The Lion King | 13
Business
By Daniel Wajuihian
Guarantees,
Bonds,
Indemnities
Untangling the Maze
J
ona signed a guarantee document for his friend, who was in need of a
fast N100, 000 loan from a financial institution. Although he had doubts
about his friend’s capacity to repay the loan, he just felt he needed to
do him the favour since he looked so desperate.
Two months later, however, he received an e-mail from the financial
institution, followed by repeated telephone calls and visits to his office,
demanding that he pays the loan of N100, 000 granted to his friend,
together with the accrued interest. His friend was unable to repay the loan
and as a guarantor, he was called upon to pay.
In this same period, the cheque he gave for the payment of his children’s
school fees had just been presented on his account, leaving only a credit
balance of N70, 000. He had not made any arrangements for payments
on the guarantee, as he ignorantly thought he was “merely acting as a
guarantor” and would never be called upon to pay.
The truth, however, is that by signing the guarantee, he had undertaken
to pay the debt if his friend failed to pay as at when due. A guarantee is
an undertaking by a person (individual or corporate), to answer for the
payment of some debt, or the performance of some obligation by another,
in case of the failure of that other person, who in the first instance is liable
to such payment or obligation . It is a contingent liability in the sense that it
only arises upon the default of that other person whose debt or obligation
was guaranteed.
Other African countries that will
experience continued pressure on
their currencies include Ghana,
which has had to go into a three-year
arrangement with the International
Monetary Fund (IMF) for a $1 billion
loan to stabilize its currency. Uganda’s
shilling is also expected to continue
to be pressurized as investors worried
by increased government spending in
the face of dwindling revenues, ramp
up demand for dollars. The Ugandan
shilling has already lost 10% of its
value in 2015 and it is not expected to
recover soon as banks and business
increase demand to protect against
further fall in the currency.
Kenya, on the other hand is expected
to see a strengthening of its currency as
investors running from other turbulent
markets seek refuge in the country.
The IMF recently predicted that the
country’s economy will grow at about
7.5%, making it one of the fastest
growing economies on the continent.
The country’s bonds are expected to
remain attractive to investors fleeing
other African markets helping to give
strength to the Kenyan Shilling. Unlike
Nigeria, Kenya is a net importer of
petroleum products and lower crude
oil prices favours its economy. It also
has more diversified sources of export
revenues of tea, coffee and tourism
exports. However, recent terrorist
attacks may derail this forecast.
Largely, many African currencies will
be impacted if the US Federal Reserve
takes a decision to start raising interest
rates as early as June 2015 as being
speculated. This will likely result in a
stronger dollar, and also possibly slow
down foreign portfolio investment into
African countries as investors go in
search of higher and less risky yields
especially as the various elections on
the continent in the next two years raise
political and ethnic tensions.
