1. The National Bank of Egypt lent a customer a loan to buy a car in the amount of EGP 100 at an interest rate of 10% and agreed with the customer to pay EGP 110 after a year.
2. The loan contract was signed by both parties and the contract was deposited in the office drawer.
3. The bank thus used a portion of excess liquidity equal to 100 pounds, and thus its ability to lend decreased.
4. Is it possible for the bank to “sell the loan” to another limit? It is very possible and this is the principle of securitization.
Steps (to simplify, not more) 1. First, the loan must be converted from a contract between two parties to a “security such as bonds” negotiable between investors. That is why it is called “securitization”, i.e. a transfer from a binary contract to tradable security (Negotiable security).
2. In coordination with a company specialized in securitization, a very important sentence will be rephrased:
“Payment of EGP 110 after a year to the National Bank“
“Payment of EGP 110 after a year to the holder of this security”
stock holder = bearer
So, whoever holds this note (the security), is owed the EGP 110 after a year.
3. The paper is sold from the National Bank to an individual investor or institution for 100 pounds, and the National Bank receives 100 pounds again.
Bank benefits from: – the fees for loan approval – the availability of liquidity again to re-lend, perhaps at a higher interest rate for another company or individual – the availability of liquidity to ensure compatibility with the requirements of the CBE to the minimum level of liquidity required.