… Assume that a collateral not perfected is an equitable mortgage; and instead of assigning zero collateral value, consider extending collateral realisation period or apply a haircut
IFRS 9 application guidance B5.5.55 specifies that for the purposes of measuring expected credit losses (which is the calculation of impairment loss), the estimate of expected cash shortfalls should reflect the cash flows expected from collateral and other credit enhancements that are part of the contractual terms and are not recognised separately by the entity.
The estimate of expected cash shortfalls on a collateralised financial instrument reflects the amount and timing of cash flows that are expected from foreclosure on the collateral less the costs of obtaining and selling the collateral, irrespective of whether foreclosure is probable (i.e. the estimate of expected cash flows considers the probability of a foreclosure and the cash flows that would result from it).
This is not to say that the entity is required to assume that recovery will be through foreclosure only, however. Instead, the entity should calculate the cash flows arising from the various ways in which the asset might be recovered and assign probability weightings to those outcomes.
The requirement of calculation of impairment under IFRS 9 is that information should be reasonable and supportable. Absence of prior liens on a collateral could diminish its value or otherwise prevent a bank from acquiring clear title. Ability to foreclose a collateral also impacts the collateral values.
Basel committee guidance on credit risk and accounting for expected credit losses paragraph 19 defines reasonable and supportable as follows: “Reasonable and supportable information should be understood as information based on relevant facts and sound judgment”.
In this write-up, I want to share my view on what is considered reasonable and supportable when determining the value of collateral not fully perfected.
Let’s first consider the regulator’s view on how to determine the value of collateral for IFRS impairment process. Page 14 of Bank of Ghana guide for Financial Publication for Banks & BoG Licenced Financial Institutions published on June 28, 2017 provides the following regarding collateral perfection
For the purpose of impairment computation by banks and deposit-taking institutions, only perfected landed-property collaterals at forced-sale values will be allowed. Perfected collaterals in this regard are collaterals for which:
- title has been obtained in accordance with Land Title Registration Act, 1986 (PNDCL 152) except equitable mortgages;
- mortgage interest has been obtained from the Lands Commission or the process for registration of mortgage interest has commenced with Lands Commission for loans and advances not later than six months of drawdown date;
- the process of registration which commenced in (ii) shall at most be completed within six months;
- the charge over the mortgage has been registered with the Collateral Registry in accordance with the Lenders and Borrowers Act, 2007 (Act 773) respectively;
- In the case of equitable mortgage, the mortgage interest has been obtained and there is evidence that the borrower has executed (i.e., assigned) the mortgage to the lender (bank);
- To account for the risk of possible delays in obtaining the order to sell the property by the court, the average length of realisation shall be three (3) years (as against two (2) years for legal mortgages) as per paragraph 2.2.2 v (c ) above.
In a letter dated January 24, 2018, the Bank of Ghana added the following clarification:
- Within the strict interpretation of Section 72 (1) of the Land title registration Act, 1986 (PNDCL 152) it would be difficult for a lender to realise the security of the collateral if same was not registered
- However, even though the law enjoins a mortgagee to register the instrument creating the mortgage, under the principle of equity and intent – once there is evidence of lodgement at the registry – equity in our opinion would intervene to have the security realised.
Taking into account the above further clarification from BoG, I see three different scenarios of a collateral:
- A collateral that is fully perfected: e. the bank’s registration of its mortgage interest charge with the Land Commission and Collateral Registry is fully completed, and based on the land search no other party has encumbrance on the borrower property and the bank has senior lien over the collateral
- Registration with Land Commission is ongoing: collateral registration with the Collateral Registry is completed, but the registration with Land Commission for the land title registration is not completed, and
- Collateral registration is substantially incomplete (collateral not perfected): The collateral registration with Land Commission and Collateral Registry have either started or not yet started. This scenario is what I call collateral not perfected.
Generally, for scenario 1 which is collateral perfected, 100% of the forced sale is used for impairment computation.
I disagree with the view that 100% of the forced sale should also be assumed for scenario 2 (collateral registration is ongoing and is not substantially incomplete). My view is that there is risk associated with full forced sale realisation under scenario 2. That risk includes additional time involved in completing the registration process. This risk can be catered for either through extension of the collateral realisation period or a haircut applied on the collateral forced sale value.
