TODAY I will deliver a speech at a symposium about the guarantees received by banks from clients as collaterals for granting credit. I prepared all the points which I wanted to cover; yet before that I unleashed my imagination and my mind to penetrate the deep details of the world of guarantees which the bank, and the client alike think that by obtaining or supplying them, the bank becomes assured that it will find some thing to lean on in case the client fails to repay the loan granted to him/her. The client feels that by extending the guarantee he/she will ensure that he/she had met the requirements, terms, conditions and guarantees of the loan, and so has become eligible to receive the loan amount and free to spend it whenever and however he/she wants. In my opinion, both are fundamentally wrong, especially when the bank depends on the guarantee as a means for loan repayment in case the client defaults. The client is also wrong when thinking that he/she has become the owner of the loan amount, and that he/she is free to spend it as he/she wishes, even in purposes other than the one which the loan was granted for, as the client considers that he/she has provided the guarantee requested by the bank, and that the bank has no right whatsoever to interfere in the manner of spending the loan's amount, in attempting to expedite repayment, in continuously following up timely settlement of due installments, or in instituting legal actions against him/her in case of nonpayment. How the bank could undertake all this when the client had provided the guarantees it requested! My thoughts extended to the concept of security itself, and how the credit granted is divided, in terms of security, to credit-in-kind, personal credits, and other loans not accepting any collaterals. According to the type of in-kind collateral accepted by the bank, the inkind collateralised credits are divided into cash, mortgage, tools and equipment, securities, and commercial papers collateralized credits. As for personal collateralised credits, they are based on a letter of guarantee from a first-class bank, or a warranty from a creditworthy and highly reputable person. Credits, which do not accept guarantees, are those which are granted on the basis of the financial standing of the borrower, his/her ability and willingness to settle his/her obligations, and his/her good reputation. On the other hand, credits granted against assigning contracting or supply agreements are considered unsecured loans (without guarantees), as repayment is not guaranteedunless the contractor or supplier duly meets its obligations. This is similar to loans extended to exporters for processing exports and known as preshipment finance; those are also considered as loans against which no guarantees are provided unless the exporter implements the export transaction in accordance with the terms of the documentary credit. When addressing collaterals, banks exercise utmost caution, and some banks follow an extreme conservative policy regarding the necessity for obtaining tangible, materialistic security upon which the bank depends to address any risks the granted loan may face. For such purpose, the bank examines all ways which lead it towards covering loans granted with appropriate guarantees, and pursues all that would secure granted facilities. The conventional thinking believes that the tangible security is the traditional guarantee of a loan, and the pillar upon which the bank relies in case of insolvency, when a default occurs leaving no choice to the bank but liquidating the security to repay the debt. Such liquidity helps the bank to overcome a crisis that totally depends on the presence of such securities. However, the modern approach sees that the most significant security is the continuity of the business activity, sustainability and its cash flows, which financially reflect the reality of the business with the availability of permanent and stable repayment resources. It is strange that Talaat Harb, the founder of Misr Bank followed this principle when extending a loan in 1920s of LE2,000 to The Arab diva Um Kolthoum, with the approval of the bank. When his office manager asked about the loan guarantee, he said: her voice is the guarantee!
