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    Potential Of Loan Securitization In Nigeria To Unlock Liquidity For Economic Growth

    By Coronation Merchank Bank on June 21, 2022

    As Nigeria looks to boost growth in the wake of the
    Covid-19 pandemic, securing illiquid assets to inject
    more liquidity into markets offers a ready-to-use
    solution to unlock the cash to drive domestic
    investment and new growth. Loan securitization in
    the country could also release sufficient liquidity to
    conclusively deal with the financing requirements of
    businesses.

    Securitization is the process by which a sovereign or
    corporate entity designs a marketable financial
    instrument by pooling illiquid financial assets. The aim
    of securitization is to improve credit availability by
    converting hard-to-trade, non-tradable assets into
    securities that can be traded in the capital markets.
    The creation of new investment vehicles, as well as
    the release of additional capital, increases market
    liquidity</p

    By buying securities, for example, investors
    themselves become lenders, allowing the original
    holder of the assets to remove these risk assets from
    their balance sheets – freeing up cash to underwrite
    more loans. While investors profit as they receive
    interest on the underlying asset and loans, the whole
    financial ecosystem also benefits as more cash is
    released to the market for re-investment and growth.

    In a nutshell, securitisation allows an entity to convert
    illiquid assets such as debt or even property into liquid
    assets. The process frees up capital for the original
    owner of the assets. The process also provides income
    for investors, unlocking new investment
    opportunities. The risks associated with
    securitization, on the other hand, include; investors
    effectively becoming creditors, the potential of
    default on the underlying loans, and lack of assets
    transparency. Finally, if loans are paid off early, there
    is also the risk that investors might not achieve the
    returns anticipated over the initially projected loan
    period.

    Globally, the benefits realised for capital markets,
    investors, liquidity, and debt management always
    outweigh the risks when illiquid asset securitisation is
    properly managed.

    Despite the fact that the global financial crisis of 2008
    highlighted the risks associated with asset
    securitization, the Basel Committee on Banking
    Supervision (BCBS) published enhancements to the
    Basel II framework in 2009 to address these concerns.
    The Basel III framework eventually incorporated these
    enhancements. As a result, Basel III has effectively
    addressed the oversight flaws in the governance and
    management of illiquid asset securitisation that the
    global financial crisis revealed.

    The BCBS, in particular, increased the risk weighting
    of illiquid securitized assets in comparison to other
    securitized exposures. To improve due diligence, the
    BCBS also required banks to meet specific operational
    criteria that were more detailed and transparent. The
    capital requirements for illiquid asset securitization
    have also increased significantly. The most notable
    change was BCBS’s revision of market risk rules,
    which increased the amount of capital required to
    cover trade book securitisation exposures.

    Coronation Merchant Bank has developed an illiquid
    loan securitization management framework closely
    reflecting current Basel III principles and guidelines.
    Replicating these frameworks across Nigeria for
    example, building Basel III requirements into national
    legislation, would allow all Nigerian financial
    institutions to develop competent, globally compliant
    and safe illiquid securitization offerings.

    The benefits of a developed and well-regulated
    securitization industry in Nigeria are three fold;
    individual, institutional and market.

    Firstly, Individual Nigerians would be able to invest in
    high-value illiquid assets that would otherwise be
    unavailable to them. This has the potential to increase
    financial inclusion by bringing more investors and cash
    into the country’s capital markets, as well as making
    new investment instruments available to a previously
    underserved segment of the Nigerian investor
    population.

    Second, Nigerian institutions would be able to
    contribute to the development of a new domestic
    asset class, as well as manage it. Aside from increasing
    their own earnings, the process would significantly
    increase the amount of liquidity (cash) available in the
    local market for reinvestment and growth.

    Thirdly, this would have a significant impact on the
    effectiveness and depth of Nigeria’s capital markets,
    allowing Sovereign and Corporate entities to access
    more cash. This would result in a significant increase
    in domestic investment and a much more evenly
    distributed growth across the economy.

    In conclusion, a well-developed regulatory framework
    for loan securitisation would allow Nigerian financial
    institutions to unlock cash to support additional
    domestic investment and economic growth. In
    addition to deepening the domestic capital market
    and allowing it to provide new sources of funding to
    the country’s real sector, a well-regulated loan
    securitisation industry in Nigeria will improve the flow
    of credit, which will spur domestic growth.

    Posted in Coronation Insights.
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