to areas of deficit/want/need (borrowers). This is a huge risk. A very risky business for banks because anything can happen to the individual borrower the next minute. He might die. His warehouse might be razed down after financing the stock in his warehouse. Or on the brighter side, he can go on a vacation to an island with his family and enjoy there till eternity.

Depositors money comes at a cost (interest accrual) to the bank. When we take Kabiru's savings and give to Michael for business and Kabiru walks into the bank the next day to request for his money, what do we do? Tell him we don't have his money anymore? If we try that there will be a run on our banks across all states. People trooping into our banking halls or using their mobile phones from the comfort of their homes to transfer their funds and we don't want that.

Yet, we are in business to serve customers. To offer financial intermediary services so we have no excuse you'll say. I agree with you but overtime banks have had their hands badly burnt therefore we need to apply caution as we discharge one of our primary responsibilities to our customers.

And what is that?

COMFORT

What comfort or collateral have you when you approach your bank. Please don't tell me you have a ready market with buyers waiting in line for your product like my friend told me. If it be so, why don't you leverage on spontaneous financing? The proposed buyers can actually pay in advance as they eagerly await your production. That way, you have money to produce or you can approach the bank with that deposit and it can be accepted as collaterized deposit. That is one form of comfort for the bank. At least, the facility will be cash-backed. No shaking.

Again, we ask to see previous works you've done in the past and you tell us you haven't done anything before but you believe so much in yourself that you want the bank to use your confession as bond. It doesn't work that way. No track record. No past successes to reference and you want your first project to be a block buster. Things don't work that way. Start with the little you have. Do small things first and show us the results. From the antecedents, we can be better prepared to offer financial assistance with your promise to pay back.

I asked my friend who is requesting for bank loan how he intends to pay back and his response was as expected, filled with high hopes. "Local movie houses will buy the movie once it's out. In fact, marketers in Alaba and Onitsha are already on ground. I've spoken with them".

Can you see the dilemma we find ourselves? I'm happy he has their commitments but is there a legal agreement, a partnership deed to close this deal? None! How sure are we that after producing a high budget movie it will not be underpriced? Have you taken into cognizance the commercial side of this project? He responded in the negative but insisted that he has it all figured out!

If it doesn't go as planned, what should the bank fall back on?

He said it will go as planned.

Sometimes, your optimism is not what makes a project work, your understanding and preparedness for failure produces success.

Questions and Reactions are welcome
My friend is like the hundreds of thousands of youths out there looking for a way to hit it big from the start.

Take it slow guys...

Your bank is here to serve you. Trust us to deliver.

Nice write-up, but..

...most of the NPLs (Non Performing Loan) in the banking space had little or no collateral backing it; most were given on a oga-know-man basis; no risk management process deployed, especially if you are from the "Oil & Gas" sector then when Brent was breaking the roof..

..but things are changing though.

davide470:
Nice write-up, but..

...most of the NPLs (Non Performing Loan) in the banking space had little or no collateral backing it; most were given on a oga-know-man basis; no risk management process deployed, especially if you are from the "Oil & Gas" sector then when Brent was breaking the roof..

..but things are changing though.

True, however, things have changed. We've seen that some who even pledged collaterals back in those years offered non-realizable collateral. For instance, presenting third party collaterals and one village Igwe's palace and all. Those properties if push comes to shove and the bank is set to sell, trading it off becomes an issue.

These days banks are wiser and risk management is requesting for collateral cover of at least 140%. This way the disastrous effect if anything should go wrong would have been watered down a bit.

Thanks for sharing in our sentiment.

A really nice article, I wish Lalasticlala would see it

Nice one. I used to hate banks as a man with many dreams in the past and not being able to get a loan, but now I understand better. Banks would rather take the risk with established business men or investors, and I don't blame them.

If you are just starting out, it's best you try to get a loan from friends, family members, or fans/admirers of your works.

Banks are not NGOs or charity organisations. Banks are profit-oriented and will always venture in businesses with little or no risk.

The only cases where a Bank will venture in bad businesses/ loans that will end up as NPL (Non-performing Loan) are cases where at least one Bank staff did not do his/her analysis well or he/she compromised for selfish gains.

