Trends and regulatory climate

Trends

What is the current state of the lending market in your jurisdiction and have any new trends emerged over the last 12 months?

The Nigerian lending market has strategically evolved since the country came out of recession in the second quarter of 2017. Since then, a series of policy measures has been implemented by both the monetary and fiscal authorities to restore growth trajectories.

Although Nigeria’s lending industry is constantly developing, a significant milestone is the Central Bank of Nigeria’s partnership with the International Finance Corporation to establish a national collateral registry. With this new centralised system, lenders can now register their security interests over movable assets owned by borrowers. The Credit Reporting Act 2017 is also a significant reform that has increased stability within the lending industry. Microfinance lenders are now more actively involved in the industry. Nigerian banks have been allocating higher credits to different sectors of the economy. The Central Bank of Nigeria’s Credit Condition Survey Report showed that there was an increase in availability of secured credit to households and corporates in the first quarter of 2018.

Regulatory activity

Is secured lending a regulated activity in your jurisdiction?

Yes. Secured lending is regulated under company law and certain commercial legislations, the applicability of which depends on the nature of the asset being secured.

Are there any specific regulatory issues which a prospective borrower should consider when arranging or entering into a secured loan facility?

Yes. When entering into a secured loan facility, a prospective borrower must consider the following:

  • corporate authorisations;
  • third-party consents;
  • stamping; and
  • perfection modalities and cost.

Corporate authorisationsCorporate borrowers should consider what corporate authorisations are required for the transaction. This would typically be in accordance with the Companies and Allied Matters Act 1990 and the borrower’s articles of association. Typically, under Nigerian law and company regulations, the resolution of the company board of directors is required to authorise the entry into a loan transaction and/or creation of security over the assets of the company. Sometimes, the articles of association may contain borrowing limits, which may be increased or limits removed via a resolution of the company’s shareholders.

Third-party consentsBoth lenders and borrowers should consider third-party consents that may be required. This could be under existing loan or other agreements with third-party lenders which may have negative pledges or undertakings against creating further security over certain assets or even prohibit further borrowing. In addition, borrowers in certain sectors (eg, oil and gas) may need to consider whether the borrowing (if taken from a foreign lender) is within permissible foreign borrowing under the Nigerian Oil and Gas Industry Content Development Act 2010.

StampingThe borrower should consider how much stamp duty will be payable for the secured lending. The Nigerian Stamp Duties Act provides that instruments executed in Nigeria, or relating, wheresoever executed, to any property situate or any matter or thing done or to be done in Nigeria, should be duly stamped. Stamp duty payable ranges from 0.125% for loan agreements and 0.375% (of the value of the loan in each case) for security documents, although for secured lending a payment of the 0.375% for the security covers the other financing documents.

Statutory registrationsBorrowers should consider the nature of the asset sought to be used as security to determine the required registrations under relevant Nigerian law. For instance, the Companies and Allied Matters Act requires that security created over certain assets must be registered at the Corporate Affairs Commission within 90 days of creation of the security. Similarly, security over land, ships and aircraft requires registration in the relevant registries. However, where registration of charges is required pursuant to the Companies and Allied Matters Act, such registration is indexed on the domicile of the company and the nature of the asset and not the location of the asset. Thus, where the asset of a Nigerian borrower is one which requires registration under Nigerian law, such asset must be registered even if the asset is not located within Nigeria.

The Secured Transactions in Movable Assets Act 2017 also established a collateral registry for the registration of security over movable chattels.

Are there any specific regulatory issues which a prospective lender should consider when arranging or entering into a secured loan facility?

There are some regulatory issues which a lender should consider when arranging or entering into a secured loan facility. If it is a foreign lender, it should be aware that it may need to obtain a certificate of capital importation (CCI) in respect of funds given to the Nigerian borrower. A CCI is a receipt issued by an authorised dealer (a bank or other financial institution registered as such) acknowledging that foreign exchange has been brought into Nigeria and converted into naira. A CCI guarantees unconditional transferability and repatriation of the loan and interest (including any recoveries from the secured asset on enforcement).

