Businesses require loans to grow and compete well in the Tanzanian marketplace. Findings from recent empirical studies of the World Bank show that one of the most effective ways of extending working-capital to businesses is through secured loans.
A secured loan is a finance transaction in which the bank acquires a security interest (or collateral) owned by the borrower, and is entitled to repossess the collateral in the event of default to secure payment of the loan.
Banks in Tanzania adopt security interests consensually either by way of mortgage, charge, pledge, or contractual lien; and they must ensure that these are properly documented and perfected to facilitate realization of the collateral upon default.
Security documentation is drafted by the lawyers acting for the bank. As loan security is a very critical issue of credit protection, banks prefer creating separate security documents instead of incorporating them into facility agreements.
The use of a deed is indispensable for a mortgage over land or movables. The deed must be sealed in the presence of two directors or a director and a company secretary.
Charges over any asset of a company tend to be documented by way of a debenture.
Since it is company shares that are commonly pledged (the Law of Contract Act, Cap 345 regulates pledge of ‘goods’ as security for debt repayment), a pledge is documented by a share pledge agreement.
A contractual lien is typically documented by a bailment contract which gives the lender only a right to retain the goods bailed with him as security for the balance due.
Improperly documenting or not documenting at all may, in the worst-case scenario, render the security interests void and unenforceable. If not, it may dent loan recovery chances in the event of default.
Security perfection generally involves obtaining consent, stamping, and registering of security documents with relevant public registries. The manner of perfection depends upon the form of security interest.
Thus, a mortgage deed, instrument of charge (e.g. debenture), and share pledge agreement are subject to stamp duty of varying amounts in accordance with the Stamp Duty Act 1972.
Consent from the Commissioner for Lands must be obtained for a mortgage over land. There’s a view that to say Yes or No to a private company seeking to borrow money from a bank has a stifling effect on the commercial life of the land.
Save for a pledge of mineral rights, telecom licenses and certain other assets within regulated sectors, a pledge over company shares does not require regulatory consent.
Registration of a mortgage over land granted by a company is vested chronologically with the Registrar of Companies (RoC) and the Registrar of Titles (RoT).
A charge created by a company over its assets must be registered with the RoC within 42 days after creation. Nominal fees (in comparison to the true value of the transaction) are payable at the time of registration to the RoT and the RoC; for example, the Companies (Fees payable to the Registrar) Regulations 2014 stipulate a fee of Sh22,000 for registration of a charge.
Registration determines priority of security, and allows the bank to exercise its remedies under the mortgage deed or instrument of charge. Non-registration renders the mortgage or the charge void as against any creditor, receiver, liquidator or administrator.
A share pledge agreement is not required to be registered, but it’s advisable to register it with the Registrar of Documents in accordance with the Registration of Documents Act, Cap 117.
A cavalcade of problems—including defects in mortgagor’s title; lack of legal capacity to borrow; inflated appraisals and mortgage fraud; failure to obtain prior consent; tight liquidity conditions; and high interest rates—afflicts the allure of secured loans which can help banks to yield profits from interest and fees charged.
To ameliorate these problems, banks should properly investigate the mortgagor’s title; procure high quality valuation services; ensure a sufficient safety margin between the value of the security and the amount of the loan disbursed to circumvent fluctuations; and incorporate into the security agreement a requirement to obtain consent as a prerequisite for loan disbursement. The government should on its part attract a higher level of private sector investments.