This document discusses security for credit facilities. It defines security as an interest in property that secures the performance of an obligation. Security is distinguished from the source of repayment. Factors influencing the choice of security include the type and value of the asset, as well as ownership and chances of realization. Security can be classified as real/personal, consensual/non-consensual, and possessory/non-possessory. Types of security discussed include cash, debentures, guarantees, liens, mortgages, pledges, and set-off.

1. SECURITY FOR CREDIT
FACILITIES
19 May 2016

2. Outline
1.What is Security?
2.Factors influencing choice of Security
3.Classification of Security
4.Types of Security
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3. What is Security
Security, simply defined, is an interest in property
which secures the performance of an obligation.
In this, security should be distinguished from the
proposed source of repayment of the credit facility
which could be income derived from the business of
the borrower or receivables (contract proceeds,
salaries, gratuities e.t.c.) due to the borrower.
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4. Factors influencing Choice of Security
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The factors that influence a banker’s choice of
security include, inter alia:
Type of asset.
Type of facility.
Value of the asset.
Ownership of the asset.
Title to the asset.
Chances of realization of the asset.

5. Classification of Security
Security can be classified into 3 groups:
Real and Personal Security
Consensual and Non-Consensual Security
Possessory and Non-Possessory Security
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6. Classification of Security contd.
Real and Personal Security
Real Security gives the creditor right over and/or
interest in some or all of the debtor’s assets, e.g.
mortgages
Personal Security involves a third party entering into
a separate contract with the creditor (the bank) and
undertaking responsibility for the debt if the debtor
defaults, e.g. a guarantee or indemnity.
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7. Classification of Security contd.
Consensual and Non-Consensual Security
Consensual security is that created by the agreement
of the creditor and debtor, e.g. pledges and
mortgages.
Non-consensual security arises by operation of law,
e.g. liens
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8. Classification of Security contd.
Possessory and Non-Possessory Security
Possessory security depends on the creditor having
possession of the goods, e.g. – pledges.
Non-possessory security is not dependent on
possession of the security interest by the creditor, e.g.
mortgages
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9. Types of Security
 Cash
 Debenture
 Guarantee / Indemnity
 Lien
 Mortgage
 Pledge
 Set-Off
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10. Types of Security contd.
Cash
This type of security involves the borrower (or a
prospective guarantor) providing an equivalent (or
lower/higher) value of the facility amount in cash as
security with the bank placing a lien over the value of the
pledged security.
This is usually seen in import transactions where the bank
demands cash cover for opening letters of credit on behalf
of the borrower.
It is the most secure form of security for a banker.
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11. Types of Security contd.
Debenture
A debenture has been defined as a written document by a
company under seal, acknowledging the company’s
indebtedness and charging the company’s assets as
security for the indebtedness.
Debentures can be classified as:
- Mortgage debenture
- Assets debenture
- Fixed debenture
- Floating debenture.
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12. Types of Security contd.
Guarantee / Indemnity
A guarantee and/or indemnity is an undertaking given by a
third party to answer or be responsible for a borrower’s
default in his repayment obligations.
The difference is that under a guarantee, the obligation is
secondary while under an indemnity, it is primary.
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13. Types of Security contd.
Lien
A lien is a form of security which entitles a person (the
lienee) who has done work for another (the lienor) to retain
possession of the lienor’s goods or documents until the
charges for the work have been paid.
In credit transactions, this is usually effected by the bank
taking a lien over all contents of the borrower’s account(s)
with the bank and reserving the right to set-off its exposure
to the borrower against all credit balances in the
account(s).
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14. Types of Security contd.
Mortgage
A mortgage is a non-possessory form of real security
which involves the transfer of ownership of an asset to a
lender (the mortgagee) by way of security upon condition
that the asset will be transferred back to the debtor (the
mortgagor, where they are different parties) when the sum
is paid.
A mortgage can be either legal or equitable.
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15. Types of Security contd.
Pledge
A ‘pledge’ is a type of real security which involves the
borrower (“the pledgor”) delivering goods to the bank (“the
pledgee”) as security until payment of a debt, upon an
undertaking that the goods shall be restored to the pledgor
as soon as the debt is repaid.
In principle, a pledge involves the transfer of possession
of the goods from the pledger to the pledgee.
Delivery of possession could be actual (e.g. transfer of the
goods) or constructive (e.g. transfer of the bill of lading
over the goods).
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16. Types of Security contd.
Set-Off
Set-off is the right of one party (a lender) to require
payment or performance from the other party (borrower)
upon some other dealing or transaction involving the
parties where payment is due from the lender to the
borrower.
This is an attractive security to banks because it does not
involve the sale of an asset to a third party and can be
executed without an order of court.
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