Due to developments in the financial sector, new and innovative financial techniques and instruments have been introduced to supply capital resources. Alternative methods have been created as a substitute to the traditional modes of raising capital, and these new methods are fast gaining popularity. One of these alternative methods is Securitization. A securitization is a fast-growing form of debt financing. It is the process in which certain types of assets are pooled so that they can be repackaged into interest-bearing securities to be sold to investors. The interest and principal payments from the assets are passed through to the purchasers of the securities. Increasing numbers of financial institutions employ securitization to transfer the credit risk of the assets they originate from their balance sheets to those of other financial institutions such as banks, insurance companies, and hedge funds.

Securitization was initially used to finance simple, self-liquidating assets such as mortgages. However, any type of asset with a stable cash flow can, in principle, be structured into a referenced portfolio that supports securitized debt. Mortgages and corporate and sovereign loans, consumer credit, project finance, lease/trade receivables, and individualized lending agreements can back securities. The generic name for such instruments is asset-backed securities (ABS), although securitization transactions backed by mortgage loans are called mortgage-backed securities (MBS). However, it is important to note that the SEC Rules on Securitization 2015 only make provisions for Asset-backed securities.

Most financial institutions use securitization as financing by moving assets off their balance sheets or borrowing against them to refinance their origination at a fair market rate. In doing this, they were also able to reduce their borrowing costs. For example, suppose a leasing company needed to raise cash. Under standard procedures, the company would take out a loan or sell bonds. Its ability to do so, and the cost, would depend on its overall financial health and credit rating. If it could find buyers, it could sell some of the leases directly, effectively converting a future income stream to cash. The problem is that there is virtually no secondary market for individual leases. But by pooling those leases, the company can raise cash by selling the package to an issuer, which in turn converts the pool of leases into a tradable security.


The process of securitization usually starts with the recreation of loans into homogenous pools. The pools are formatted according to the type of credit, maturity pattern, and interest rate risk. A company with loans or other income-producing assets (the originator) identifies the assets it wants to remove from its balance sheet and pools them into what is called the reference portfolio. It then sells this asset pool to an issuer, such as a special purpose vehicle (SPV), an entity set up, usually by a financial institution or, in most cases, the originator, specifically to purchase the assets and realize their off-balance sheet treatment for legal and accounting purposes. The issuer thereafter finances the acquisition of the pooled assets by issuing tradable, interest-bearing securities that are sold to capital market investors. The investors receive fixed or floating rate payments from a trustee account funded by the cash flows generated by the reference portfolio.

Securitization takes the role of the lender and breaks it into separate components. Unlike the more traditional relationship between a borrower and a lender, securitization involves the sale of the loan by the lender to a new owner, the issuer, who then sells securities to investors. The investors are buying bonds that entitle them to a share of the cash paid by the borrowers on their mortgages. Once the lender has sold the mortgage to the issuer, the lender no longer has the power to restructure the loan or make other accommodations for its borrower. That becomes a servicer’s responsibility, whose role is to collect the mortgage payments and distribute them to the issuer for payment to investors. Where the borrower defaults, the servicer is armed with the responsibility to institute an action on behalf of the SPV to recover cash for the investors. The servicer can only do what the securitization documents allow it to do. Sometimes, these contracts may constrain the servicer’s flexibility to restructure the loans.

In most cases, the originator services the loans in the portfolio, collects payments from the original borrowers, and passes them on, less a servicing fee, directly to the SPV/trustee. In essence, securitization represents an alternative and diversified source of finance based on the transfer of credit risk from issuers to investors. The issues are rated by a rating agency based on the structure of the issue, the underlying pool of assets, expected cash flows, the extent of loss protection provided to investors, the degree of credit enhancement, etc. the rating normally improves the saleability of an issue.


Securitization has a variety of benefits that investors can take advantage of. Some of these benefits are:

  1. It connects the capital markets to the consumer finance markets. It is the mechanism by which borrowers get to borrow money directly from institutional investors, who in turn get to invest in consumer loans.
  2. It allows the originator to take debt off their balance sheet and replace it with liquidity.
  3. It provides investors with clearly rated investments that pay according to the risk they are willing to shoulder.
  4. It protects investors against the credit risk exposures of the originator. This is because all of the risks and rewards attached to the assets are conveyed to the SPV at the true sale transfer.
  5. It improves liquidity by ensuring fast capital liquidation by the originators to enable them to engage in other businesses. This gives them access to liquidity by transforming illiquid capital into liquid capital instead of remaining stagnant due to tied-down capital.


