PROBLEMS OF COMMERCIAL
BANKS LOAN SYNDICATION ON THE NIGERIAN ECONOMIC AND THE IMPACT OF MICRO
ECONOMIC VARIABLES ON GDP IN NIGERIA ECONOMY
TABLE OF CONTENT
Cover page
Title page
Approval page
Dedication
Abstract
Acknowledgment
Table of content
CHAPTER ONE
1.0 Introduction
1.1 Background
of the research
1.2 Statement
of research problem
1.3 Objectives
of the study
1.4 Significance
of the study
1.5 Research
question
1.6 Limitation
of the study
1.7 Definition
of terms
Reference
CHAPTER TWO: LITERATURE REVIEW
2.0 Introduction
2.1 Source of
literature
2.2 Review of
concept
2.3 Review of
related work
2.4 Empirical
studies
2.5 Theoretical
framework
2.6 Summary
of review
Reference
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Research
method
3.2 Fact
finding method
3.2 Sources
of Data
3.3 Population
of the study
3.4 Sample
and Sampling
3.5 Research
Instrument
3.6 Method of
Investigation
3.7 Method of
Data Analysis
CHAPTER FOUR
Data presentation and analysis
4.1 Data presentation and Analysis
4.2 Discussion
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary
5.2 Conclusion
5.3 Recommendation
References
Bibliography
CHAPTER ONE
1.0 INTRODUCTION
Finance
is required by different people, organizations and other economic agents for different
purposes. To provide the needed finance, there are varieties of institutions
rendering financial services. These institutions are called financial
institutions. Financial institutions are divided into money and capital market.
In the money market we have commercial banks that render financial services in
term of intermediation. This involves channeling funds from the surplus
spending to the deficient spending units of the economy, therefore,
transforming bank deposits into credits.
The role of credit in economic development has been
recognized as credits are obtained by various economic agents to enable them
meet operating expenses. For instance, business firms obtain credit to buy
machinery and equipment. Farmers collect loans to buy seeds, fertilizers, erect
various kinds of farm buildings. Government bodies obtain credits to meet
various kinds of recurrent and capital expenditures. Furthermore, individuals
and families also take credit to buy and pay for goods and services (Adeniyi,
2006).
Ademu (2006) said the provision of credit with
sufficient consideration for the sector’s volume and price system is a way to
generate self-employment opportunities. This is because credit helps to create
and maintain a reasonable business size as it is used to establish and/or
expand the business, to take advantage of economics of scale. It can also be
used to improve informal activity and increase its efficiency. This is
achievable through resource substitution, which is facilitated by the
availability of credit. While highlighting the role of credit, Ademu (2006),
further, explained that credit can be used to prevent an economic activity from
total collapse in the event of natural disaster, such as flood, drought,
diseases, or fire. Credit can be garnered to revive such an economic activity
that suffered the set back.
The banking sector helps to make these credit
available by mobilizing surplus funds from savers who have no immediate needs
of such funds and thus channel such funds in form of credit to investors who
have brilliant ideas on how to create additional wealth in the economy but lack
the necessary capital to execute the ideas (Nwanyanwu, 2010). It is instructive
to note that the banking sector has stood out in the financial sector as of
prime importance, because in many developing countries of the world, the sector
is virtually the only financial means of attracting private savings on a large
scale (Adeniyi, 2006).
There are many literature, that debated on the
intermediary role of banks in the economic growth. But, there seem to be a
general consensus that the role of intermediation of banks help in boosting
economic growth. Akintola (2004) identified banks’ traditional roles to include
financing of agriculture, manufacturing and syndicating of credit to productive
sectors of the economy.
According to Central Bank of Nigeria Annual Report
(2012), Sectoral Distribution of Commercial Banks’ Loans and Advances (N’ Million)
in fourth quarter 2012 stood at 316,364.0 for Agriculture, Forestry and
Fishery, 1,068,341.7 for Manufacturing, 1,771,496.3 for Mining and Quarying and
539,759.8 for Real Estate and Construction. Export and Import are 65,612.8 and
690,962.4, respectively. Public utilities, transport and communication and
credit to financial institution were 29,270.5, 966,251.3 and 249,083.4,
respectively. Adekanye (1986) observed that in making credit available, banks
are rendering a great social service, because through their action production
is increased, capital investment are expanded and a higher standard of living
is realized.
