CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Financial Intermediaries are desirable because they increase the efficiency of the study/investment process. This means that they facilitate the flow of funds from surplus spending units to deficit spending unit. These financial intermediation services include liquidity and material intermediation.
The buying and selling of financial institutions take place in the financial markets, which includes money market and capital market. Money market is the part of the financial market which provides facilities for the exchange of short-term funds and includes all the machinery, rules and regulations for handling the supply of and demand for loanable funds of maturities varying from a day to one year. Money market is concerned with the “wholesale” dealers in short-term funds and with the credit instruments which represents titles to or indebtedness for such short term funds.
The money market is of great importance to the government and other institutions in need of short term funds and to suppliers of short-term funds who because of the character of their libilities, undertaken to main part of their assets in relative liquid form, because of the liquidity of the instruments traded in the money market, the monetary authorities exert a lot of influence on the market to regulate the money supply. Unlike cash assets which are sterile in terms of earnings money market securities provides commercial banks with liquid assets for the purpose of meeting liquidity requirement while undertaking investment.
Capital market is a segment of the financial market that deals with long-term investments and with operations necessary for financing them. It covers all institutions (particularly financial agents) and facilities that exist in an economy for the mobilization of long funds in the economy and for channeling such funds to long-term investors. Sometimes the financial claims that changes hands in the capital market have no maturity dates at all.
Capital market participants may be lenders or borrowers of long-term funds. Some are simply financial intermediaries who perform marketing functions on behalf of others in the sale purchase of fund to, invest in long-term or whenever they are sell long-term financial accommodation for desired investment activities.
The capital market is categorized into two:-
- The primary market
- The secondary market
The primary market is in effect the new issues market at it is concerned with the ideal and sale of new securities. The operators in the market are the issuing hovers such as stock bankers, merchant and commercial banks.
The secondary market is the market for the resale of existing securities. The center of activities for the secondary market is the stock exchange. The loans syndication is one of the functions of the merchant banks, which is one of the operators of the primary market.
Loan syndication may be defined as where a group of financial institutions (banks and non-banks) come together to finance a project on common agreement terms and conditions in single loan documentations.
Syndication is also a situation where corporate bodies require medium to long-term loan from time to time. The bank involved in loan syndication is called consortium banks. A consortium of banks takes a decision to syndicate the loan with the objectives of spreading the risk of default or loss in the same way insurance companies underwrite large risk among selected insurance companies.
Loan syndication is very important to banks because it selects lender in a way that competitors are not involved, so that there may be no loss of business to competitors; commercial banks often head loan syndication.
The important features of syndicated loan are:-they are typically very large amount (several millions) and they are at least two lenders (a spread of banks) and one borrower commonly involved.
The origins of syndicated loans are traced back on banker of the middle ages who distributed their financial risk among several houses to support trade flows. This system was more on a participating basis than a formalized as the lenders do not adopt one common loan documentation.
What may be regarded as modern loan syndication with the conception of Eurodollar (Dollars Denominated deposits outside the United State of American): This started after the war when banks in United States of American was for banks to lend money to their customer only on short-term basis hardly exceeding one year and such loan s were matched with specified deposits. After the war, the united state Government introduced attractive incentives which encouraged corporations to undertake large capital investmentprogrammes designed to match the high growth rate of the economy.
However, since the banks were controlled by government mainly in areas of loan growth and reserved requirement (liquidity and cash ratio). It becomes difficult for a single bank to lend all the money required by a corporation to meet its projectedd investment programme. Also, in other for a single bank not to put all its egg In one basket, the need arose for more than one bank to come together and share the risk by each providing a proportion of the total loan required by the borrower, for ease of administering such loan one or more of the lending banks would act as the lender/agent bank.
In Nigeria, loan syndication can be traced to the 60’s when a consortium of commercial banks and acceptable houses discounted trade bill finance scheme, formalized loan syndication came into being during this oil boom of 70’s when there was need for adequate capital to finance the industrialization programme. During this period, the new merchant banks have been incorporated. Loan syndication has assumed international dimension because of the need to provide capital to finance and fast growing world and underwritten by one more financial institution normally from location other than the domicile of the borrowers to include lenders from different countries which provide the borrowers access to move than its currency of domicile.
1.2 STATEMENT OF THE PROBLEM
Loan syndication in the Nigeria financial market has been the problem to the enterprise in project financing. Looking back at the origin of syndicated loan which was traced back to the bankers of the middle ages, the system was more of a participatory base than formalized syndication and the lenders did not adopt common loan documentation. The history of loan syndication has created some problems to the researchers; which are listed as follows:-
- The problem might come from delay in packaing and putting credit in place before disbursement to the borrowers.
- The banks invited by the lead bank to participate in loan syndication may decline and come up with reasons like growth constraints, liquid problems etc. some syndicated loan take morethan one year to be concluded, this shows that the agreement is not all that easy.
