Last week, a client requested that I review an offer letter from a Financial Institution (not a Bank, but Other Financial Institution)(OFI/the Lender), for a loan facility. As a condition precedent for the disbursement of the facility, one of the securities that the Lender demanded for was post-dated cheques, not only from the Borrower, but also from the Guarantor of the facility. When I questioned this pre-condition, my client informed me that the Lender had claimed that this requirement was a Central Bank of Nigeria (CBN) policy. I told my client to request that the Lender provide a copy of this policy requirement, as I could never believe that any CBN policy or guideline could insist upon such a bizarre and problematic stipulation. To date, we are still awaiting the details of that supposed CBN policy from the Lender; which I suspect, we may have to wait till ‘hell freezes over’ to receive, because to the best of my knowledge, no such policy exists. And how can it? Which Apex Bank would prescribe a policy, which could potentially lead to an offence?
Anyway, to earn my fee, I still looked through some of the relevant laws. I perused the Banks and Other Financial Institutions Act (BOFIA), Part II Sections 58-63 which deals with OFIs, and I saw that the provisions deal primarily with the licensing of OFIs, and there was nothing contained therein that supported the Lender’s demand. I looked at the Money Laundering (Prohibition) Act 2011 (MLA), and also drew a blank there too – there was no provision there about post-dated cheques being a CBN requirement for OFIs to be able to disburse loans. Though Section 3(4) of the MLA provides inter alia that OFIs should take measures to manage and mitigate risks, these enhanced measures are in respect of due diligence to avoid suspicious, illegal transactions passing through them, not to engender offences!
To cut a long story short, I did not find any such CBN or legal requirement anywhere. What I did discover, is that this requirement of post-dated cheques seems to be a dubious practice employed by OFIs and DNFIs to blackmail MSMEs and Entrepreneurs who desperately require money for their businesses, in the event that they default on repayment; as this is the easiest way to engage the services of the Economic and Financial Crimes Commission (EFCC) – by presenting the dishonoured cheques and accusing the borrower of a multiplicity of offences including, but not limited to, Obtaining Credit by false pretences contrary to Sections 419A(1)(a) and 419B(b) of the Criminal Code Act, a felony which, if the Borrower is found guilty, is liable to three years imprisonment.
Naturally, I advised my client against making such a grave mistake of providing post-dated cheques to the Lender, because of the dire consequences, in the event of default. What if the client was truly expecting some revenue to be credited to it within the specified period of the date of the post-dated cheque, and through no fault of the client, the inflow failed to come? Under this suspicious arrangement, such a Lender would go to any length to ensure that the client is still held liable, even if it means going to prison.
Take for example, an airline that took a loan in December 2019 to enhance its working capital; the first repayment of the facility was due to be made in June 2020, and a post-dated cheque had already been issued for June 30, 2020. Considering the fact that there has been no travel since the end of March because of the Covid-19 pandemic – the ban on flying and the closure of all the airports in the country, and even before that, people had started to wind down on travel, especially to popular spots which Nigerians visited in droves like China, from where the virus was said to have emanated, and even London, it would be a long shot to expect that the airline would be able to meet that obligation fully – even by September or December 30. Apparently, profit margins in the airline business in Nigeria are nothing to write home about, and not only in Nigeria, also worldwide, many airlines started to lay off their staff immediately the lockdown began, due to their inability to pay salaries without operating services. Some airlines have even declared bankruptcy, and folded up. Would the management of the airline then be prosecuted, if it’s post-dated cheque bounces?
Even before the Covid-19 pandemic, rents on residential accommodation had somewhat declined. If a property development company had taken a loan facility from an OFI to complete the construction of its building, pledging the expected rental income which obtained at the time to repay the loan, and issued post-dated cheques in that regard, what would happen? Many residential properties have remained empty for long periods, while those that are able to secure tenants, are in some cases, accepting less than half of the usual rent.
The Dishonoured Cheques (Offences) Act
The question is, why does CBN allow OFIs to carry out this unwholesome practice that is akin to unsupervised, unregulated loan sharking, when CBN is duty-bound to regulate OFIs and ensure that they operate well within the confines of the law? The Dishonoured Cheques (Offences) Act 1977 (DCA) was enacted for the purpose of making it an offence to settle a lawful obligation, by issuing “a cheque which when presented within a reasonable time is dishonoured on grounds that no funds or insufficient funds were standing to the credit of the drawer of the cheque…..”. Section 1(1)(b) makes the drawer of such a cheque presented not later than three months after the date of the cheque, guilty of an offence, which upon conviction (i) two years imprisonment without the option of fine for an individual and (ii) in the case of a body corporate, a fine of not less than N50,000.