On scenario three (collateral registration is substantially incomplete), many interpret the regulator view to mean that such collateral should have be zero value. I would like to take a different view from the majority. My view is use a similar approach to what I proposed for scenario 2. I come to such a view using market or credit practice conventions of banks in Ghana and also the regulatory guidance.
Let’s first discuss the credit practices convention in Ghana. It is important to note that the fact collateral perfection has not started at the time of default does not reduce the chances of recovery on the property. Once the mortgage is signed, the bank has at least an equitable mortgage. It is worth mentioning that a mortgage is always signed before a bank disburses a loan. This requirement is not negotiable for most banks.
There is no hardening period under Ghana law to restrict perfection period. A property can be attached for sale as a legal or equitable mortgage after judgement. One can even attach the borrower/guarantor’s property not mortgaged after a bank obtain judgement against them. The slow process of the registration system in Ghana might result in a default or court process being started or completed before perfection. That should not be a bar for commencement of the court process.
If we agree that collateral under scenario three can be considered as equitable mortgage, then what does the regulator say about equitable mortgage?
The regulator’s view is that to account for the risk of possible delays in obtaining the order to sell the property by the court, the average length of realisation shall be three (3) years (as against two (2) years for legal mortgages) as per paragraph 2.2.2 v (c ). This means the regulator is not assigning zero value for scenario 3, but instead the regulator is asking for extension of the collateral realisation period.
I summarise to say that there are two approaches to be considered to reflect the risk of not realising the full forced sale value of collateral under scenario 3. The approaches are:
- Extension of collateral realisation period, or
- Application of haircut
On the application of the haircut option, in the absence of credible data – using judgement and prudence under IAS 8, I recommend 25% realisation of collateral not perfected – meaning the bank is expected to lose 75% of the value. A collateral not perfected in my view is like a subordinated claim. The Basel guidance on subordinated claims collateral under foundation approach is 25% realisation. The rationale for the 75% haircut from Basel as a reasonable basis is explained below.
First, IFRS 9.B.5.51 states that an entity can use various sources of data that may be both internal (entity-specific) and external. Possible data sources include internal historical credit loss experience, internal ratings, credit loss experience of other entities and external ratings, reports and statistics. Entities that have no, or insufficient, sources of entity-specific data may use peer group experience for the comparable financial instrument (or groups of financial instruments).
There is no hierarchy between internal and external data under IFRS 9. However, where external data contradicts internal data, internal data prevails. In relation to collateral not perfected, management has no experience on what value it derives. On the other hand, the Basel committee has its experience which can be viewed as external data and is acceptable under IFRS 9. In absence of internal management experience, the Basel committee experience can be considered as a reasonable basis for collateral haircut of collateral not perfected. In other words, if a bank lacks the data, for example, it can use proxy data or benchmark data. This is an acceptable practice. Usage of Basel assumption of 75% haircut for collateral not perfected is acceptable.
In terms of the legal framework in Ghana, the collateral perfection process for landed property is as follows:
- At the onset of the loan process, the lender obtains a mortgage interest by signing-in/ writing a mortgage deed with the borrower. This is a precondition for loan disbursement.
- Search and due diligence is completed and the bank has confirmed that no ownership and any encumbrance on the property exists, except the customer applying the loan.
- The customer has title to the collateral and title has been obtained over Land in accordance with Land Title Registration Act, 1986 (PNDCL 152) or Land Registry Act 1962 (Act 122) and the bank has obtained those title documents.
- Security over land can be taken by way of a mortgage. The Mortgages Act 1972 (NRCD 96) governs the procedure for creating a mortgage. An instrument creating a mortgage over land in Ghana must be in writing and be signed by the mortgagor (or mortgagor’s duly appointed agent). The mortgage must state the name and address of the mortgagor and the mortgagee, the nature of the mortgagor’s interest, the identity and location of the mortgaged land and the secured amount. In addition, the mortgagor must execute the mortgage before (i) a Commissioner of Oaths if executed in Ghana; or (ii) a public notary if executed outside Ghana.
