Olamide Famuwagun

Taking a loan does not stop at a personal or business level, because there are countries lacking financially too. This is especially true for medium to low income earning countries who cannot meet their international financial obligations.

In such situations, there are only so many financial corporations can do to help. This is why the IMF was created, and the IMF loan arm available to countries in need.

Why does the IMF Loan Exist?

The major threat faced by the international financial system is a country in financial crisis, who cannot pay its international bills. Having countries like this could in a short while, offset the international financial system. These countries are unable to earn enough on the capital market to maintain a safe level of reserves and also meet their international payment obligations.

IMF loans exist to help member countries tackle financial problems, stabilize their economies, and achieve a sustainable level of growth. The IMF is not a bank, therefore it does not finance projects. This is the duty of development banks and other agencies.

What are the conditions for obtaining an IMF loan?

There are no fixed conditions for obtaining an IMF loan. They set the conditions through a discussion between the government of the country and the IMF. However, a country is only considered when in any of the following categories:

1. A near state of financial crisis
2. Depleted international reserves
3. Currency under attack in the foreign exchange markets
4. Economic activity stagnant or falling
5. A high number of firms and households going bankrupt.

On application (through a letter of intent), the IMF and the government agree on a set of policies aimed at attaining some specific goals and objectives. After approval, they release the loans in installments over the life of the program. They must achieve the set goals of each installment before they would release money for the next.   IMF loans usually provide a certain percentage of the financial resources required by a country.

What are the IMF Loan major lending facilities?

Stand-By Arrangement (SBA): The IMF’s Stand-By Arrangement (SBA) has been the major lending facility for member countries since its inception in 1958. Although its rates are non-concessional, they are almost always lower than a country borrowing from raising finance through private markets. In 2009, they upgraded the SBA to accommodate more borrowing limit and a higher upfront fund. Its conditions were also simplified and streamlined.

Flexible Credit Line (FCL): 

The FCL is for countries with adequate fundamentals, strong policies, and an excellent track record of policy implementation. Conditions are eased in the Flexible Credit Line, and there are no caps on the size of the credit line. They don’t phase or condition disbursements on certain policies.

Precautionary and Liquidity Line (PLL): 

This facility provides finance to balance the payment needs of countries with existing sound policies. This finance could be to meet the actual or potential balance payment of the country. Also, they design it strictly for countries with sound policies.

Rapid Financing Instrument (RFI): 

Just as the name implies, this provides rapid and low access financial support to member countries in need. It does this without the need for a full-fledged implementation or goal achievement program. This facility caters to needs including natural disasters, emergencies from fragility, commodity price shock, and post-conflict situations.

Extended Fund Facility: 

The extended fund facility is used to help countries stabilize the payment difficulties related to structural problems. These problems usually take more time to correct compared to macroeconomic imbalances.

Trade Integration Mechanism: 

Lastly, the trade integration mechanism is the facility through which the IMF provides loans to countries suffering from multilateral trade liberalization. This mostly affects developing countries and results from the decline from export earnings when it loses access to certain markets. It could also be as a result of food imports going up after removing agricultural subsidies.

Conclusion

IMF loan is a great alleviation scheme for countries in financial distress. It is most beneficial to low-income countries, offering debt relief, as well as a way to repair the damage. Encouragingly, IMF loans are a sign that a country’s economic policies are in place, and it reassures officials of the community and investors. This helps the country find additional financing from external sources. You can learn when and how to get IMF loans in the article written here.

Banks are amazing financial institutions, and offer banking solutions to make our individual and business life easier. On the other hand, they do not offer the best of savings interest rates, neither do they give considerable interest on the borrowed sum. This is because the major purpose of a bank is to make money and therefore they don’t exactly put you first. A Credit union is members oriented and nonprofit.

Many have turned to credit unions due to its many benefits, which is what we explore in this article.

What is a credit union?

Credit unions replicate the operation and services of financial institutions like banks, with the exception that they are owners oriented. The members of the union own the institution. The goal of a credit union is to serve the members first rather than maximizing profits as seen in banks. Most times, a credit union offers better savings and loan interest rates, but also suffer from reduced maximum disbursal amount as a result.

How does a credit union work?

The members of a union are its owners. When you open an account with a credit union and deposit money, you become a member of the union. This gives you the position of both an owner and a customer. They use your money in meeting the loan needs of other members and the cycle continues. A credit union operates just like a bank.  

What are the pros and cons of a credit union?

There are several pros and cons that come with using a credit union. They are:

Pros

1. You are a member of the union and therefore receive benefits like dividends and voting rights
2.  Credit union offers lower fees than traditional banks, which makes them a cheaper option
3. They also offer lower rates to members on taking a loan.
4. Credit unions are community and members oriented
5. Since they are smaller, they have better customer service and can cater to the needs of the customers effectively  

Cons:

1.  Although a relatively low sum, you have to pay to become a member of a credit union. Credit unions also have a minimum opening account balance
2. Not all credit unions are insured, therefore poses a risk with your money
3. Credit unions are limited in branches and ATMs because they are location-based and operate in a small area
4. The services offered by credit unions are limited compared to commercial banks. For example, their maximum loan amount  
5. Credit unions most times do not have enough profit to implement the best technology compared to banks. You might not have the leisure of mobile or online banking.

