TYPES OF BORROWERS AND

LENDING SERVICES

1 7/20/20
 OBJECTIVE OF LESSON
At the end of this lesson, learners should be able to:
 Identify different types of bank customers
Identify and explain all lending services offered by
high street banks
Identify and explain alternative sources of finance
other than those offered by high street banks
Identify which type of lending services is most
appropriate for each type of customer
Take account of particular risk when lending to
minors, trustees and unincorporated associations.

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 INTRODUCTION
TYPES OF CUSTOMER BORROWERS
Bank customers are classified into two categories
namely corporate and retail ( personal accounts).
Corporate customers are limited liability companies
( incorporated busineses). E.g ZESCO, Zambia
Sugar, CEC
 Corporates customers are registered with the registrar
of companies and are issued with certificate of
incorporation
Retail or personal customers cover individuals and non
incorporated businesses. Each of these may open
3 different types of accounts and may wish to borrow7/20/20
.
 PERSONAL ACCOUNTS
Any person who has the capacity to enter into a
contract may open an account in his or her name.
Individual personal accounts are also referred to as
sole accounts and constitute the largest in numbers in
the banking system as a whole.
The requirements for opening a personal account are
generally minimal.
All prospective customers need to satisfy the KYC
criteria.
KYC means Know your Customer
Prospective client need to submit his nrc, proof of
4 residence, 7/20/20
 PERSONAL ACCOUNT CONTD
Passport size photos, references, specimen signature
and photocopy of nrc.
Then the prospective customer completes an account
application form which is mandate on terms and
conditions
When lending to personal account holders, the
mandate to contract lies solely with the single person
who signs the loan agreement and is personally liable
for the liability incurred.
Mostly individuals in formal employment with
reputable institutions are considered to be low risk
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when compared with self employed 7/20/20
 JOINT ACCOUNTS
 A joint account is any account opened in names of two or
more people other than a partnership, personal representative
or trustees.
 If a loan is granted to other than one individual, then a joint
mandate will be required in which each party undertakes to be
jointly and severally liable for any indebtedness.
 If the borrowing on the joint account is in default, the bank
will have three rights of actions because legal action can be
taken against both of them jointly and as individuals to
recover the full debt against the parties concerned.
 For example Mr Sam and Phanless Phiri may have the
following accounts in your books.
 Mr Sam & Mrs Phanless Phiri Current A/C K10,540 Dr
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 JOINT ACCOUNT CONT
 Sam Phiri Current A/C K 6,400 Cr
Phanless Phiri Current A/c K 2,345Cr
The three choices available to the bank against Mr Sam &
Phanless Phiri defaulting are
(i) Sue Sam & Phanless jointly for K 10,540
( ii) Sue Sam Phiri individually for K 10,540
(iii) Sue Phanless Phiri individually for K 10,540
Further, more the mandate gives the bank the right of set-
off, which means that the funds in the individual accounts
can be taken in reduction of the joint borrowing.

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 TRUSTS ACCOUNTS
An account opened by an appointed trustee for the
benefit of someone else. Usually take care of property of
beneficiaries
A trustee executes his duties for the benefit of
beneficiaries.
A trust may be express or implied.
When opening such an account, the bank need to have a
copy of the trustee deed.
The trustee deed is a legal document which specifies the
duties and powers of the trustee
Before lending, the bank need to ensure that that the