- The bank has Registered the charge over the mortgage with the Collateral Registry in accordance with the Lenders and Borrowers Act, 2007 (Act 773)
- If corporate entity, the bank has performed registration of the mortgage charge with the Registrar-General.
- An instrument creating a mortgage over land in Ghana must be filed at the Land Registration Division of the Lands Commission; under the terms of either the Land Registry Act 1962 (Act 122) if the land is within a non-registration district, or the Land Title Registration Law 1986 (PNDCL 152) if the land is in a registration district. As at the date of this note, the registration districts are Accra, Tema, Kumasi and parts of Winneba.
IFRS 9 guidance on collateral
The estimate of expected credit losses reflects the cash flows expected from collateral and other credit enhancements that are part of the contractual terms of financial instrument and are not recognised by the entity separately from the financial instrument being assessed for impairment.
Under IFRS 9, irrespective of whether foreclosure is probable, the estimate of expected cash shortfalls on a collateralised financial asset reflects:
- The amount and timing of cash flows that are expected from foreclosure (including cash flows that are expected beyond the asset’s contractual maturity); less
- Costs for obtaining and selling the collateral.
IFRS 9.B5.5.55 – For the purposes of measuring expected credit losses, the estimate of expected cash shortfalls shall reflect the cash flows expected from collateral and other credit enhancements that are part of the contractual terms and are not recognised separately by the entity. The estimate of expected cash shortfalls on a collateralised financial instrument reflects the amount and timing of cash flows that are expected from foreclosure on the collateral less the costs of obtaining and selling the collateral, irrespective of whether foreclosure is probable (i.e. the estimate of expected cash flows considers the probability of a foreclosure and the cash flows that would result from it).
Consequently, any cash flows that are expected from the realisation of the collateral beyond the contractual maturity of the contract should be included in this analysis. Any collateral obtained as a result of foreclosure is not recognised as an asset that is separate from the collateralised financial instrument unless it meets the relevant recognition criteria for an asset in this or other Standards.
- IFRS 9.IE18 – IFRS 9.IE23 – Example IFRS 9.IE18: Company H owns real estate assets which are financed by a five-year loan from Bank Z with a loan to-value (LTV) ratio of 50 percent. The loan is secured by a first-ranking security over the real estate assets. At initial recognition of the loan, Bank Z does not consider the loan to be originated credit-impaired as defined in Appendix A of IFRS 9.
- IFRS 9.IE19: Subsequent to initial recognition, the revenues and operating profits of Company H have decreased because of an economic recession. Furthermore, expected increases in regulations have the potential to further negatively affect revenue and operating profit. These negative effects on Company H’s operations could be significant and ongoing.
- IFRS 9.IE20: As a result of these recent events and expected adverse economic conditions, Company H’s free cash flow is expected to be reduced to the point that the coverage of scheduled loan payments could become tight. Bank Z estimates that a further deterioration in cash flows may result in Company H missing a contractual payment on the loan and becoming past due.
- IFRS 9.IE21: Recent third-party appraisals have indicated a decrease in the value of the real estate properties, resulting in a current LTV ratio of 70 per-cent.
- IFRS 9.IE22: At the reporting date, the loan to Company H is not considered to have low credit risk in accordance with paragraph 5.5.10 of IFRS 9. Bank Z therefore needs to assess whether there has been a significant increase in credit risk since initial recognition in accordance with paragraph 5.5.3 of IFRS 9, irrespective of the value of the collateral it holds.
It notes that the loan is subject to considerable credit risk at the reporting date, because even a slight deterioration in cash flows could result in Company H missing a contractual payment on the loan. As a result, bank Z determines that the credit risk (i.e. the risk of a default occurring) has increased significantly since initial recognition. Consequently, bank Z recognises lifetime expected credit losses on the loan to Company H.
- IE23: Although lifetime expected credit losses should be recognised, measurement of the expected credit losses will reflect the recovery expected from the collateral (adjusting for the costs of obtaining and selling the collateral) on the property as required by paragraph B5.5.55 of IFRS 9 and may result in the expected credit losses on the loan being very small.