In addition, the following issues should be considered by a lender when entering a secured loan facility:

  • Type of asset used as security – the lender should consider what assets could be used as security for the loan facility. Security over certain assets trigger registration requirements under Nigerian law, while some are exempt from registration requirements. These would largely depend on what is being financed and the structure of the borrower.
  • Type of security – the lender should consider the type of security that would be most appropriate for the facility and type of asset available. Possible security interests include mortgages, charges (fixed and floating), pledges, liens and hypothecation, among others. The remedies available on enforcement may influence the lender’s consideration of the type of security to be created.
  • Due diligence of the company and the asset to be used as security – the lender should perform due diligence on the company to ascertain the risks inherent in the financing and how best these risks can be mitigated. Due diligence should involve a search of the company’s records at the Corporate Affairs Commission, as well as on the security at the relevant registry. A commission search should reveal whether the company has any existing registrable security and whether annual returns have been filed by the company up to date. Lenders should note that failure to be up to date with annual returns filings would adversely affect the lenders ability to register its security where such requires registrations until the returns are brought up to date.  

Lenders should also conduct due diligence on the assets to be granted as security. In the case of assets with their own registries (eg, land, ships and aircraft), searches should also be conducted at the relevant registries.

Due diligence on the company will enable the lender to ascertain the overall financial health of the company and any security that may have priority over the security to be created.

The lender should also consider tax which is withheld (at 10%) on interests payable on the loan. This is typically addressed in favour of the lender through gross-up clauses in the financing and security documents.

Are there plans or proposals for reform or significant changes to the regulatory landscape in this area?

The lending industry in Nigeria has been undergoing extensive business law reforms. Such reforms include the Credit Reporting Act 2017, which made it easier for credit data gathering and reporting. Lenders can now obtain credit records on potential borrowers from one of the credit bureaux. Another reform is the Secured Transactions in Movable Assets Act 2017, which seeks to:

  • enhance financial inclusion in Nigeria;
  • stimulate responsible lending to micro, small and medium-sized enterprises;
  • facilitate access to credit secured with movable assets;
  • facilitate perfection of security interests in movable assets;
  • facilitate realisation of security interests in movable assets; and
  • establish a collateral registry and provide for its operations.

The legislative arm of the government is in the last stage of passing a bill to repeal the extant Companies and Allied Matters Act 1990 and re-enact a new act.

Structuring a lending transaction

General

Who are the active providers of secured finance in your jurisdiction (eg, international banks, local banks or non-bank financial institutions)?

The institutions involved in the active provision of secured finance are:

  • local and international banks;
  • finance companies;
  • primary mortgage institutions;
  • non-bank financial institutions;
  • government development banks;
  • microfinance banks; and
  • private equity and venture capital funds.

Is well-established market-standard facility documentation used in your jurisdiction for secured lending transactions?

Yes, market-standard facility documentation is used in Nigeria for secured lending transactions. A lot of bilateral and syndicated loans in Nigeria are modelled on the Loan Market Association forms and precedents. The Nigeria Single Currency Secured Term Facility Agreement of the Loan Market Association is one of the agreement forms that has been customised for use in the Nigerian lending market. 

Syndication

Are syndicated secured loan facilities typical in your jurisdiction?

Yes. Lending institutions in Nigeria engage in syndicated secured lending for large transactions.

How are syndicated facilities normally structured? Does the law in your jurisdiction allow a facility agent to be appointed to act on behalf of other banking syndicate members?

Typically, the borrower instructs a financial institution to arrange the facility on its behalf. The arranger markets the facility and secures the participation of other banks or commercial lenders to make commitments to the facility. In some instances, some of the proposed syndicate members become co-arrangers on the facility. The arranger appoints a law firm to act as lender’s counsel on behalf of the syndicate of lenders.

