Mr ojo borrowed N54,000 from a commercial bank and deposited his life insurance certificate with the bank. The certificate deposited serves as

This question is testing an understanding of how banks protect themselves when granting a loan.

When a bank lends money, it usually asks the borrower to pledge something valuable that the bank can hold or claim if the borrower fails to repay the loan. This item is called a collateral security. In this case, Mr Ojo deposited his life insurance certificate with the bank as the item of value backing the N54,000 loan; if he defaults on repayment, the bank has a legal claim against the value of that certificate.

The certificate cannot be a current asset of the bank, because a current asset is something the bank already owns and expects to convert to cash in its normal course of business; the certificate still belongs to Mr Ojo and is only held as security. It is not an interest charged, because interest is the cost of borrowing the money, expressed as an amount or percentage, not a physical document. It is also not a loan repayment, since repayment refers to Mr Ojo paying back the borrowed sum over time, which is a separate matter from the certificate deposited at the start of the loan.

Whenever a question describes an item pledged to secure a loan, rather than the loan amount, the interest, or the repayment itself, the correct term is collateral security.