Guidance from KPMG Insights
Example – Measurement of lifetime expected credit losses of a collateralised loans
- 8.240.30: Bank L holds a collateralised loan. L determines that the credit risk of the loan has increased significantly since initial recognition – i.e. the risk of default has increased significantly. However, because the value of the collateral is significantly higher than the amount due from the loan, the LGD is very small. 7A.8.240.40: Although L does not believe it is probable that it will suffer a credit loss if a default occurs, it recognises lifetime expected credit losses for the asset.
This is because a significant increase in credit risk is assessed with reference to the risk of default rather than to the LGD. However, the amount of the loss would be very small, because the asset is expected to be fully recoverable through the collateral held under almost all possible scenarios.
- 8.240.50: the amount of cash flows that are expected from foreclosure are cash flows that the entity actually expects to receive in the future. Because expected cash flows are a probability-weighted estimate, they include possible scenarios in which the cash flows recoverable from collateral decrease (or, where relevant, increase).
- 8.240.60: In some cases, observable quoted forward prices for collateral may exist, especially for financial collateral. However, forward prices for financial collateral will generally reflect a premium or discount to the current market price – i.e. a spot price – with the premium or discount reflecting benchmark interest rates that would often be below the asset’s original effective interest rate. Therefore, for the purpose of estimating the cash flows from the collateral, such prices that do not include a risk premium would not support the inflation of estimated future values based on a projected rate of return for the collateral that includes a risk premium.
- 8.240.70: in our experience, lenders often realise collateral at a discount to appraised values, and this expected discount is reflected in the measurement of impairment.
- 8.240.80: When measuring an impairment loss on a financial asset denominated in the entity’s functional currency but collateralised by an asset denominated in a foreign currency, in our view the estimated foreign currency future cash flows resulting from foreclosure of the collateral should be translated into the functional currency of the reporting entity, using the appropriate forward rates, and then included in the calculation of cash shortfalls.
- 8.240.90: When an entity is calculating the impairment loss for a collateralised financial asset, in our view a gain should not be recognised – even if the collateral is expected to have a higher value than the gross carrying amount of the loan, if any surplus will be returned to the borrower.
- 8.240.100: Any collateral obtained as a result of foreclosure is not recognised as a separate asset unless it meets the recognition criteria in IFRS for the relevant asset. If the recognition criteria are met, then in our view any collateral received should be initially measured based on the carrying amount of the defaulted loan. Thereafter, it should be accounted for under the relevant standard and classified as held-for-sale if appropriate.
- 8.240.110: In our view, the accounting treatment of collateral after foreclosure is dependent on the legal environment in which the entity operates and the terms on which the collateral is provided. For example, in the case of a mortgage loan collateralised by a property, two distinct sets of circumstances could apply:
- The bank (lender) could repossess the property as a result of the borrower’s default with the intention of recovering the amounts owing, on the understanding that any amounts received in excess of the mortgage balance will be refunded to the borrower; and any shortfall would remain the obligation of the borrower. The bank may continue to charge interest on the outstanding balance. The bank will remain exposed to interest rate risk on the mortgage, and not be exposed directly to property price risk. We believe that repossession is used only to reinforce the bank’s contractual right to cash flows from the loan, and consequently the bank should continue to recognise the loan and should not recognise the property.
- The bank could repossess the property, which in terms of the contract comprises the full and final settlement of the mortgage – i.e. the bank would retain any excess proceeds over the outstanding balance on the mortgage, and the borrower would be released from its obligation in the event of a shortfall. Therefore, the bank would be directly exposed to property price risk rather than to interest rate risk on the loan, and we believe that the bank should de-recognise the loan and recognise the property.
Guidance from PwC
Although collateralisation mitigates the risk of credit losses, the existence of collateral does not remove the requirement to record current expected credit losses, even when the current fair value of the collateral exceeds the amortised cost of the financial asset (unless the instrument qualifies for one of the practical expedients discussed in LI 7.4). This is because the collateral may be illiquid; such as real estate, automobiles, business inventory, equipment and other assets. In addition, the collateral value may decline in the future, exposing the lender to losses in the event of default by the borrower. ASC 326-20-30-10 highlights the fact that existence of collateral, on its own, does not eliminate the need for a credit losses allowance.