The lender’s counsel conducts due diligence on the borrower and drafts the financing and security documents. The facility agreement is based on the Loan Market Association form of facility agreement for Nigeria. An all asset debenture is typically prepared by the lenders’ counsel. The all asset debenture creates security (which may consist of mortgages, fixed and floating charges and security assignments) over the assets of the borrower. It is also quite common in Nigeria to have the key shareholders of the borrower create a charge over their shares in the borrower. The security is typically held by a corporate trustee for and on behalf of the lenders.

A facility agent is recognised under Nigerian law. A facility agent is typically appointed as a representative of the lenders subject to the terms of the transaction. The arranger or another lender or lenders, act as facility agents under the facility agreement. Facility agents coordinate the loan for the lenders. The role typically includes receiving the interest and repayments from the borrower and distributing them to the members of the syndicate, monitoring performance by the borrower of its obligations under the facility agreements and acting as liaison between the lenders and the borrower.

Does the law in your jurisdiction allow security and guarantees to be held on trust by a security trustee for the benefit of the banking syndicate?

Yes. Nigerian law allows security and guarantees to be held on trust by a security trustee for the benefit of the banking syndicate. However, based on the Loan Market Association facility agreement, any guarantees to be provided (especially by sponsors of the borrower) are typically embedded in the facility agreement. Where the guarantee is a separate document, this can be held by the security trustee on behalf of the syndicate of lenders. Once the security trustee has been validly appointed, the security trustee is recognised as the legal holder of the security on proper perfection of the security.  

The syndicate of lenders can appoint a member of the syndicate or a third party as a security trustee; however, in Nigeria, a third-party corporate trustee is preferred. Corporate trustees are regulated by the Securities and Exchange Commission. 

The rights, powers and duties of the security trustee are usually regulated by the terms of the trust deed, which typically include the rights available to a receiver under the law. 

Special purpose vehicle financing

Is it common in secured finance transactions for special purpose vehicles (SPVs) to be used to hold the assets being financed? Would security generally be given over the shares in the SPV or would lenders require direct asset security?

It is uncommon in secured finance transactions for special purpose vehicles (SPVs) to be used to hold the assets being financed, unless it is a project finance. In project finance transactions, the assets of the projects are held by SPVs, which serves to ring-fence the assets from the assets of the sponsors. However, in corporate finance transactions the borrower does not go through the process of setting up an SPV to hold the assets but, rather grants security over the assets held by it.

Where SPVs are used, security is typically given over the shares of the SPV in addition to direct asset security. Lenders insist on direct asset security in most instances due to registration requirements and to create a defence against subsequent encumbrancers.

Even where an SPV is not used, it is becoming more common for lenders to require security over the shares of the borrower where the shareholding of the borrower is closely held and not diverse.

Interest

Is interest most commonly calculated by reference to a bank base rate or a market standard variable reference rate (eg, LIBOR, EURIBOR or HIBOR)? If the latter, which is the most commonly used reference rate in your jurisdiction?

The Central Bank of Nigeria sets the universal base rate for calculating chargeable interest in lending transactions in Nigeria. Local banks sometimes set different benchmarks for local naira denominated loans, such as the Nigerian Interbank Offer Rate. However, for foreign currency denominated loans, the most common variable reference rate is the LIBOR. 

Are there any regulatory restrictions on the rate of interest that can be charged on bank loans?

Yes. The Central Bank of Nigeria, by virtue of the Central Bank of Nigeria Act, is the regulatory authority which provides regulatory restrictions on the rate of interest chargeable on bank loans. The Central Bank of Nigeria requires banks to give full disclosure on lending rates. A circular is issued by the bank from time to time, publishing the interest rates that banks can charge the public on loans and advances for different sectors. These interest rates are to be used in the offer letters and facility documentation for the loans. 

Use and creation of guarantees

Are guarantees used in your jurisdiction?

Yes. Guarantees may be given by both legal and juristic persons.

What is the procedure for their creation?

A guarantee contract must be evidenced in writing and signed by the guarantor or its agent. Based on Nigerian law of contract, which requires that for a contract to be valid it must be backed by consideration or made by deed in the same way as for a loan, authorisation for a guarantee provided by a company is by way of a resolution of the company directors. Where the Loan Market Association Agreement is used and the guarantee is to be provided by the parent or majority shareholder of the company, such guarantee is embedded in the facility agreement, otherwise it is a separate document. A guarantee executed in Nigeria or relating to a thing to be done in Nigeria must be stamped in accordance with the Stamp Duties Act for it to be tendered in evidence.

