LOAN SYNDICATION AS AN ALTERNATIVE BUSINESS FINANCING STRATEGY IN NIGERIA

LOAN SYNDICATION AS AN ALTERNATIVE BUSINESS FINANCING STRATEGY IN NIGERIA

ABSTRACT

The study was focused on the study of loan syndication as an alternative business financing strategy in Nigeria. The study examines the extent to which loan syndication has contributed to the performance of the Nigeria enterprise. Data was collected through the administration of the questionnaire numbering eighty (80) of which sixty-seven (67) were answered and returned. The response form the return questionnaire form the data for the research work.. This data were analyze on the bases of simple percentages while the Chi – square were employed in the test of the hypothesis

The study reveals that loan syndication has improved the performance of the Nigeria enterprise. It has not been significantly being applied in the basis of the finding made. It was recommended that participating bank in loan syndication business should endeavor to set up distinct department or section with good management structure capable of dealing with the cooperate borrowers seeking for syndication loans and that banks should be involved in a lot of innovation programme that will increase their deposit base in order to comprehensively eliminate the fear of a possible liquidating that may arise from making syndication loan which one major reason for which should shy away from providing adequate syndication facilities to industrialist.

TABLE OF CONTENT

 

Title page

Approval page

Dedication

Acknowledgement

Abstract

Table of content

 

CHAPTER ONE:

 

1.0     Introduction

1.1     Statement of problems

1.2     Objective of study

1.3     Significance of study

1.4     Research hypothesis

1.5     Scope and limitations of this study

1.6     Definition of terms

CHAPTER TWO:

2.1     Review related to literature

2.2     Background of the loan syndication

2.3     Other financial market

2.4     Internationalization of the capital market

2.5     Purpose of syndicating loan

2.6     Parties to loan syndication

2.7     Contribution of syndication in project financing

2.8     Problem of prospect of loan syndication in  the nigeria financial market

CHAPTER THREE:

3.1     Research design and methodology

3.2     Sample procedure

3.3     Data collection

3.4     Data analysis techniques

3.5     Determination of the sample size

 

CHAPTER FOUR:

4.1     Data presentation and analysis

4.2     Test of hypothesis

 

CHAPTER FIVE:

5.1     Summaries, conclusion and recommendation

5.2     Findings

5.3     Conclusion

5.4     Biography

5.5     Questionnaires and appendix

 

BIOGRAPHY

A

 

 

 

 

PPENDIX/QUESTIONNAIRE

CHAPTER ONE

 

BACKGROUND OF THE STUDY

The origin of the syndication loan was traced to the bankers of the middle age who distributing their financial risk among several house to support the trade flow. This system was more on a participating basis, then a formalize syndication as the lender did not adopt one common loan documentation.

The velalive insufficiency of fund for capital investment is a common factor in every economy especially in developing counties of the world. In developing counties like Nigeria; the low level of capital investment manifest in high unemployment rates; low productivity and corresponding low standard of living for greater majority of the population.

Finding a solution to this problem of providing fund for capital investment has been a major  pre-occupation of financial institutions in Nigeria. Beyond the traditional term loan; share offers; bonds and on; business organizations and   financial institutions alike have sought out avenue to tackle the problem of insufficient fund for capital investment. One of the solutions they have come up with is syndicated load or multiple  credit facilities , which is aimed at spreading risks and weakening the impact of restricting laws and regulation on lending by financial institutions .

Syndicate has been defined as an association of industrialist , or financial or banking consortium forced to carry out some industrial projects .

Accordingly, loan syndication is basically defined as an agreement between two or borrower with credit facility utilizing common loan documentation.

The spectacular growth of loan syndication as an alternative financial instrument for business organization occurred as response to several economic factors in Nigeria. Notable among these were:

• The National industrial policy of 1989, which is aimed at achieving, accelerated pace of industrial growth in Nigeria economy.

• The Introduction of structural adjustment programmed in 1986, culminating in the establishment of foreign Exchange market (F E M) and depreciation of the aria, This made imported machinery and equipment very expensive and requiring hung capital outlays which most companies or financial institution can not comfortably afford.

• Restriction on credit expansion by government and monetary authorities to minimize inflation. Central bank of Nigeria dose not included syndicated loan finance with in the credit checking, banks are there fore, able to syndicate loans with out interfering with the credit ceiling.

• The scrapping of import license regime which enabled more users of imported equipment and machineries to source and bring into the country.

• Deregulation of interest rate made loan syndication attractive to both business organizations and financial institutions. The above factors concerned with the persistent domestic inflation and arising cost of domestic production have increased the magnitude of credits demand by vanoys users of fund particularly the industrial producers.

In addition, there are certain legal and regulatory limitations on lending activities of commercial and merchant banks such as the statutory lending limit as provided in the banking act of 1969s. 13 (1) , the liquidity requirement ,e t c . In order to surmount these legal and regulatory limitations on lending activities of commercial bank (union bank) and merchant banks, loan syndication has become an attractive credit delivery technique aimed at spreading risks reducing the impact of the restricting laws and regulations.

Currently, there exists no comprehensive enacted law on loan syndication in the country as to regulate the activities of the financial institution that lead and participate in the syndication. What is perhaps significant about loan syndication in the country is not the rapid growth of the financial institutions involved loan syndication, but their activities which have been quite remarkable over the years.