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check the trustee deed to check whether the trustees have
7/20/20
powers to borrow.
 TRUST ACCOUNTS CONTD
Trustees are not allowed to delegate their powers and
have limited borrowing powers according to the
Trustee Act 1925
Trustees have no implied powers to charge trust
property unless
1. The trust deed gives them permission
2. The loan is for a specific reason e.g to make
improvements to the trust property
3. The beneficiaries give permission
A mandate for joint and several liability should be
obtained
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 ACCOUNTS OF PERSONAL
REPRESENTATIVES
The persons appointed to wind up and distribute a
deceased estate are called personal representatives
If appointed by will, they are called executors and if
appointed by the court, they are called Administrators.
When opening an account by administrators, letter of
appointment to be administrator from the court should be
obtained.
The duties of the both the executors and administrators is
to administer the estate of the deceased.
A mandate of joint and several liability should be
obtained if a loan is granted
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 CLUBS , ASSOCIATIONS, SOCIETIES
Special care needs to be taken when asked to lend to
these accounts
These associations are run by club committees which
normally abide by set of rules set in their constitutions
Business itself is not a separate legal entity
They usually exist for the benefit of members
For a bank, the club etc has no contractual powers and
can not be sued for its debts.
If approached by such bodies for loans, check the rules
of the club to check whether they are allowed to
borrow or not.
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 CLUBS, ASSOCIATION AND SOCIETIES
If constitution allows them to borrow, ensure there is
no undue risk involved in repayment
Check constitution to establish purpose of the
association
Check whether loan funds is in the interest of the
association
Obtain guarantees of office bearers of the club and
subject them to CAMPARI
Any property purchased should be held by trustees
Ensue you open separate account to identify extent of
liability
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 PARTNERSHIP
Is a relation which subsists between persons carrying
on a business
Mostly common with professionals
Exists whenever the facts satisfy statutory definition as
provided by Partnership Act 1890
A partnership agreement should be obtained when
opening an account as it sets terms of their association
Bank should further obtain joint mandate and several
liability
Partnership can not create floating charge over their
assets such as stock in trade or book debts as security
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 SOLE TRADERS
 Sole traders are in business for their own benefit
 They are personally liable for any business debt and if they
can not pay, could be made bankrupt
 E.g. shopkeepers, grocery stores, etc.
 When appraising lending request for sole traders, in
addition to CAMPARI, obtain a business plan.
 If a business plan is not making sense, don’t lend
 Contents of business plan are objectives, mission and
vision, the business,management,market,
products,pricing,suppliers, physical resources, personnel,
financial projections

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 INCORPORATED COMPANIES
A company is a body incorporated under the
company’s act
On incorporation, a company becomes an entirely
separate legal entity from individuals who set it up
It can sue and can be sued
When opening an account KYC must be done
Obtain references for all directors
Obtain a board resolution appointing the bank as
banker to the company.
Obtain mandate stating signing authorities.

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 INCORPORATION COMPANIES CONT
Obtain certificate of incorporation which is the birth
certificate
Obtain memorandum of Association to check
objectives and powers of the company
Obtain articles of Association to check rules and
regulations formulated by shareholders, that govern
the internal procedures of the company and powers of
its directors and officers.

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 LENDING PRODUCTS
The following are the various types of financing
products provided by the high street banks to its
various customers
The purposes for the finance will vary according to the
clients needs
Before lending, the customer request will be evaluated
taking into consideration the principles of lending as
well as the bank policy

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 OVERDRAFT
This type of lending facility is for short term purposes
only.
Generally on an in case of need basis
It is only available to current account holders because it
allows the account to fluctuate between debit and credit
within an agreed overdraft limit, anticipating a salary or
other funds.
Interest is calculated on daily basis on the overdrawn
position
Interest is charged on the overdrawn balance only at a
margin above the base rate.
A commitment fee is charged to cover commitment of
18 funds by the bank if the facility is not taken up. 7/20/20
 BANK LOANS
Bank loans may be either short term loans, medium
term loans or long term loans.
A bank loan may be used to finance working capital or
capital expenditure
The interest rate is normally fixed
The following are various types of loans provided by
banks