Do any laws affect or restrict the granting or enforceability of guarantees in your jurisdiction (eg, upstream guarantees)?

Nigerians are generally free to give guarantees to foreign entity. However, there are certain entities which are restricted from giving guarantees – for example, banks require the prior written consent of the Central Bank of Nigeria before granting security over their assets or giving guarantees in respect of loans taken from foreign entities (other than bank deposits in the ordinary course of business). Federal government ministries, departments and agencies may also not give guarantees without the approval of the Federal Executive Council.

Otherwise, there are no restrictions and the enforceability of guarantees in Nigeria is largely subject to the laws of contract and commercial transactions.

Subordination and priority

Describe the most common methods of structuring the priority of debts and security.

Under Nigerian law, a fixed charge has priority over a floating charge affecting the same property, unless the terms on which the floating charge was granted prohibited the company from granting any later charge having priority over the floating charge and the person in whose favour such later charge was granted had actual notice of that prohibition at the time when the charge was granted. However, the doctrine of constructive notice of registered documents has been abolished, so knowledge is not imputed simply because the security document containing a negative pledge was registered at the Corporate Affairs Commission.

Where the equities are equal, priority is determined by registration. The security registered first by a genuine creditor without notice takes priority over an earlier interest on the same property.

In relation to a corporate borrower, Nigerian law recognises the priority of a registered charge as ranking in priority over an unregistered charge. Where registration of a charge of a corporate borrower is required by law, failure to register renders such charge void against the liquidators and any creditor of the company. If two security interests granted to two separate creditors are both required to be registered with the Corporate Affairs Commission, and are registered as prescribed, the security’s date of creation rather than its registration determines priority between the security interests.

Nevertheless, lenders can contractually structure the priority of debts and security. This is done by entering into an intercreditor and security sharing deed between themselves and the trustee (where the security is held by a trustee), the deed will provide for the terms of sharing of the security and for a lender to turnover any payments it received from the borrower to be shared in accordance with the terms of the deed.

Documentary taxes and stamp duty

Are any taxes, stamp duty or other fees payable on the granting of a loan, guarantee or security interest, or on its enforcement?

Yes, there are some documentary taxes and stamp duties payable on the granting of a loan, guarantee or security interest in Nigeria – these include:

  • Stamp duty – pursuant to the Stamp Duties Act, all instruments executed in Nigeria or relating wheresoever executed to any property situate or any matter or thing done or to be done in Nigeria, will not, except in criminal proceedings, be given in evidence or be available for any purpose whatever, unless it is duly stamped. Thus, where loan or security documents fit this bill, they will require stamping. Stamp duty is also typically paid on loan agreements and security documents on an ad valorem basis.
  • Asset registry fees – where the property to be used as security consists of a property with its own registry, security over such asset must be registered at the relevant registry and registration and other administrative fees may be payable.
  • Corporate Affairs Commission – fees for the registration of security at the commission is charged ad valorem on the value of the loan.
  • Value added tax – value added tax is chargeable on fees and other vatable supplies in respect of the loan documentation and perfection of security.

In addition, other fees may be payable on the enforcement of security. Such fees vary depending on where the security is situated.

Cross-border lending

Governing law

Is it more common for local law to govern the terms of the facility documentation or is the law of another jurisdiction often elected by the parties (eg, English law or New York law)?

There is freedom to contract under Nigerian law and parties may choose the law that they want to govern their loan documents. However, English law is the most commonly used governing law for cross-border lending, in which case the English courts are also typically preferred. However, there has been an increase in parties opting for arbitration for the settlement of disputes.

However, Nigerian law is typically the governing law of security documents in respect of assets located in Nigeria.

Restrictions

Are there any restrictions on the making of loans by foreign lenders or the granting of security or guarantees to foreign lenders?