- After the loan has been disbursed, another problem can arise from the uncorporative attitude of the borrower is meeting the terms and conditions in the loan agreement such as submission of progress report, quarterly management account.
- The payment of interest and principal when due occasionally possess some problem.
- The borrower may be facing liquidity problems, low scale turnover, diversion of working capital into acquisition of fixed assets etc. such problem if not properly handled may lead to rescheduling, restricting and refining the loan.
1.3 PURPOSE OF THE STUDY
The purposes of this study are:-
- To ascertain the extent to which loan syndication has been applied by Nigerian enterprises in project financing and to examine the extent to which loan syndicationhas contributed to the performance of Nigeria enterprise.
- To ascertain the adequacy of syndicated loans provided by banks to industrialist and to indentify the encountered in the documentation process of loan syndication business in Nigeria.
- To ascertain the extent to which management structure has affected loan syndication business In Nigeria.
- To ascertain the effect of the long-term nature of syndicated loans on the liquidity positions of the banks in Nigeria.
- To determine the areas of disagreement between the legal banks and the participating banks in the loan syndication business, and to highlight the prospect of loan syndication both users of the loan and the bank that extend credit.
- RESAERCH QUESTIONS
The following questions have been asked as a guide to the study:
- Has loan syndication been applied by Nigerian enterprises in project financing?
- How do you evaluate syndicated loans provided by banks to industrialists in Nigeria?
- Does long-term nature of syndicated loans affectliquidity position of banks in Nigeria?
- How does long-term nature of syndicated loan affect liquidity position of banks in Nigeria?
- Looking at the position of Nigeria economy, do you that think it is strategic to syndicated loans?
- SIGNIFICANCE OF THE STUDY
As it relates to the problem of loan syndication in Nigeria financial market, there are five parties to benefit in loan syndication which include:-
- THE LENDER: This research work will help the lender to provide fund/credit to another financial institution with the expectation that the funds will be repaid with interest.
- THE BORROWER:This research work will also help the borrower that usually channel its request to a bank with which he has established a relationship or alternative to the bank he has carefully chosen based on the perception or assessment to its expertise and the ability to deliver to ask for fund
- THE LEAD BANK:This research work will help the borrowers to know that the lead bank is a bank that oversees the arrangement of a loan syndicated and they are paid an addition al fee for this services.it also serves as the bank of the borrower choice which agrees to raise the required amount.
- THE AGENT:This research work will also help the agent to know that he has express or implied authority to act for another so as to bring the principal into contractual relationship with other parties i.e. a body that connects the principal with the third party (beneficially).
- THE INTENDING RESEACHER:This research work will help the intending researcher to know how to solve or settle the problem of loan syndication in Nigeria financial market. It will also help him to know that loan syndication is very important to banks because it selects lenders in a way that competitors are not involved, so that these may b e no loss of business to competitors.
- SCOPE OF THE STUDY.
This research work covers the area of Access Bank PLC Ekwulobia Branch in Anambra State, the study deals with the problem of loan syndication in the Nigerian financial institution and its contribution on the economy in general.
The analysis is centered on the money deposit bank in the Nigeria financial system.
- DEFINITION OF TERMS
The terms used in this study can be defined as follows:
LOAN SYNDICATION: This is an agreement between two or more lending financial institution to provide a borrower with credit facility utilizing common loan documentation.
CAPITAL MARKET:This market is a segment of the financial market that deals in funds or financial instruments with long/indefinite term loan.
MONEY MARKET: This market is a segment of the financial market that deals in funds/financial instrument with short/medium term loan.
FINANCIAL INTERMEDIARY: It’s an entity that acts as the middleman between two parties in financial transactions.
FIANANCIAL INSTITUTION: It’s an establishment that focuses on dealing with financial transaction such as investments, loan and deposits.
FINANCIAL MARKET:its terms describing any market place where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives.
LOAN: This is a credit facility granted to a customer which is installmentally repayable over a period of time.
CONSORTIUM:They take decision to syndicate the loan with the objectives of spreading the risk of default or loss which the insurance companies under. Write large risk among selected insurance companies.
LIQUIDITY: The degree to which an asset or security can be bought or sold in the market without affecting the assets price.
MATURITY:The period of time for which a financial instrument remains outstanding. The maturity of the investment is the term of agreement. It determines how long the payment will take place.
CREDIT INSTRUMENT: It’s the document that serves as an evidence of debt such as a promissory note or an i.o.u.
WHOLESALE BANKING: Banking services between merchant banks and other financial institutions. It deals with large institutions.
INDEBTEDNESS: A short term fixed income security once issued by the united state treasury that had a coupon rate.
LIQUID ASSESTS: An asset that can be converted into cash quickly and with minimal impact to the price received.
INVESTOR:An individual who commits money to investment productswith the expectation of financial return.
MARKET SECURITY: Its very liquid securities that can be converted into cash quickly at a reasonable price.
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