In considering collateral value, a reporting entity should consider factors such as perfection of the lien, lien-positioning, and potential changes in the collateral’s value.
In addition, if a financial asset is collateralised – and the reporting entity determines that foreclosure of the collateral is probable, the entity should measure expected credit losses based on the difference between the collateral’s fair value and amortised cost basis of the asset.
(iii) Legal certainty
- – In order for banks to obtain capital relief for any use of CRM techniques, the following minimum standards for legal documentation must be met:
- – All documentation used in collateralised transactions and for documenting on balance sheet netting, guarantees and credit derivatives must be binding on all parties and legally enforceable in all relevant jurisdictions. Banks must have conducted sufficient legal review to verify this – and have a well-founded legal basis to reach this conclusion and undertake such further review as necessary to ensure continuing enforceability.
Legal environment of collateral perfection and foreclosure in Ghana per the Laws of the Land
In considering the perfection of a collateral, based on Basel guidance one must first understand the legal laws in jurisdictions in relation to whether such collateral right can be enforced in the law courts of that country.
Security interests created in Ghana must be perfected to render them valid and enforceable against the grantor and as notice to the world. When a security interest in property is superior to other interests and claims to the property, it is said to be perfected. Put simply, perfection is the validation of legal documents. It involves the taking of additional steps to render the rights created under a legal document effective against third parties, and/or to retain its effectiveness in the event of default by a party. Generally, the collateral perfection process is as follows;
- Creating the mortgage: Security over land can be taken by way of a mortgage. The Mortgages Act 1972 (NRCD 96) governs the procedure for creating a mortgage. An instrument creating a mortgage over land in Ghana must be in writing and be signed by the mortgagor (or mortgagor’s duly appointed agent). The mortgage must state the name and address of the mortgagor and the mortgagee, the nature of the mortgagor’s interest, the identity and location of the mortgaged land, and the secured amount. In addition, the mortgagor must execute the mortgage before (i) a Commissioner of Oaths if executed in Ghana, or (ii) a public notary if executed outside Ghana.
- Search and due diligence: Search at the appropriate land registry or registries (and sometimes survey department) to find out the legal ownership of a property. Due diligence on the identity of the owner to ensure we are dealing with the right person or entity. Landed collateral process starts with search to verify ownership and if any encumbrance on the property.
- Creation: Drafting of legal documentation to enable the bank take security, signing the security and witnessing the signatures of the parties.
- Perfection: Payment of stamp-duty if required, consent if required, and registration at the appropriate land registry, BoG Collateral Registry or other government department.
An instrument creating a mortgage over land in Ghana must be filed at the Land Registration Division of the Lands Commission under the terms of either the Land Registry Act 1962 (Act 122) if the land is within a non-registration district, or the Land Title Registration Law 1986 (PNDCL 152) if the land is in a registration district.
Hitherto, charges over moveable assets from non-corporate entities could not be registered. The Registrar-General’s Department is used for registration of collateral of corporate entities.
The Collateral Registry created by the Borrowers and Lenders Act, 2008 [Act 773] is intended to widen the collateral base beyond landed property, which is usually the main collateral taken from non-corporate entities. Collateral over movables can now be registered at the Collateral Registry. The Collateral Registry is to principally register charges and collaterals created by borrowers to secure credit facilities provided by lenders.
It is the security that is registered – but, of course, the security is based on documents. It is the responsibility of the lender to ensure the proper documents are in place and properly described when inputting them into the Collateral Registry database. If you don’t put in the correct details, if anyone conducts a search based on the right details your charge will not show up.
Hence, inputter and authoriser are to ensure correct information is provided. The search and due diligence on the property will confirm that the land certificate is correct and that a borrower manufactures land title for same property and presents it to another bank. The charge document will not be drafted until the title document is confirmed via a search report.
Realisation of the asset
Each stage of the process in critical. The next stage is built on the foundation of the previous process i.e.: 1. Search and due diligence; 2. Creation; 3. Perfection; 4. Enforcement
Collateral perfection in Ghana involves:
- The stamping, and
- Registration of the security documents with public registries
Stamping is the making of an impression on a legal document by a public authority in pursuance of a law, and for which a tax or duty is exacted.