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 1. ORDINARY LOANS
Provided on a structured basis for long term borrowing.
Interest rates are usually expressed as a margin over the
base rate although a fixed rate is agreed.
A repayment programme is established over agreed terms.
Interest is charged to the current account except for specific
types of loans where it is charged to the loan account itself
thus increasing the outstanding balance temporarily pending
repayments, which is inclusive of interest.
A facility letter is drawn spelling out the terms and
conditions of loan.
Can be used to finance capital expenditure
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 2. BRIDGING LOAN
 This is a loan advanced to enable an individual to pay for
the new house pending receipt of the sale proceeds from
the previous property and the new mortgage proceeds.
 Arrangement fees are charged to cover the cost of
administration in setting up the facility in addition to
interest and commission on facility
 One of the most important facts to establish is the true
amount required for the bridge.
 Example: Mr. and Mrs. John Chanda are selling their
existing home for K550,000 with an outstanding mortgage
of K 300,0000. They are buying a new house for K
750,000 and have obtained a new mortgage of K 550,000.
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 BRIDGING LOAN CONTD
How much can you, or should you lend?
First of all, look at available margins between the
transactions and establish the source of repayment of
fees and expenses.
 Sale
Purchases
Old sale Proceeds K 550,000 New Property K
750,000
Less o/s Mortgage K 300,000 Mortg obtaid K
550,000
-----------------
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Net amt available K 250,000 Amt reqd
 BRIDGING LOAN CONTD
 If all goes according to plan Mr & Mrs John Chanda will have
K 50,000 surplus to pay solicitors and estate agents fees,
removal expenses etc. Not much of a safety net for all costs
involved, so you would want to establish that they have
personal resources available to meet those costs. The bridging
loan could be provided in 3 ways.

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 3. PERSONAL LOANS
These are packaged loans which carry fixed fees and
monthly interest incorporated into the repayment
programme. Usually they also include premiums to
protect the individual’s payments in the event of illness
or accident.
Common as customer does not even need to see the
bank manager.
Completion of a basic loan application form is all that
is required for the loan to be credit scored.
Hence, the borrowing is quick to arrange, simple to
operate and can be profitable for the bank
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 PERSONAL LOANS CONTD
Funds can be used for all consumer durables and home
improvements,
The borrowing is taken over a fixed period at fixed
rate of interest which does not change despite base rate
changes during the life of the loan.
Usually, there is a minimum and maximum age limits
between 18 and 70.
Duration of loan tends to be between 12 and 36
months
Interest is calculated for the term of the loan and
included as part of the monthly repayments of capital
25 borrowed. 7/20/20
 PERSONAL LOAN CONTD
 E.g
Capital Borrowed K 1,000
Insurance Premium K 109.50
Interest Payable K 288.98
-------------
K 1,398.48 = 24 Payment K 58.27
---------------

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 CHARACTERISTICS OF PERSONAL
LOANS
 This type of facility is easier to access
 Because the borrower has readily cash disbursed, can negotiate
for cash discounts from shop owners.
 Goods bought through personal loan become the immediate
property of the borrower
 Can also be accessed by non customers upon satisfactory
identification, search and recommendation
 No security is usually required
 Because security is not required, these loans are costly to
reflect the higher risk involved
 Makes planning easy as borrower knows the exact amount to
pay regularly which is fixed and no hidden costs to pay
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 4. REVOLVING CREDIT
ACCOUNT
 Involves paying into a revolving account fixed monthly
payments by the client
 Client has the option of drawing by cheque up to 30 times
the monthly payments
 E.g with effect from 1st January, 2018, Caren transfers K
50 per month from his ordinary account into his revolving
credit account.
 In late March, he issues a cheque for K 1,500 to pay for his
holiday leaving the account overdrawn by K 1,350.
 Regular payments continues and in july he issues a cheque
for K 350 leaving his account overdrawn by K 1,500

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 REVOLVING CREDIT CONTD
Caren enjoys the flexibility of spending any funds
available without asking the bank for a loan
Usually interest and other charges are debited to the
revolving account unless customer makes arrangement
to for them to be charged to his ordinary account.

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 5. MORTGAGE SCHEMES
 These are loans for purchase of houses.
 Most banks are now in competition with building societies
in the provision of such loans
 They are usually long term loans
 Because of the long tenure of such loan against the desire
of depositors for short term, banks usually restrict
themselves to such loans
 Banks lend up to 80% -90% of the valuation of the
property concerned
 Repayments are done on monthly basis and includes
interest and principal over agreed terms.

30 7/20/20
 MORTGAGE CONTD
Borrower requested to take unemployment or
health insurance as well as assurance
Property is charged as security due to long term
nature
Apart from disadvantage of long term nature, it is
profitable and safer for the bank
Fixed rate reviewed following base rate changes.