The Securities and Exchange Commission (SEC) Rules on Securitization 2015 (rules) is the extant law regulating securitization in Nigeria. The rules provide for the structure of the transaction, special types of securitization, and motives for securitization.

These rules only make provisions for Asset-Backed Securities, which is why Securitization under the rules is defined as the issuance of securities backed by a pool of assets. The rules also allow all types of standard assets to be securitized except revolving credit facilities (credit card receivables), encumbered assets, securitization exposures, and loans with a bullet repayment of both principal and interest.

The Rules further define the SPV as a legal entity formed with the exclusive purpose of acquiring and holding certain assets for the sole benefit of noteholders in the Asset-Backed Securities, such that the noteholders have acquired nothing but undivided interests in the asset pool. It also provides that the SPV should be incorporated as either a public limited liability company or a trust created by a written instrument or any other legal entity that which SEC may, by regulation, permit to be used for a securitization transaction. The objects of the SPV in the Memorandum and Articles of Association should be limited to matters related to the securitization transaction.

Concerning the transfer of assets from the originator to the SPV, most originators prefer not to convey an outright sale of the securities to the SPV. They rather transfer only the credit risk associated with the assets leaving the legal title still vested with them. This transfer is referred to as Synthetic Securitization. However, the SEC rules made it mandatory for all transfer of assets to the SPV to be absolute and on a “without recourse” basis. Such conveyance of assets is deemed a True Sale Securitization and is treated as final, absolute, and binding on the originator, SPV, and all third parties involved in the transaction.

In addition to the provisions highlighted above, the Rules provide for the registration requirements for securities, the SPV’s composition, SPV’s powers, restrictions on the operations of the SPV, and eligible assets in securitization transactions, among others.


Securitization is a relatively new concept of raising capital or financing for companies, which may be one reason why many companies are yet to fully utilize it. There are a lot of benefits associated with securitization, as we have discussed. Also, the SEC has made rules to guide the entire securitization process, making it a lot easier to deal with. It is my belief that with these rules, companies or organizations will be able to fully unlock the potential and opportunities offered by securitization.


  1. A. Jobst, “What is Securitisation?” https://www.imf.org/external/pubs/ft/fandd/2008/09/pdf/basics.pdf accessed on November 18, 2022
  2. The Economic Times “What us Securitisation?” https://economictimes.indiatimes.com/definition/securitization accessed on November 15, 2022
  3. Securitization of Loans – An Overview https://docs.oracle.com/cd/E64763_01/html/SZ/SZ02_Overview.htm accessed on November 14, 2022
  4. C.A Kumar, “Debt Securitisation”, Management of Financial Service, http://anucde.info/sm20210803/Management%20of%20Financial%20Services%20final/MFS%20Final/Pdf%20manage%20of%20finan%20services/LESSON%206b.pdf   accessed on November 15, 2022
  5. A.D Abiona, (2020) “Raising Capital for Companies: Securitisation as an option in Nigeria” https://www.mondaq.com/nigeria/securitization-structured-finance/944096/raising-capital-for-companies-securitization-as-an-option-in-nigeria accessed on November 18, 2022
  6. Potential of Loan Securitisation in Nigeria to unlock liquidity for economic growth https://www.coronationmb.com/potential-of-loan-securitization-in-nigeria-to-unlock-liquidity-for-economic-growth/ accessed on November 15, 2022
  7. Securitization in Africa: Highlighting the Benefits to Investors in Nigeria https://dlm.group/wp-content/uploads/2020/09/Sonnie-Ayere-Securitisation-Presentation-08.09.2020..pdf accessed on November 16, 2022
  8. Ehimony, Yori, An Introduction to Securitisation (August 20, 2015) available at SSRN: https://ssrn.com/abstract=2647984 accessed on November 15, 2022
  9. SEC Rules on Securitization 2015 (Nigeria)

Written by Anyanwu Chiamaka  for The Trusted Advisors

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