In Ghana, stamping is administered by the Land Valuation Division of the Lands Commission on behalf of the Ghana Revenue Authority under the Stamp Duty Act, 2005 (Act 689) (the “Stamp Duty Act”).
Under the Stamp Duty Act, all security documents are required to be duly and properly stamped to render them admissible in evidence and enforceable in the courts of Ghana. An unstamped or insufficiently stamped document will therefore not be admitted into evidence in court, and a person cannot rely on it to make his/her case.
Security documents may be stamped upon payment of the appropriate stamp duty. It must be noted that while some security documents may be classed as being exempt from stamp duty (either by the Stamp Duty Act or under some binding agreement such as a bilateral trade agreement), such security documents are required to be stamped as ‘exempt’ regardless of the exemption.
Security documents must be stamped within two months of execution or, as the case may be, within two months after first receipt in Ghana when the security documents were executed outside Ghana.
The Stamp Duty Act allows for late stamping of security documents upon the payment of a penalty of GH¢30. However, where the unpaid stamp duty exceeds GH¢30, there is a further penalty by way of interest on the unpaid stamp duty – at a rate of 5% per annum from the date of execution up to the time when the interest is equal in amount to the unpaid stamp duty.
Security documents are subject to ad valorem tax in Ghana. Primary security is subject to stamp duty at a rate of 0.5% of the secured liability/obligation, while any auxiliary security is subject to stamp duty at a rate of 0.25% of the secured liability/obligation.
Where, after stamping, the security document is subsequently amended to increase the secured liability, the security agreement is required to be stamped-up. Stamp duty of 0.5% or 0.25%, as the case may be, shall be payable on the difference between the secured liabilities.
In Ghana, stamping precedes registration with other registries in Ghana. Security documents therefore cannot undergo other forms of perfection unless they are fully stamped. Further, any person who registers an unstamped security document for purposes of official records commits an offence and is liable on summary conviction to a fine.
Registration is the act or process of recording or enrolling specified information in an official or public register or records.
Generally, all charges in the form of security are required to be registered in the public registries to serve as notice of the creation of the charge to the world.
There are three main registries that security documents must be registered with in Ghana:
- Companies Registry (applicable to corporate entities only)
Under section 107 of Companies Act of Ghana, 1963 (Act 179) (the “Companies Act”), a security created by companies incorporated in Ghana is required to be registered with the Registrar of Companies. Any unregistered security created over the assets of a company is void as a security, and all monies secured by the charge becomes immediately payable.
Particulars of the security created (with the security document annexed) are required to be registered with the Registrar-General’s Department of the Ministry of Justice and Attorney General, which performs the functions of the Registrar of Companies (the ‘Companies Registry’).
All securities created must be registered within twenty-eight (28) days of the security’s creation; however, the courts may grant an extension of time for filing a security document on justifiable grounds.
Registration of a charge with the Companies Registry constitutes actual notice of the creation of the charge (but not the contents of the security document) to persons dealing with the company from the date of registration.
It is worth mentioning, however, that pledges or possessory liens on goods, charges by way of pledge, deposit, and letters of hypothecation or trust receipts, bills of lading, promissory notes and bills of exchange are exempt from this requirement of registration.
On successfully completing registration, the Companies Registry issues a certificate of registration as evidence of registration.
Regarding release of a security duly registered, companies are required to commence the process by application in a prescribed form to the Companies Registry. The Registrar of Companies, upon proof of satisfaction in whole or in part of the debt for which the charge was given or the release of the whole or part of the property charged, will issue a memorandum of satisfaction.
- Collateral Registry
The Collateral Registry is an online registry set up under the Borrowers and Lenders Act of Ghana, 2008 (Act 773) to record all registration of charges pledged by borrowers to secure credit facilities provided by lenders.
A borrower (any person who has concluded a credit agreement with a lender) or any person interested in a charge or collateral is required to register the particulars of the charge or collateral created in favour of a lender with the Collateral Registry. The security created must be registered within twenty-eight (28) days of the creation of the charge or collateral.