A foreign lender should be aware that it may need to obtain a certificate of capital importation (CCI) in respect of fund availed the Nigerian borrower. A CCI is a receipt issued by an authorised dealer (a bank or other financial institution registered as such) acknowledging that foreign exchange has been brought into Nigeria and converted into naira. A CCI guarantees unconditional transferability and repatriation of the loan and interest (including any recoveries from the secured asset on enforcement). Foreign lenders are unable to hold land and other assets directly in Nigeria and must appoint a Nigerian entity to act as its security trustee to hold the security interest over the asset to be secured. Nigerian banks must also seek the consent of the Central Bank of Nigeria before they can give a guarantee to a foreign lender (other than in the ordinary course of their business).

Are there any exchange controls that restrict payments to a foreign lender under a security document, guarantee or loan agreement?

Yes, there are restrictions on payments to a foreign lender under Nigerian law. Repatriation of the principal and interest sum by the foreign lender is regulated by Foreign Exchange Monitoring and Miscellaneous Provisions Act. A foreign lender must have obtained a CCI at the point of importation of the loan into Nigeria. The CCI grants the lender access to the Central Bank of Nigeria Foreign Exchange Market where the naira is converted to the lender’s currency for repatriation to the lender’s country. However, there are some companies which earn foreign exchange (eg, oil and gas companies) which would rather not convert loans to naira and thus make the procurement of a CCI impossible. This is because they tend to make cash calls and earn revenue in dollars and can pay interest and principal in dollars without recourse to the official foreign exchange market. The risk here is that if there is a default and the lender needs to enforce security, it may get its proceeds in naira and repatriation would be difficult.

Security – general

Security agreements

Is it possible to create a security interest over all assets of an entity? If so, would a single security agreement suffice or is a separate agreement required for each type of asset?

Yes, it is possible to create a security interest over all the assets of an entity. In this case, one security document will suffice – typically called an ‘all asset debenture’ in Nigeria. 

Release of security

What are the formalities for releasing security over the most common forms of assets?

The lender will execute a deed of release. The deed of release is a registrable instrument which must be stamped at the Federal Inland Revenue Service and registered at the applicable registries. This may include the Asset Registry, the Corporate Affairs Commission and the National Collateral Registry (for movable chattels).

Asset classes used as collateral for security

Real estate

Can security be granted over real estate? If so, what are the most common forms of security granted over real estate and what is the procedure?

Yes, security can be granted over real estate. The common form of security granted over real estate is a mortgage or charge.

Mortgages must be made in writing and be registered at the land registry where the property is located. Until registered they will remain inchoate and are equitable mortgages. Where it is given by a corporate entity, it must also be registered with the Corporate Affairs Commission. The consent of the governor of the state where the property is located must be obtained for a legal mortgage over real estate to be valid and enforceable and where the land is held by the federal government or any of its agencies, the consent of the Minister of Lands, Housing and Urban Development is required.

Machinery and equipment

Can security be granted over machinery and equipment? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Security can be granted over machinery and equipment, usually in the form of a mortgage, charge or pledge.

A mortgage or charge over a tangible, movable asset (eg, machinery and equipment) is created by a transfer of title to the assets with a provision for re-conveyance at discharge – similar to creating a mortgage over real estate.

A pledge is created by depositing the machinery and equipment, and in certain cases, the title documents to the machinery and equipment, with the lender as security for the debt, on condition that the pledged machinery and equipment will be returned to the borrower if the debt is discharged or sold if the borrower defaults. The essential element of a pledge under Nigerian law is actual or constructive possession.

Such security interest, when created, must be registered with the National Collateral Registry pursuant to the Secured Transactions in Movable Assets Act 2017. Where it is created by a company, it must be registered with the Corporate Affairs Commission.

Receivables

Can security be granted over receivables? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes. Security can be granted over receivables such as debts, insurance policies proceeds and contractual rights. The common forms of security granted over these kinds of property are:

  • assignment of receivables by way of security;
  • charges;
  • option rights established as security; and
  • mortgages.