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 5. BUDGET ACCOUNTS
 Used to help the client to manage various utility bills for a
year
 The client estimates total annual bills which are then
divided by 12 to come up with monthly bills
 A budget account is then opened where the monthly
estimates are debited from the cheque account and credited
into the budget account.
 When the monthly bills are received, they are debited to the
budget account
 Bank charges and interest on overdrawn balance are
charged
 Reviewed annually to take into consideration changes in
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 6. CREDIT CARDS
 These are plastic cards with a micro chip embedded inside
containing client details
 Enables clients to purchase goods and services even when
they do not have funds
 A client is given say a monthly limit which he could use
 Usually more expensive than personal loans
 Payable on monthly basis within the date specified on the
monthly statement
 Interest also charged on overdrawn position.
 Banks also receive commission from merchants accepting
the credit card in payment for goods and services

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 7. SINGLE PAYMENT LOANS
For certain clients that have established good
relationship with the bank, they are advanced loans
which are repayable once as a bullet.
The repayment consists of both the interest and capital
component of the loan.

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 8. PROBATE LOANS
 This type of loan is granted to either the executors or
appointed estate administrators of the deceased
person.
The loan is to facilitate payment of statutory bills
required before accessing funds or property of the
deceased such inheritance tax
The repayment is from proceeds of sale of the estate
property.

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 MINOR ACCOUNTS
A minor is any person below the age of 18
All contracts entered into by minors for the repayment of
money lent are unenforceable
All loans to minor should be guaranteed by the parent
who could be asked to repay in the event of default by
minor.
Most bank guarantee forms include an indemnity clause
which means that the guarantor will promise to pay
whether or not the principle debtor is liable.

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 ALTERNATIVE SOURCES OF
FINANCE
Sometimes customers prefer not to borrow from the
high street banks .
Smaller business have difficulty in raising finance for
long periods as banks are not willing to finance them
During period of restraints, banks may be reluctant to
provide funds for other than short term situations
If there is no any product that the bank can offer to
satisfy the customer’s needs, you may direct them to
alternative sources of finance.
The most common of those you will encounter are

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 1. FACTORING
Administering and accounting for debts owed to a
company can be time consuming and costly.
Factoring companies can remove the burden of
administration and accounting by taking on the duty
of sending out invoices and chasing outstanding debts.
The company having challenges with collecting funds
from debtors sells the debt to the factoring company.
The factoring company immediately pays cash to the
company at say 80% of the total debts owing.
The factoring company takes over the responsibility of
collecting the funds from the client debtors.
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 FACTORING CONTINUED
There are two types of factoring, With recourse and
without recourse.
Without recourse, if the factoring company fails to
collect funds from the client’s debtors, it can not go
back and demand for refund from the hiring company
which it initially paid
With recourse, it simply means the client can demand
for its money from the hiring company.
The factor company charges factor charges and pays
the remaining 20% after it has collected the full
payment.
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 BENEFITS OF FACTORING
1. Elimination of bad debt : A non recourse factor will assume
the risk of bad debt
2. Professional collection of debt: A good factor will collect
debts in a professional manner
3. Unlimited capital: Factor finance is the source of finance that
grow with increase in sales
4. Take advantage of volume and early payment discounts:
With improved cash flows, you will be able to take advantage
of cash discounts
5. No debt incurred: Factoring is not a loan and so no debt
incurred
6. Factoring is quick and easy- Provides cash fast
7. Factoring companies do not monitor how you use funds
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 2. INVOICE DISCOUNTING
With invoice discounting, the company having
challenges with collecting the debts from its debtors
are advanced some money against invoices ( at a
discount) by finance companies.
However, unlike with factoring where the
administration and chasing for debts transfers to the
factoring company, with discounting the responsibility
for chasing remains with the company and its clients
are not aware that they have borrowed against the debt
they owe.