An unregistered charge or collateral is of no effect as security for a borrower’s obligations for the repayment of the money secured, and the money secured immediately becomes payable despite any provision to the contrary in any contract.
Only charges created from February 1, 2010 and covering GH¢500 and above are eligible for registration with the Collateral Registry.
In the case of companies, the requirement to register charges created is in addition to the requirement to register charges created with the Companies Registry.
Regarding the release of a security duly registered, the Registrar shall issue a memorandum of release of debt in the register and furnish the borrower with a copy of the memorandum, upon application (online), in prescribed form with proof of payment in part or whole of the debt secured and release of the whole or part of the property secured.
3, Lands Registry
Land registration has been defined as the process of recording legally-recognised interests (ownership and/or use) in land (Mc Laughlin: 1989). Registration is essentially a written record that is a reliable means of ensuring accurate knowledge of some real property in terms of ownership and transactions relating to it. The device is susceptible of infinite variation. The two main types of land registration identified are deed registration and title registration.
The Land Registry Act is plagued with a number of problems which may be summarised as follows: the fact that the validity of title in the deed is not guaranteed; the fact that the object the deed refers to is not very well described – usually through the use of inaccurate and unscientific plans; the fact that the chronologically stored deeds are hardly accessible; and the fact that it did not provide for an adjudication committee or tribunal to deal with conflicting interests. In sum, the deed registration system under the Lands Registry Act, Act 122, has not addressed itself to the problems of providing an indefeasible title to land as required.
Recognising the weaknesses in the Land Registry Act, government decided to introduce a form of compulsory registration throughout Ghana (although it would be implemented on a pilot basis). The purpose of the land registration is twofold: to give certainty and facilitate proof of title; and to render dealings in land safe, simple and cheap, and to prevent fraud on purchasers and mortgagees.
In a system of land registration, one can easily see who the owner of a certain property is. The register is supposed to reflect the correct legal situation on the ground (the mirror principle), and there is no need for further (historic) investigation beyond the register (the curtain principle). Whatever is registered is guaranteed to be the truth, and any third-party in good faith who relies on the register and transacts any business with the registered land owner will be compensated for any losses (the insurance principle).
Enforcement of collateral
The Borrowers and Lenders Act 2008 (Act 773) provides that prior to enforcement of security, the secured party must deliver a 30-day notice of default to the borrower and allow the borrower 30 days to remedy the breach. The notice of default must be registered with the Collateral Registry and should contain the date of default under the relevant finance document(s), and date on which the borrower receives the notice.
After the 30-day period, the Registrar of the Collateral Registry will issue a certificate confirming the enforcement of security. Other than with respect to land (on which see below), all realisations of charges over non-cash assets must be by way of auction sale. Any disposal of land subject to a mortgage is typically permissible only under a court-approved sale arrangement, or by an out-of-court auction organised in accordance with the Auction Sales Act 1989 (PNDCL 230). The net proceeds of enforcement must be distributed in the following order:
- Amounts required to discharge reasonable costs the charger incurred in realising the security;
- Amounts required to discharge legal expenses to the extent the credit agreement permits
- Amounts required to discharge the secured obligations
- Amounts the borrower owes to persons who have a subordinate charge in the secured assets
- Amounts the borrower owes any other person who has given the secured party notice of its interest in the secured assets. The balance of net proceeds, following these distributions, must be returned to the borrower
Out-of-court enforcement regarding any asset is generally permitted under Ghanaian law. Governmental consents are only required prior to enforcement of security if the security is granted over an asset in which a Ghanaian governmental or statutory authority has an interest, or is in respect of a governmental authorisation or licence.
Generally, there are no restrictions on who can enforce a security interest over assets in Ghana, provided that the person seeking the enforcement is the secured party, its trustee, agent, assignee, successor or transferee. From a practical perspective, a secured party that is a foreign entity can require a local receiver to act on its behalf.
Can security over the same asset be granted to two creditors? If so, how will priority be determined?
A person can grant security over the same asset to two or more creditors. In such a case and in the absence of any agreement between the secured parties to the contrary, priority among the security interests will depend on the type of security interest and/or the security’s date of creation. Generally, the earlier-created security interest ranks ahead of the later one. However, if a security interest is required to be registered with the Collateral Registry, Companies Registry or Lands Commission, a registered security interest has priority over an unregistered security interest.