In the case of an assignment, notice of the assignment must be given to the borrower’s counterparty. Lenders also typically require an acknowledgment of the notice to create privity of contract between them and the counterparty. It must also be stamped at the Federal Inland Revenue Service and registered as a charge at the Corporate Affairs Commission.

Financial instruments and cash

Can security be granted over financial instruments? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes, security can be granted over financial instruments by way of pledge or charge. The most common types of financial instrument security are granted over include equity instruments (eg, shares) and debt instruments (eg, commercial papers, bonds, treasury bills, futures and options).

Security over financial instruments typically do not require registration at the Corporate Affairs Commission but may require registration based on the law governing the financial instrument and the constitutional documents of the issuer. Where shares are involved, the borrower typically provides the lender with an undated blank share transfer form (which are to be dated and the name of the transferee inserted on enforcement), as well as board resolution accepting the transfer on enforcement and authorising the transferee’s name to be entered in the register of members in respect of the share on enforcement.

Can security be granted over cash deposits? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes. Security can be granted over cash deposits. The most common forms of security over cash deposits is a charge. The charge may be fixed or floating.

For a charge on cash deposits, the borrower and lender enter into a deed of charge and are required to inform the financial institution managing the account on the borrower’s behalf of the charge and the lender’s interest. In some cases, the borrower may be required to create an escrow account where such cash deposit is held by a third party for the benefit of the borrower and lender under agreed terms and conditions. Where the charge over deposits is a fixed charge, the deed of charge creating security over cash deposits need not be registered at the Corporate Affairs Commission, as it is not a book debt to which the registration requirements apply. However, where the charge is a floating charge, it requires registration at the Corporate Affairs Commission as a floating charge. The deed must also be duty stamped at the Federal Inland Revenue Service.

Intellectual property

Can security be granted over intellectual property? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes. Nigerian law recognises the grant of security over intellectual property. Often, the forms of security granted over intellectual property are mortgages, charges or security assignments.

Where the security provider (borrower) is the legal owner or licence holder of IP rights, the lender may take a mortgage or fixed or floating charge over the intellectual property.

The effect of the mortgage is a transfer of the legal title to the intellectual property to the lender as security on condition that such title will be re-assigned when the security obligations have been discharged.

Enforcement

Criteria for enforcement

What are the common enforcement triggers for loans, guarantees and security documents?

The common enforcement triggers for loans, guarantees and security documents are as follows:

  • default in financial or other obligations under the facility agreement;
  • failure of the borrower to pay any instalment of principal sum and interest, or the whole or part of the principal or any premium, owing under the security documents, within one month after it becomes due;
  • any event where a creditor of the borrower initiates a process of execution against the security or commences proceedings for the winding up of the borrower by order of the court;
  • the borrower suffers, after the issue of charges of the class concerned, losses or diminutions in the value of its assets which in the aggregate, an amount of more than half of the total owing in respect of charges of the class held by the charge holder who seeks to enforce its security and charges whose holder ranks before it for payment of principal or interest; and
  • any circumstance occurs which entitles a charge holder which ranks for payment of principal or interest in priority to the charges secured by the general floating charges to realise its security.

Process for enforcement

What are the most common procedures for enforcement? Are there any specific requirements with which lenders must comply?

In Nigeria, the common procedures for enforcement in event of default are:

  • appointment of a receiver or a receiver and manager in respect of the security – this may be made by the court on application of the creditor once the debt is due or out of court;
  • taking possession of the security;
  • enforcement of claims vested in the company;
  • exercising the power of sale to dispose of the security, subject to the leave of court;
  • bringing a foreclosure action; and
  • winding up the company.

Lenders must comply with the Companies and Allied Matters Act and the terms and conditions of the security document for valid enforcement.

Ranking in insolvency

In what order do creditors rank in case of the insolvency of a borrower?

Creditors will rank in the following order of priority in case of insolvency:

  • creditors secured by way of a fixed charge;
  • preferential creditors;
  • creditors secured by way of a floating charge;
  • secured but contractually subordinated creditors; and
  • unsecured creditors.