This is quite educative.

Please I need clarification on something personal.
I hope you don't mind if I send you a private message.

Thanks.

I am voting for Atiku

APC govt policies are killing talents

Please don't borrow money make free money

Good write up

I agree with you op, especially in the mortgage sector, only few are well informed and access mortgage products from mortgage bank. Before walking into any financial institution avail your self with info. And trust me the bank won't toy than to give

Quite enlightening. So many opportunities exist in our Financial system. That's one place your money can sweat for you and make returns even while you are sleeping (and probably snoring) on your bed. But the information gap is just too wide.

I still feel if the general public have a proper knowledge of some of these opportunities, I doubt they would still be leaving their money lying fallow in commercial banks.

I endorse this write up back to back.

Keneking:
APC govt policies are killing talents

I disagree with you bro.

Kkk

H

jeffrizzy1:



I disagree with you bro.

What is interest rate?

I really need to learn more about bank loans

Bank loan is like the devil's gift, weta isi bia welu isi I need one but God forbid I approach Nigerian banks for loan.

I laughed hard when I saw your post. Many persons don't understand that banking is a risky business. A lady approached me a while ago. She wanted financing for an LPO. I told her the company that issued the LPO is not among companies and establishments we deal with. Not that the company is bad. I took her to a microfinance Bank to see a friend there. She was asked if she has any properties that is worth 24M? She said ah ah, she will do the supply and return the money na bla bla bla... I told her it doesn't work that way. Anything can happen to the company and they may not be able to pay for your supplied goods, so what happens to the bank (depositors) money
The saving grace for entrepreneurs in America is that they have venture capitalists (firms) that sponsors ideas. That was the saving grace for most of this dot.com organizations in America

amicable09:
Understanding Bank Lending is inspired by a conversation/chat I had yesterday with a friend. It might benefit the general public so I thought to share.

More to come...
*******************************************
Some minutes past 10am yesterday, a friend from school who studied Theatre Arts and is currently in the movie industry featuring in epic films and slowly rising as an upcoming star actor called me to request for my bank's partnership with him for a movie he's planning on shooting.

Bank, partner with an individual ? An individual who hasn't registered his company name with Corporate Affairs Commission (CAC). A young graduate in his 20s who is still trying to find his feet in the entertainment industry wants us to fully sponsor his film project. That's funny. I told him to chat me up as the conversation was going to be a long one. Then we began.

I decided to share the history of that chat here because there are a lot of people complaining that Banks don't encourage SMEs, banks don't encourage entrepreneurs, banks don't give loans to retail customers and so on. Not quite true. I'll explain why.

When you accost your account officer or walk into any of your bank's branches on a beautiful day after returning from your dreamworld, you are full of ideas, so much fire in your bones, very optimistic about your dream of being your own boss and an employer of labour but you need to understand what we see when we listen to your big dreams.

The loan/overdraft/import financing/LPO or whatever it is you're requesting for when you approach your bank will come at a cost. Why? Because banks don't print money. We take from areas of surplus (depositors) and give to areas of deficit/want/need (borrowers). This is a huge risk. A very risky business for banks because anything can happen to the individual borrower the next minute. He might die. His warehouse might be razed down after financing the stock in his warehouse. Or on the brighter side, he can go on a vacation to an island with his family and enjoy there till eternity.

Depositors money comes at a cost (interest accrual) to the bank. When we take Kabiru's savings and give to Michael for business and Kabiru walks into the bank the next day to request for his money, what do we do? Tell him we don't have his money anymore? If we try that there will be a run on our banks across all states. People trooping into our banking halls or using their mobile phones from the comfort of their homes to transfer their funds and we don't want that.

Yet, we are in business to serve customers. To offer financial intermediary services so we have no excuse you'll say. I agree with you but overtime banks have had their hands badly burnt therefore we need to apply caution as we discharge one of our primary responsibilities to our customers.

And what is that?

COMFORT

What comfort or collateral have you when you approach your bank. Please don't tell me you have a ready market with buyers waiting in line for your product like my friend told me. If it be so, why don't you leverage on spontaneous financing? The proposed buyers can actually pay in advance as they eagerly await your production. That way, you have money to produce or you can approach the bank with that deposit and it can be accepted as collaterized deposit. That is one form of comfort for the bank. At least, the facility will be cash-backed. No shaking.

