Commercial banks refer to financial institutions, which provide commercial banking transactions to customers. These transactions include firstly, provision of a payments mechanism, in which individuals, firms and government can make payments to each other. Secondly, commercial banks provide a safe place for individuals, firms and government to keep their money. Thirdly, by accepting deposits and lending, commercial banks act as financial intermediaries, and as such transform the risk and maturity characteristics of the lending which could otherwise exist if borrowers were to seek out for those with excess liquidity lo lend. Among some of the services, banks provide customers with a means of obtaining or selling foreign currency whenever they require it either to facilitate foreign travel or International Trade.

Of course there are several other functions and responsibilities of commercial banks including playing an advisory role to individuals and companies on financial mat­ters, leasing, executorship and trustee services, to mention but some. However, of much interest in this article is the issue of loans.

What are commercial bank loans?
Commercial bank loans are medium-term credit facilities (usually from one to five years) that are extended to customers. Other credit facilities are short-term including bank overdrafts, trade credits and bills of exchange. Banks also offer long-term credit facilities such as debentures, mortgages and other bank loans.

While some loans are unsecured, banks will usually demand security before they commit themselves to providing loans. Unfortunately, this does not usually auger well with some prospective borrowers, par ticularly individual borrowers. Collateral demanded by banks is in most cases misconstrued as a stumbling block to customers who would wish to access loans. For instance, I remember hearing one person say, "I went to the bank asking for a loan facility of MK100, 000; and yet the bank officials asked for a security that would be at least equivalent to the money I was looking for. Since I had none, I was told off. Look here, if I had this so-called-security; why would I waste time going to the bank for assistance? I would be that rich already...It seems our friends from the banks do not understand why we go to them asking for a loan...It is because we don't have that much money and we want them to assist us."

The above sentiments probably signify some traditional misunderstanding of the way commercial banks operate in as far as loan dis­bursement is concerned. In the first place, let us look at the sources of money that banks lend out. Commercial banks raise funds by collecting deposits from businesses and consumers via cheque deposits, saving deposits and time deposits. It is this same money that banks lend to customers. In simple terms, commercial banks do not necessarily own money -they are the safe keepers of people's money. This implies that a customer's loan on one hand is bank's liability on the other. A liability is an obligation of an entity arising from some past transactions or events (in this case, the deposits), the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.

In view of the foregoing, it should therefore be appreciated that banks are not the owners of the deposits. As such banks will take all the necessary precautionary measures to ensure that customers' deposits are as secure as possible. Such care is not only lim­ited to safekeeping of funds but also to safe disbursement of the same. It is along this line of thinking that the issue of security on loans comes in.

What is a secured loan?
A secured loan is a loan in which the borrower pledges some asset (for instance a house) as collateral for the loan. The loan is thus secured against the collateral such that in the event that the borrower defaults, the lender takes possession of the asset used as collateral and may sell it to regain the amount originally lent to the borrower. The amount that can be borrowed differs from lender to lender and is a function of the borrower's ability to repay the loan by considering value of property used as collateral and individual circumstances.

What are the advantages of a secured loan ?
Firstly, commercial banks ask for security in order to reduce financial risks. As earlier on pointed out, the moneys banks lend to customers are liabilities; in other words the money belong to depositors. Now, liabilities (deposits) embody a duty to the banks that entails settlement by future transfer or use of assets, provision of services or other yielding of economic benefits at a determinable date, on occurrence of a specified event or on demand. This implies that depositors are entitled to their money any time or at any agreed time they would want it. What do you think would happen if depositors found out that their money has been lost through careless lending? Surely such a bank would lose trust of customers. By asking for security therefore, banks are able to balance the risk of lending out so that financial risks are greatly minimised or avoided.

Secondly, a secured loan usually leads to a bank offering attractive terms for the borrower on interest rates and repayment period. This is so because the lender has confidence that under any circumstances, the loan will be recovered. Banks charge different rates to different borrowers depending on the perceived risk category of the prospective borrower and since availability of collateral will reduce the element of risk, lower interest rate may be offered to secured loans. On their part, due to attractive loan conditions, borrowers are also motivated to duly service the loan so as to maintain good image and relationship with the lender. Such considerations tend to build mutual trust and appreciation between the lender and the borrower.

Thirdly and related to the above point is the fact that a secured loan will usually enable the borrower to access large amounts of money. Unlike with unsecured loans, the loan amount that has a collateral attached will, in most cases, be considerably large. Considering the fact that a customer will borrow money in order to purchase goods or services 'now' that they would not otherwise be able to afford, secured loans would help borrowers purchase very expensive products, especially those that require significant capital investments. By being able to access expensive products 'now', borrowers may also save particularly in cases of increase in future prices. For instance, an individ­ual may buy a house at a certain price, say, MK700, 000 today, using a bank loan that would be serviced within a period of five years. If, after five years, the same house costs MK4 million due to, among other things, an increase in demand for houses in that particular location; then that person would save significantly because the principal and interest paid back to the bank would by far be less than the new price. Fourthly, since the lender has the benefit of security, secured loans can be offered to people who may otherwise be excluded from other loans. For example, borrowers who are self-employed, or have recently changed jobs may not be able to get a guarantee from a third party to suppose the borrowing and solely rely on the collateral. Banks keep a good history of every customer's track record and over a period of continuous good relationship the same amounts which require collateral today may be released unsecured tomorrow. This aspect confirms the fact that banks require collateral as a cushion against default but once the trust is built, security is not a major issue.

Finally, secured loans are good for planning purposes. Commercial banks lend money in order to earn interest. Since a secured loan guarantees loan repayment, the lender can confidently and effec­tively chart, its future course of action. This is what is known as planning. Surely, a bank that has its activities well planned will prosper not only to its own benefit but also to the benefit of the society at large as it will be able to attend to more customers.

This is good news - will you therefore consider applying for a secured loan now? Remember securities are not meant to be a stumbling block but rather a gateway to loans.