CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The overall economic growth in Nigeria both in the areas of industrialization and provision of social services, has increased the need for huge amounts of money to be borrowed from the financial institutions for their execution. The boom of early seventies brought a change in the structure of the economy towards increased in industrialization. As a result of deregulation from the monetary authorities and in order not to put all eggs in one basket, lenders would prefer to provide the huge loan for the financing of the economic and social projects through loan syndication.
Loan syndication (also known as consortium lending) may be defined as the art and process whereby a group of financial institutes provide credit facility to a borrower under common agreement, terms and conditions in simple loan documentation. The important features of syndicated loan are that they are typically very large amounts (several millions) and there are at least two lenders (a spread of banks) and one borrower commonly involved. The decision as to whether the financing of a project will be undertaken by a bank or consortium of banks will depend on the size of the finance or loan.
The borrower is usually a large or medium sized corporate body, government or parastatals with considered technical and managerial expertise. In loan syndication, one or two lender bank co-ordinate and manage the lending for every administration of such loan, one or more of the lending banks would act as the level/agent bank. Loan syndication has continued to be on the increase because of the rapid expansion of the economy effectiveness of Foreign Exchange Market (FEM) which reduces the value of naira and inversely increasing overall costs of production and projects.
1.2 STATEMENT OF PROBLEM
Loan syndication arises through the following fundamental causes namely;
a. Pooling of fund
b. Sharing of risk
In the process of meeting the two fundamental causes of loan syndication, there are some challenges that are likely to be encountered which may hinder its growth and survival and such challenges include;
. Delay in packaging and putting the credit in place before disbursement to the borrower. Some of the banks invited by the lead bank to participate in a syndication may decline and come up with reasons like loan growth constraints, liquidity problems etc. Some syndicate loan take up to two years to conclude after the loan have been disbursed.
. Uncooperative attitude of the borrowers in meeting the terms and conditions in the loan agreement account.
. The payment of interest and principal as at when due poses some problems. The borrower may be facing liquidity problems, low sales turnover and diversion of working capital into acquisition of fixed assets etc such problems if not handled properly may lead to rescheduling, restructuring and refinancing the loan.
. Since rates are regulated instead of deregulated, it follows that banks may find it difficult to get fund from depositor so as to lend customers. All these setbacks make the management of loan syndication to be difficult for banks. However, the topic of the project is structured because of the following;
. Does loan syndication exist in Nigeria?
. Who are the beneficiaries of loan syndication?
. What administrative challenges does the arrangement pose and how are these resolved?
. Are there any structural problems in determining security in the arrangement?
. What are the risk factors or levels in the arrangement?
. What legal problem could arise and how is it resolved?
1.3 RESEARCH QUESTIONS
1. To what extent has syndicated loan been applied by Nigeria enterprises in project financing?
2. How adequate is syndicated loans provided by bank to industrialists in Nigeria?
3. What are the effects of long term nature of syndicated loans on the liquidity position of banks in Nigeria?
4. What are the prospects of loan syndication in Nigeria?
5. Can syndicated loan be said to provide adequate funds for project financing in Nigeria?
1.4 OBJECTIVES OF THE STUDY
The formal objectives of the study are stated as follows;
. To ascertain the extent of which loan syndication has been applied by Nigeria enterprises in project financing.
. To examine the extent to which loan syndication has contributed to the performance of Nigeria enterprises.
. To evaluate the adequacy of syndicated loan provided banks to industries.
. To ascertain the effect of the long term nature of syndicated loans on the liquidity position of banks in Nigeria.
. To highlight the prospect of loan syndication to both users of the loan and the banks that extent the credit.
1.5 STATEMENT OF HYPOTHESIS
Hypothesis One
HO: Syndicated loan has not been employed against other alternative as a medium/long term financing alternative.
HI: Syndicated loan has been employed against other alternative as medium/long term financing alternative.
Hypothesis Two
HO: Syndicated loan does not have any effect in our national economy.
HI: Syndicated loan has effect in our national economy.
Hypothesis Three
HO: Syndicated loan does not have much impact in out national economy.
HI: Syndicated loan has much impact in our national economy.
1.6 SIGNIFICANCE OF THE STUDY
The study will be of great benefit to bank management and regulatory authorities such as CBN, NDIC etc and also to general public. There is an adage that says “To whom much is give, much is expected”. The essence of banks giving out loan is for them to collect back their money with interest on it and will if they now want to give a large amount of money as loan then they will need more capital so the bank will need to call more banks in order to give large amount of money for loan.
To the general public, once a loan is given it increases market efficiency, then people will benefit from it and it will increase their standard of living, which will also increase the growth and development of that particular economy. To other researchers, they can make use of this study as a reference i.e. to get additional information to what would have gathered.
1.7 SCOPE OF THE STUDY
The scope of the study is to know the extent of loan syndication in Nigeria. This project work shall examine how effective loan syndication has been able to increase the corporate and social responsibilities of the enterprise. Also to evaluate how banks have been able to pull funds together to assist the corporate firms and how risks are been shared among those banks.
1.8 LIMITATIONS OF THE STUDY
One area of limitation is the constraint imposed by limited financial resources and time available to carry out the research. In the same vein, non-availability of enough data from banks posed a big problem and inability of the bank official to release some of the confidential materials, which would help the research work.
1.9 Definition of Terms
The terms used in the study can be defined as follows;
Loan: This is a credit facility granted to a customer which is installmentally payable over a specified period of time.
Loan Syndication: According to Anyanwokoro (2015), loan syndication is an arrangement by which different banks or financial institution team together to grant a large loan to a customer.
Project: A project is an undertaken with a view of maximizing project and reducing or minimizing loss.
Project Financing: Project financing means providing the necessary funds or facility needed for the efficient and effective implementation of a project.
Syndicate: This means an association of financiers or industrialists or backing consortium formed to carryout some big industrial projects.
Long Term Loan: A form of debt that is paid off over an extended time frame exceeds one year in duration.
Medium Term Loan: Is a loan where repayments are made over a period of between one and five years.
Short Term Loan: Is a loan scheduled to be repaid back in less than a year.
Repayment Period: The act of paying back money previously borrowed from a lender. A common method of repayment is a lump sum with interest at maturity.
Financial Market: Is a market in which people trade financial securities, commodities items of value at low transaction cost.
Borrower: Is a person that has applied, met specific requirements and received a monetary loan from a lender.
Lender: A private, public or institutional entity which makes funds available to others to borrow.
Financial Institution: Is an institution that provides financial services for its clients or members.
Financial Services: They are the economic services provided by the finance industry which encompasses a broad range of business.
Lead Bank: The bank of the borrowers choice that agree to raise the required amount either on a best effort base or under written obligation.
Agent Bank: This is an administrator of the loan