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 3. HIRE PURCHASE
This facility involves a client who want to purchase an
asset but has no immediate cash.
The client signs an agreement where they will start
paying in instalments for the total cost of the asset.
The client hires the asset and starts using it although the
asset is in the name of the company.
Upon completion of the final payment, the property
transfers to the owner.
The contract is usually a conditional sale, which means
you are legally bound to complete payment for the
purchase at which stage, you become the owner
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 BENEFITS OF HIRE PURCHASE
1. Immediate use of asset minus paying for it in full
2. Do not have to get worried with paying of
maintenance cost of the asset
3. Expensive asset can be utilised as Payment is spread
over time
4. Fixed rental payment makes budgeting easier as all
expenditure is known in advance
5. You own the asset upon making last payment

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 VENTURE CAPITAL
Venture capital is a method of financing a business
start up in exchange for an equity stake in the business
It usually involves a number of investors putting up
funds together for investing in a company

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 4. LEASING
A lease is defined as arrangement between the
lessor( owner of asset) and lessee ( user of asset)
whereby the lessor purchases as asset for the lessee
and allows him to use in exchange for lease rentals
Lease finance is appropriate for an individual or
business which cannot raise money through loans or
lack of funds
The finance company will provide the asset to the
client in return the client pays rental charges over an
agreed period of time.
The lessee will have exclusive use of the asset though

45
the asset belongs to the lessor 7/20/20
 TYPES OF LEASES
 There are two types of leases namely finance lease and
operating lease
FINANCE LEASE
This lease is usually for a longer period of time and all
maintenance costs, insurance are borne by the lessee. It is
non cancellable. At the end of the lease period, the lessor may
opt to buyer the asset at lower price than what is its market
value.
OPERATING LEASE
This is the type where maintenance costs, insurance are all
borne by the lessor. The agreement is cancellable at the
option of either party and it is for a short period. Lessee has
46 no option to buy at the end 7/20/20
 BENEFITS OF LEASE
 (a) Balanced cash outflow: Lease rentals are spread over
some period hence saving burden of one time huge cash
payment
 (b) Better usage of capital: Company invests capital
which could have been used to purchase the asset in cash to
all ventures
 (c) Tax Benefit: Lease payments are considered as
operating expenses and hence tax deductible
 (d) Off balance sheet debt: Leasing is classified as off
balance sheet debt and does not appear as debt on company
balance sheet although lease expense is treated same as
interest on loan
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 (e) Better planning: Lease rentals remain constant over7/20/20
lease tenor and helps in planning cash out flows
 BENEFITS OF LEASE
(f) No risk of obsolescence: Leasing yields greater
returns and saves the business from risk of investing in
technology that might soon become out of date
(g) Termination rights: At end of lease period with
finance lease, the lessee holds the right to buy the
property and terminate the leasing contract.
(h) Flexibility: Lease can be for a short period or for
the entire life of the asset

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 5. STOCKING LOAN
These are loans which are given to retailers dealing in
expensive durables like cars by finance house.
The loans are for stocking the retail networks with
expensive durables they can not afford to purchase.
The manufacturers of the durables supplies the
expensive durables to the retailers but bills the finance
houses who pays for same.
The retailers then pays the finance house once each car
is sold with interest.
This facility is granted on a revolving basis at agreed
levels.
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 6. FRANCHISE
 This is a source of funds from large retail companies like
supermarkets. Example in Zambia is Spar Soweto and
kabangwe
 The funds advanced are towards the purchase of suitable
premises and equipment to the franchisee.
 The franchisee will run the business, pays a license fee to
the franchisor for use of the ‘ brand name’ and any facilities
provided.
 The franchisee is financially and legally independent of the
franchisor.
 Provided that the franchisee can raise sufficient capital,
they will receive the back up they will receive back up
50 support. 7/20/20
 7. GOVERNMENT AID
Governments provides schemes in which they assist
small businesses by way of grants and loans.
A grant is not repaid while a loan must be repaid with
interest although the interest rate is lower than that
charged by commercial banks.
Example of government aid in zambia are loans
provided by development bank of zambia and Citizen
Empowerment Commission

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 SUMMARY
There are two categories of borrowing customers
namely personal and corporates
There are two major lending products offered by high
street banks which are loans and overdrafts
Besides high street lending products, there are
alternative sources of funds
Bankers should be careful when lending to minors and
unincorporated association.

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