securitisation
Securitisation is when a bank bundles many loans together and sells them as one investment, so it gets cash back now instead of waiting years to be repaid.
In plain English
Think of a landlord in Lagos who owns forty flats and collects rent from each tenant every month, small small, over many years.
One day he decides he would rather have one large payment now than wait years for forty separate rent cheques, so he sells the right to collect all that future rent to an investor for a lump sum today.
The landlord gets his cash immediately, and the investor now waits patiently for the trickle of rent to come in over time, hoping it adds up to more than they paid.
That is exactly what a bank does when it securitises loans. It takes a pile of mortgages or car loans or personal loans, all paying back slowly over years, bundles them into one package, and sells that package to investors as a bond.
In Nigeria, a bank that has given out thousands of small business loans might package them and sell them to pension funds or other investors, freeing up cash to lend out again rather than sitting and waiting for repayments to trickle in.
In the United Kingdom, banks famously securitised mortgages before 2008, and when many homeowners stopped paying, the bonds built on those mortgages lost value fast. That is the risk side of this coin worth remembering.
A bank has ₦2,000,000,000 in outstanding car loans that will be repaid over five years. It sells this pool to an investment fund for ₦1,800,000,000 today. The bank gets immediate cash to lend again, and the fund collects the repayments over the next five years, hoping to earn more than the ₦1,800,000,000 it paid.
Questions people ask
Is securitisation the same as selling a debt to a debt collector?
Not quite. Selling a single bad debt to a collector is usually about recovering money from one struggling borrower. Securitisation bundles many performing loans together and sells the whole package as an investment product, often before anything goes wrong.
Does securitisation happen in Nigeria?
Yes, though less often than in bigger financial markets. Nigerian banks and mortgage institutions have used securitisation to raise funds, and it is regulated by bodies like the Securities and Exchange Commission to keep things transparent.
Why would a bank give up future profit by selling loans early?
Because cash in hand today lets the bank make new loans, earn new interest, and manage its risk, rather than tying up money for years waiting on repayments that might also carry some risk of default.
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