In a financial practice known as “share-based lending” or “share financing,” borrowers use their company shares as collateral to get loans. This strategy has become more popular in Kenya and other nations for several reasons:
- Flexibility in Collateral: Physical assets, such as real estate or vehicles, are frequently required as collateral for traditional loans. But not everyone has access to these resources. A larger spectrum of people can receive loans thanks to the alternative form of security that shares offer: collateral.
- Diversification: Shareholders of publicly traded corporations may have significant stock holdings. They can utilize these shares as collateral to get funds without liquidating their investments rather than selling them.
- Quick Access to Funds: Compared to conventional loans that need property evaluations and other time-consuming procedures, share-based loans may offer quicker approval times. For those who require immediate financial assistance, this may be advantageous.
- Avoiding Capital Gains Tax: If the value of the shares has increased after the acquisition, selling them may result in capital gains tax. By holding their shares and utilizing them as collateral for loans, share-based lending enables individuals to escape this tax obligation.
- Leveraging Stock Portfolios: Investors with successful stock portfolios can use their gains to obtain money for a variety of needs, including business expansion, financing further education, or paying for medical bills.
- Asset Preservation: Share-based financing enables borrowers to maintain share ownership while releasing capital. When they think the value of the shares will keep rising, this is especially helpful.
- Rates of Interest:
Share-based loans may have more affordable interest rates than unsecured personal loans, depending on the state of the market and the perceived risk of the shares.
- Sources of Financing Diversification:
Share-based lending allows businesses to expand beyond conventional bank loans as a source of funding. This can be especially useful when trying to raise money for capital-intensive or expansionary initiatives.
- Confidentiality: Share-based loans might give privacy because borrowers are not required to divulge their precise borrowing justifications or a wealth of financial details.
- Unlocking Unrealized Value: When shares are offered as collateral, people may profit from both the share’s value and the money acquired through the loan.
It’s significant to remember that share-based lending has hazards as well. Borrowers may be required to offer more security or run the risk of having their shares sold to repay the loan if the value of the shares they have pledged drops sufficiently. Additionally, share-based loan terms and conditions might differ greatly, so borrowers should thoroughly analyze the terms and comprehend any potential repercussions.
The Capital Markets Authority (CMA) in Kenya regulates share-based financing to provide transparency, equity, and investor protection. Before utilizing shares to obtain loans, individuals should, as with any financial decision, seek professional counsel and carefully weigh their possibilities.