Also, the study of the extent to which union bank of Nigeria plc. Employ syndicated loan as an alternative financing means with particular reference to Anambra and Enugu states respective financing means with loan as an alternatively have been carried out in this study. The researcher carefully appraised all aspects of loan syndication as financing alternative in the country from the point of view of the borrower. It is also made clear in this work that consideration of numerous merits of syndicated loan financing as against its demerits. It is not to be used as a last resort but should be considered alongside with equivalent alternatives. All these notwithstanding the most important of this study (it empirical study) is to know the popularity of syndicated loan financing among business organization in the country and the extent to which they employ it as financing alternative, no such study has been carried out in Nigeria.

For the empirical study, Anambra and Enugu State respectively have been chosen due to constraint imposed by cost and short-term on the researcher, otherwise the researcher could have conducted the survey throughout the country.

 

In Nigeria loan syndication can be trace to the 60’s. When a consortium of the commercial bank and the acceptance house discounted trade bills for the marketing board under the produce bill financial scheme, formalize loan syndication came into been during the oil boom of 70’s where there was need for adequate capital to finance the industrialization programme.

During the programme, few of the merchant banks have been incorporated.

Loan syndication has assumed international dimension because of he need to provide the capital to finance the fast growing world economy.

An international syndication credit is managed and was under written by one more financial institution normally from access t more than its currencies of domicile

 

STATEMENT OF THE PROBLEMS

There are conflicting views as to whether business organizations should be financed by syndicated loan or not. The opposition to the use of this alternative, especially in Nigeria, argues that syndicated loan is expensive and involves much administrative work. Also, there is need to point  out in every clear terms the advantages inherent in syndicated loan as medium and long term financing alternative. Besides, a review of the role of financial institutions in financing N9igeria business organization through syndicate loan is of paramount importance. In addition to the above, the extent to which syndicated loan financing is embraced by Union bank of Nigeria Plc. In the country need to be studies to know actually whether the much emphasized syndicated loan financing is being employed as financing alternative in Nigeria.

OBJECTIVE OF THE STUDY

1. To ascertain the adequacy of the syndicated loan provided by the bank to the industrialist.
2. To assertion the effect of long term syndicated loan on the liquidity position of the bank in Nigeria.
3. To ascertain the extent to which management structure has affected loan syndication business in Nigeria.
4. To determine the increase of disagreement between the lead bank and the participating bank in loan syndication business
5. To identify the problem encountered in the documentation process of syndicating loan.
6. To highlight the prospect of loan syndication to both the users of the loan and the bank that extend the credit.

 

 

 

 

SIGNIFICANCE OF THE STUDY

This study will be of crucial benefit to the borrowers. The attention of the researcher was drawn by the need for loan syndication in Nigeria especially in the area of providing the borrower with credit facilities. This becomes obvious that will be a need to grant study that could examine loan syndication as it affects the investment and capital project outlays.

Therefore, the significant of this study is to look into ways of making it easy for financing a capital project outlays which requires a syndicated loan, and also to encourage financial firms to jointly finance project which one financial firm cannot single handedly finance. It is hoped that after this study. It will be useful to every bank especially those in merchant banking and development banking. It will also provide information to general public on how to employ loan syndication as alternative business financing.

This work is expected to be of immense values to the students in financial studies and other related courses mostly accountancy, banking and finance and so on, since this is part of what they are going  to practice in their various place of work. Lastly, it will and government and other institutions to formulate suitable policy that will guide them in financing a big projects jointly with other financing firm.

 

There are two main parties to loan syndication;

1. The lender
2. The borrowers

 

The lender bank is appointed and is called the agent bank or the lead bank. It the agent bank of the lenders and its main duty if monitor the disbursement and utilization and repayment of the credit as per the lending agreement.

 

The borrower consists of the following;

 

1. Individual customers

 

The borrower will usably channels its request to a bank with which it has already establish a relationship or alternatively to a bank it has carefully chosen based on the perception or the easement of its expertise and ability to deliver. It may also channel the request to a number of banks calling for bids of offers with a bid to select the most favorable offer. The bank of the borrowers choice which agree to raise the required amount is known as the lead bank of the syndication

 

RESEARCH HYPOTHESIS

Ho: Loan syndication has not been applies to a syndication extent by the Nigeria enterprise in project financing

 

Hi: Loan syndication has been applies to a syndication extent by the Nigeria enterprise in project financing

 

Ho: Syndicated loan are not adequate to industrialist in Nigeria

 

Hi: Syndicated loan are adequate to industrialist in Nigeria

Scope and limitation of the study

 

This study deals with the Nigeria financial market and their impact and contribution to the industrialist and to the economy in general through granting of syndicated loan. This research also dealt briefly on other countries financial market as it relates to loan syndication. One area of militating the financial resources and the time available to carry out the research in the same vain, non-reliability of the relevant data from the bank posed a big problem while the inability of the bank official to release some of the research work also affected the quality of the research.

 

DEFINITION OF TERM

1. Syndicated loan is normally carried out by merchant bank through the coming together of the financial institution for the purpose of providing large fund to the client who may or may not be a customer to all the different institution participating in the execution of the loan facility. The single idea is that each individual lender is bound by one loan agreement as lender and borrowers.
2. Finical market: this is the market form which large companies and financial enterprise attract long term investment fund through the network of the financial institution and stock brokers licensed to perform capital market function.
3. Loan: this is credit facility granted to a customer which is installmentally repayable over a specified period of time
4. Financial house: a financial house is a financial enterprise, which specialize in providing fund to buy major asset. On the other hand, financial house are non-banking institution, which usually perform some of the function of bank but on a small scale.
5. Lead bank: the bank of the borrowers choice that agrees to raise the required amount either on a best effort base or under written obligation.
6. Agent bank: this an administrator of the loan
7. Capital market: this is market for medium and long-term loans. A merchant bank is a player in this market.

 

 

 

 

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