Regarding assignments of contract rights, the timing of notification to the counterparty determines the priority of assigned interests. A fixed charge on an asset and a security assignment will typically both have priority over a floating charge over the same asset, unless the terms of the floating charge prohibits the company from granting security.
Bank of Ghana guidance on inclusion of collateral in the calculation of loan impairment
Page 14 of a June 28, 2017, Bank of Ghana (BoG) release showed a new guide for Financial Publication for Banks & BoG Licenced Financial Institutions (https://www.bog.gov.gh/public-notices/3082-guide-for-financial-publication-for-banks-a-bog-licensed-financial-institutions) For the purpose of impairment computation by banks and deposit-taking institutions, only perfected landed-property collaterals at forced-sale values will be allowed. Perfected collaterals in this regard are collaterals for which:
- title has been obtained in accordance with Land Title Registration Act, 1986 (PNDCL 152) except equitable mortgages
- mortgage interest has been obtained from the Lands Commission or the process for registration of mortgage interest has commenced with the Lands Commission for loans and advances not later than six months of drawdown date;
- the process of registration which commenced in (ii) shall at most be completed within six months;
- the charge over the mortgage has been registered with the Collateral Registry in accordance with the Lenders and Borrowers Act, 2007 (Act 773) respectively;
- In the case of equitable mortgage, the mortgage interest has been obtained and there is evidence that the borrower has executed (ie, assigned) the mortgage to the lender (bank);
- To account for the risk of possible delays in obtaining the order to sell the property by the court, the average length of realisation shall be three (3) years (as against two (2) years for legal mortgages) as per paragraph 2.2.2 v (c) above. It is required that the valuation of collaterals will be done by qualified or professional valuers.
In a letter dated January 24, 2018, the Bank of Ghana added these following clarifications:
- Within the strict interpretation of Section 72 (1) of the Land title registration Act, 1986 (PNDCL 152) it will be difficult for a lender to realise the security of the collateral if same was not registered.
- However even though the law enjoins a mortgagee to register the instrument creating the mortgage under the principle of equity and intent, once there is evidence of lodgement at the registry, equity in our opinion would intervene to have the security realised.
The Bank of Ghana went on to say: “Within the principle of equity, therefore, evidence of lodgement at the Lands Commission could be considered as having an interest. Banks are however being encouraged to ensure completion of the entire process”.
Basel guidance on claims on collateral
(ii) Loss given default (LGD)
- A bank must provide an estimate of the LGD for each corporate, sovereign and bank exposure. There are two approaches for deriving this estimate: a foundation approach and an advanced approach.
LGD under the foundation approach
Treatment of unsecured claims and non-recognised collateral
- Under the foundation approach, senior claims on corporates, sovereigns and banks not secured by recognised collateral will be assigned a 45% LGD.
- All subordinated claims on corporates, sovereigns and banks will be assigned a 75% LGD. A subordinated loan is a facility that is expressly subordinated to another facility. At national discretion, supervisors may choose to employ a wider definition of subordination. This might include economic subordination, such as cases wherein the facility is unsecured and bulk of the borrower’s assets are used to secure other exposures.
Collateral under the foundation approach
- In addition to the eligible financial collateral recognised in the standardised approach, under the foundation IRB approach some other forms of collateral – known as eligible IRB collateral – are also recognised. These include receivables, specified commercial and residential real estate (CRE/RRE) and other collateral, where they meet the minimum requirements set out in paragraphs 509 to 524.73. For eligible financial collateral, the requirements are identical to the operational standards as set out in Section II.D beginning with paragraph 111.
How to determine the value of a collateral not perfected
Historical data covering an economic cycle for the following data requirements which cover the time period from the date of default to end of the recovery process:
- date of default,
- exposure at default,
- post-default classification (liquidation, restructure/finance, and cure),
- Collateral perfection status,
- collateral indicator,
- collateral valuation,
- collateral allocation,
- unsecured recovery collection cost
- Recovery costs.
- Collateral sale value
- Start date of legal process
- End date of legal process
- Collateral sale date