Oct 30,2012 / News / Firms News

There is widespread recognition among banks and law firms in South Africa that standardised loan documentation could help reduce the high cost of loan transactions and speed up the transaction process. Standardised documentation will also develop the secondary market for loans and facilitate syndication of loans. While efforts to develop and implement standardised documents are still in the early stages, there are signs of progress.
“Strong support exists in the South African banking and finance sector for the work of the African Loan Market Association (ALMA), which is spearheading the drive to introduce standardised loan documentation,” says Elliott Wood, a director in the Banking and Finance practice at Werksmans Attorneys. “The thinking is that more cost-effective, efficient transactions would stimulate the market, particularly the secondary and syndicated loan market, to the benefit of lenders and borrowers alike.”
ALMA is a non-profit trading association formed in September 2011 to support and grow the African syndicated loan market by giving members access to training, market information and standardised loan documentation. Its members include major local and international banks, law firms, development finance institutions and credit rating agencies.
“Standardised loan documentation is a priority and ALMA’s documents committee has already developed the first such documents and made them available to members,” says Wood.
However, some challenges are being encountered in terms of take-up of these documents by the banks.
According to Wood, the first standardised documents are specifically for unsecured loans. “By definition, this type of loan is geared for a niche market, representing a very small percentage of borrowers. However, some banks have attempted to use the unsecured loan documents for secured loans,” he says.
“This is obviously not ideal, since the documents were designed for unsecured loans and, not surprisingly, then had to be adapted for the context of secured loans, which requires significant amendments,” Wood says. “Clearly, the standardised forms will only achieve their purpose if used for appropriate transactions.”
A related challenge is that users of the new documentation still have to get used to the notion of standardisation, which could take time.
“In Europe, where standardised documentation has achieved relative success, it took the Loan Market Association (LMA) many years to achieve this,” says Wood. “The European market is also significantly different from the scenario locally and we can’t expect standardisation to happen overnight in South Africa.” The LMA also has far more documents available to members which helps.
This does not detract from the high level of support for standardisation in South Africa – as well as in Kenya and Nigeria, which have also become members of ALMA.
“There is no denying that the current set-up, where each bank and law firm uses its own loan documentation, can add to the cost of transactions and result in delays,” Wood says.
“For each and every transaction, the parties have to familiarise themselves with a different versions of loan documentation. This can be extremely time-consuming – and hence expensive – especially when multiple lenders are involved in a transaction.”
He points out that the average length of a main loan agreement can be significant, with ancillary and security documents accounting for substantially  more pages. “Loan agreements are voluminous, to say the least, and if there is no standardisation, an enormous amount of time is expended on documentation reviews and gaining familiarity.”
This goes some way towards explaining why loan transactions can take so long, often many months to conclude, depending on their complexity.
“So ALMA is definitely taking steps in the right direction,” Wood says. “Going forward, it will be critical to expand the standardised documentation available so as to cater for other types of loan transactions. Standardised documentation has the potential to make a meaningful impact on the time and cost of transactions, especially if applicable to a broader range of transactions.”