Are credit unions better than banks?

This depends on your needs. Credit unions are not better than banks, but they may be beneficial to you since they offer lower interest rates on a loan and higher rates on savings. However, credit unions cannot match the financial capacity of a bank.

Banks owe their allegiance to shareholders, while credit unions are more members oriented. We cannot say one is better than the other because it depends on your needs. For example, if you need a loan running into hundreds of millions, a credit union cannot help you. They do not have such financial capacity, therefore you have to turn to a bank.

Conclusion

Although very beneficial, credit unions remain a nonprofit institution, and cannot match the financial capacity of a bank. However, if you would not need a huge loan sum, and prefer a place where you would be valued and your voice count, then a credit union is for you. see here to learn about Credit Bureau.

There are several debt instruments i.e assets that require a fixed payment to the holder, usually with interest (such as bonds and mortgages ) available in the commercial market.

 However, when in need of capital, most companies use debentures (which is a type of bond) to borrow money either for expansion or other business developments.

What are Debentures?

The word “Debenture” is from the Latin word “Debentur” which means “to owe”. It recognizes debentures as one of the major debt instruments in the commercial community.

It is a type of bond used by companies and the government to issue a loan at a fixed rate of interest. Debentures are usually long-term security and they secure it  on assets.

In simpler terms, a debenture is a document a company issues as an acknowledgement, at one point or the other, and for specific purposes, borrow a certain amount of money from the public.

Significance of a debenture certificate

This document also signifies the company’s promise to repay under some terms or at a specific future date. Therefore, Debenture holders can be referred to as creditors of such a company.

What are the types of Debentures?

There are several types of Debentures, they include

Secured and Unsecured: 

A  debenture is referred to as secured when the debt security is in an asset or set of an asset. They can also call this a mortgage debenture and they often put the assets in question in the care of a trustee.

A debenture is insecure or naked when the agreement is solely upon the credibility of the issuer. 

 Registered and Bearer:  

When a company registers a debenture, it means the issuing company has recorded certain details such as name, address, and other holding details. 

They must update this record whenever they transfer the debenture to another holder. This is quite important as the issuing company only pays to a registered holder.

An unregistered however is a bearer debenture where transfer procedures come easy such that they can make it to a new holder by mere delivery. Here, whoever produces the coupons attached to the debenture certificate gets paid.

Convertible and Non-Convertible:

When a debenture is convertible, it means the holder gets to convert his holdings into equity shares. However, information as to the time and rate of such conversion must have been clearly stated in the terms of the debentures agreement as at the time they issued it. 

As opposed to this, non-convertible debentures do not provide for conversion. It is a simple debenture that cannot go beyond the original purpose of a debenture which is debt.

First and Second:

This is an extension of the Secured / Mortgaged debentures. 

It must fulfil two major obligations on the assets obtained as security, respectively.

It refers the primary and first charge over the asset to as first mortgaged debentures while they know the second charge as the second mortgaged debentures

Redeemable and Irredeemable:

A company regards a debenture as Redeemable where a specific date has been fixed on the debenture certificate for redemption. This puts the issuing company under a compulsory obligation to repay the principal amount to the debenture holder on the date assigned. 

Irredeemable debentures or perpetual debentures are a direct opposite, there is no record for a redemption date. Redemption here is usually either done on the company’s liquidation or according to other terms of the agreement between the company and the holder. 

How does Debentures work?

Ultimately, a debenture doesn’t work like a strictly configured standard product. 

Established on the agreement made between a company and the debenture holder. They both decide the terms and conditions to follow in the debenture agreement. 

Debentures are like traditional bonds with the only difference being the fact that debentures do not require collateral. They usually buy Debenture bonds on the assumption that the company borrowing will repay. 

 However, if the company runs bankrupt or goes out of business, its assets will be liquidated, and they make an order to pay all its potential lenders.

What are the Advantages and Disadvantages of Debentures

The following are the salient advantages of debentures:

1. It provides investors with fixed income and interest rates at lesser risk.
2. A company can issue Debentures without having to give up the control of its equitable shareholders.
3. The interest payment on debentures is tax-deductible.
4. Sourcing for finance through debentures is less costly as compared to other debt instruments. 
5. Debentures do not cover/affection a company’s profits. 

Disadvantages

1.  It reduces a company’s borrowing capacity. 
2. Where under a redeemable debenture, it legally binds a company to comply with the assigned date irrespective of its financial strength at that time. 
3. Debenture puts a company at risk during market fluctuations because it places a permanent burden on its earnings. 

Conclusion 

To secure the future of any company, capital is a necessity and it is best to venture into business expansion or projects using debentures in situations where your company’s sales, profits, and earnings are stable.