Section 2 of the DCA provides inter alia that, in the case of a body corporate issuing a bounced (dud) cheque, officers like the Director, Manager and so on, shall be held liable, as in the case of an individual drawer.
The only defence to this offence, is if the drawer can prove to the satisfaction of the court, that when the cheque was issued, he/she/it honestly believed that it would be honoured, if presented for payment within the specified period of three months of the date on which the cheque was issued (Section 1(3) of the DCA). Now, how does a Borrower prove this, when at times, a Borrower has to sign not even post-dated cheques but undated cheques, and is not given any notice before they are presented? Notification before presentation is key, whether the cheques are post-dated or undated. What if the Borrower has insufficient funds in the account that the undated cheque was drawn on six months prior, but has funds available in another bank account? In the alternative, could the fact that the cheques may be undated work to the advantage of the Borrower, especially if they are not given notice before the Lender presents them? – that if I didn’t know when the cheques were to be presented for payment, how could I ensure that the account was funded? Food for thought!
Better Monitoring by Lenders
This is not to say that one is condoning people borrowing money which they have absolutely no intention of repaying, but surely, loans can be secured by more lawful means, for instance, by the Lender placing a lien on a Borrower’s goods and warehousing them (if the transaction is in respect of tangible goods), or the Lender having direct access to the proceeds from sales, rents and that kind of thing, apart from having the Borrower use landed property as collateral to secure facilities, depending on the quantum of the loan facility.
I say this because, while Nigerians are quite adept at defaulting on repayment of their loans (sometimes having diverting the borrowed funds to marry new wives and live lavish lifestyles), every so often, there may be genuine reasons for the inability of Borrowers to repay, as at when due. For this reason, it behooves on Lenders to ‘know-their-customers’ very well, in order to separate the wheat from the chaff, and also to monitor the activities of the Borrower from the beginning to the end of the transaction. To avoid funds not being deployed for the purposes for which they were borrowed for in the first place, Lenders need to take more of a keen interest in the business operations of their Borrowers, as opposed to just granting loan facilities and waving Borrowers goodbye until it is time for repayment. Instead, they may, for example, set pre-conditions such as, Lenders being the one to disburse funds to suppliers of raw materials, directly. These type of measures, may assist in making the loan transactions sail more smoothly.
According to the the Statistician-General of the Federation and the CEO of the National Bureau of Statistics, 41.5 million MSMEs were registered in Nigeria as of 2017. He also mentioned that
“MSMEs offered job opportunities to drive job and wealth creation, as well as income redistribution within the society”. However, access to finance remains one of the biggest impediments to securing the growth of such a viable sector in Nigeria, to make the desired impact on our economy and country, in general. Many of the MSMEs lack sufficient start-up capital and/or working capital, especially because the banks are not usually favourably disposed to lending them money, particularly SMEs for start-ups.
The Secured Transactions in Movable Assets Act 2017
The implementation of the Secured Transactions in Movable Assets Act 2017 (STMAA), whose objectives are to, inter alia: “…..1(a) enhance financial inclusion in Nigeria; (b) stimulate responsible lending to MSMEs; (c) facilitate access to credit secured with movable assets…..”, is imperative. This way, MSMEs and Entrepreneurs can use movable assets like motor vehicles, machinery etc as collateral for loan facilities, as long as they are well described, documented and registered as security interests in the National Collateral Registry, established by the CBN. It is a common occurrence to hear Lenders, whether Banks or OFIs, refuse to accept movable assets as collateral for loans. This should not be so. It is curious that, while a nebulous non-existent so-called CBN policy is allowed by the authorities to be used with gusto and aplomb, the lawful STMAA has not really been allowed to see the light of day, in order to facilitate economic growth in the country!
One thing is certain, as the economy slowly starts to reopen after the Covid-19 lockdown, as a country, one of our priorities should be a re-appraisal of our financing strategy, whether for Banks or OFIs (end this bizarre practice of post-dated and undated cheques as a form of collateral), as it is obvious that, what we presently have is antithetical to economic growth. There really cannot be any ease of doing business, if access to funds remains as uphill a task as it is, in Nigeria.
“THE QUESTION IS, WHY DOES CBN ALLOW OFIS TO CARRY OUT THIS UNWHOLESOME PRACTICE THAT IS AKIN TO UNSUPERVISED, UNREGULATED LOAN SHARKING, WHEN CBN IS DUTY-BOUND TO REGULATE OFIS AND ENSURE THAT THEY OPERATE WELL WITHIN THE CONFINES OF THE LAW?”