Assessment of the acceptability of personal guarantees and life assurance policies as collateral for loans in Ghana

Abstract

Whenever a financial institution advances money to its clients, it has to take collateral so as to reduce and/or prevent a total loss of funds and revenue in case the borrower defaults. Thus collateral offered serves as a protection to the financial institution. Generally security accepted by financial institutions includes mortgages, pledges, stocks and shares, land, buildings, guarantees and life assurance policies. Traditionally, banks and Nonbank financial institutions prefer the use of landed property as security for their loans, even though they find it difficult and long procedure to realize this Security. The use of movable collateral under Ghana law was a key constraint for SMEs, as bank lending was largely based on real estate collateral, while SMEs typically do not possess real estate assets. The objectives of this paper therefore are to establish the extent of acceptance of guarantees and life assurance policies as collateral for personal and SME credit in Ghana; to provide a basic understanding of life assurance policies and guarantees as collateral and to examine the qualification requirement for guarantors and life assurance policies if they are acceptable by financial institutions in Ghana. In order to achieve the above objectives, a survey was conducted amongst credit officers of financial institutions in Ghana. Participants were from banking and non-banking financial institutions. Questionnaires, comprising of both open ended and closed questions were distributed to a sample of thirteen (13) banks and fifteen (15) non-bank financial institutions which were selected to constitute the respondents of this study. The results indicated that although most banks policies accept personal guarantees as collateral, the practice is of limited usage in these banks. In the case of the non-bank financial institutions, there is a high rate of usage of personal guarantees. The results also revealed that most banks do not accept life assurance policies as collateral. None of the non-bank financial institutions used for this study had ever accepted life assurance policy as collateral for a loan.