Again, we ask to see previous works you've done in the past and you tell us you haven't done anything before but you believe so much in yourself that you want the bank to use your confession as bond. It doesn't work that way. No track record. No past successes to reference and you want your first project to be a block buster. Things don't work that way. Start with the little you have. Do small things first and show us the results. From the antecedents, we can be better prepared to offer financial assistance with your promise to pay back.

I asked my friend who is requesting for bank loan how he intends to pay back and his response was as expected, filled with high hopes. "Local movie houses will buy the movie once it's out. In fact, marketers in Alaba and Onitsha are already on ground. I've spoken with them".

Can you see the dilemma we find ourselves? I'm happy he has their commitments but is there a legal agreement, a partnership deed to close this deal? None! How sure are we that after producing a high budget movie it will not be underpriced? Have you taken into cognizance the commercial side of this project? He responded in the negative but insisted that he has it all figured out!

If it doesn't go as planned, what should the bank fall back on?

He said it will go as planned.

Sometimes, your optimism is not what makes a project work, your understanding and preparedness for failure produces success.

Questions and Reactions are welcome
My friend is like the hundreds of thousands of youths out there looking for a way to hit it big from the start.

Take it slow guys...

Your bank is here to serve you. Trust us to deliver.

Can bank accept degree and NYSC certificates as collateral for a loan of six months, to be paid with any interest rate of the bank choice?
A very business opportunity is shining right here but no means to finance it.

What the op wrote is very true, however, the banks in Nigeria are zero percent interested in giving small business any form of insight into helping them grow. Even when you don't need loans or any form of financing, as a financial institution, they are to help guide business owners, here in Nigeria, the bankers are not trained as bankers at all.

Once they see you have big balances, they send their marketers to cling to you like a leach, just interested in growing their targets and not ever interested in if your business makes it to the next day.

Due to minor temporary cash flow issues like when dollar spiked out of control last year, causing price of my inputs to sky rocket.. those big balances went low for a period of time... even asking customer care a question inside the bank, you appear as a nuisance.

jerryadigun:
This is quite educative.

Please I need clarification on something personal.
I hope you don't mind if I send you a private message.

Thanks.

OK... but I'm afraid I have lost password to the email linked to my NL account. Except it is very personal and for one ear alone, I can improvise.

Thanks.

amicable09:

OK... but I'm afraid I have lost password to the email linked to my NL account. Except it is very personal and for one ear alone, I can improvise.

Thanks.

Yes please. It's personal and I would appreciate any other alternative.

Thanks.

Igyeseh:
Can bank accept degree and NYSC certificates as collateral for a loan of six months, to be paid with any interest rate of the bank choice?
A very business opportunity is shining right here but no means to finance it.

I don't know of any commercial bank that will accept degree and NYSC certificate as collateral for loan request.

One thing we look out for in pledged collateral is how easily realizable is it! That's key. If you default, can the bank trade your certificate on NSE

of what use is it then to the bank if it can't be traded? That's the problem. Government can accept it but commercial banks won't.

To finance your bright business idea, I suggest you try private placement as an option.

amicable09:


Depositors money comes at a cost (interest accrual) to the bank. When we take Kabiru's savings and give to Michael for business and Kabiru walks into the bank the next day to request for his money, what do we do? Tell him we don't have his money anymore?

No, just take amicable's savings and give to Kabiru, and it continues that way.

By the way, your post is educative.

The business of financial intermediary is faced with a lot of risk especially in Nigeria. Most people don't know that bank have to make provision out of the revenue they have gained for NPLs that are lost ,substandard and so on.Some banks with lower risk appetite have had their fingers burnt in the past and havs learnt their lessons.

Igyeseh:
Can bank accept degree and NYSC certificates as collateral for a loan of six months, to be paid with any interest rate of the bank choice?
A very business opportunity is shining right here but no means to finance it.

when things go bad, how much do you think they'l sell your nysc certificates for? It's not more than a mere paper in terms of value to the bank. It's only valuable to you, and can't be converted into cash