Considering the aforementioned and given the
intermediary role of commercial banks in economic growth, this study intend to
examine the impact of commercial bank credit on economic growth in Nigeria.
1.1 BACKGROUND OF THE RESEARCH
Financial
institution plays a major role in oiling the wheel of growth in any economy of
the world. They are financial intermediaries between end users of deposit and
various investors. They facilitate various business activities. Commercial
banks in Nigeria have undergone a remarkable and a tremendous change over the
years both in the number of institutions, ownership structures as well as depth
and breadth of operations designed to position it as Africa’s financial hub.
Financial landscape has been produced as a result of the reforms, characterized
by strong and large banks, improved financial infrastructure and efficient
payment system. This is shown in the average capital adequacy ratio (CAR) of
commercial banks which stood at 16.7 per cent at the end of March 2014. (CBN
news bulletin 2013), the main objective of the reform is to ensure a sound and
efficient financial system. The reforms are necessary to enable the banking
system develop the required resilience to support the economic development of
the nation by efficiently performing its function as the pillar of financial
intermediation (Aburime, 2008). In Africa, Nigeria is the second largest
economy with respect to gross domestic product (GDP) and second to South
Africa. Since 2003, GDP growth has averaged 6 to7%. GDP per capita has moved
from below 700$ in 2004 to $1418 in December 2009 showing economic growth.
Nevertheless, wealth distribution is heavily lopsided
with54% of the entire population classified as leaving below the poverty line
(CBN Annual Report 2013). Owing to the tight monetary policy since 2011, an
objective of single digit inflation has been focused on. In December2011,
inflation declined to 10.3% and jumped to 12.6% in January 2012. This was as a
result of the partial removal of fuel subsidy. Three different measures were
put in place in January 2012 in other to reduce inflationary pressure. Cash
reserve requirement (CRR) was raised from 1.0% to 8.0%, monetary policy rate
(MPR) was raised from 6.25% to 12.0% and the Liquidity Ratio (LR) was raised
from 25.0% to 50.0%. (CBN, Annual Report, 2012) shows that movement in money
supply has been sluggish. The high interest rate is as a result of the
relatively high inflation in the economy.
Commercial bank in Nigeria increased their maximum
lending rates from 22% – 33% to 25% – 27% in May 2012, leading to high
operating costs followed by decaying infrastructure.
Rose (1999) says that profitability is the net after –
tax income of banks usually proxies by return on assets and return on equity
ratios. This ratio are affected by numerous external factors real gross
domestic product, level of import and export, Nigeria, commercial banks have
always played major roles in the economic development and their operations are
always affected by macroeconomic conditions(CBN news bulletin 2011). In the
past decades, Nigerian banks have experience challenges in economic indicators.
In foreign literatures, a lot of work has been done, Tanna and Pasiousras
(2005) Staikouras and Wood (2004) gives evidence of significant contribution of
factors that are external towards earnings of banks, but in Nigeria, only
Aburime (2008) have done a research into this topic covering only up to 2006.
Loan syndication is now being practiced in Nigeria
starting from the 1960’s when a consortium of commercial banks and acceptance
houses discounted trade bills for marketing boards under the produced bill
finance scheme. Formalized loan
syndication have into being during the oil boom of the 70s when there was need
for adequate capital of financing the industrialization programmes. During this period few merchant bank had been
incorporated.
1.2 STATEMENT OF RESEARCH PROBLEM
To
investigated why loan syndication is not properly managed given priority
attention by monetary authorities.
Despite its strategic place in financing viable projects, capable of
injecting foreign currency creating employment and facilitating rapid economic
development.
To examine critically the place of financial
institutions in the management of loan syndication in the economy.
Loan syndication is a child of circumstances arising
form legal lending restrictions risk sharing and liquidity problems. The researcher would like to know despite
these constrains prevailing is it still a supplementary option for business
financing.
1.3 OBJECTIVES OF THE STUDY
For an
economy to get developed there must be a supplementary source of financing
viable investment projects beyond the limits of an individual financial
institution. It is on this basis that we
would like to define the objective.
The following include the research study.
1.
To identify those fundamental problems
confronting commercial banksloan syndication and suggest how much problem can
be solved.
2.
To ascertain the effect of loan syndication in
the economic development.
3.
To highlight the potentials of loan
syndication in the economy.
4.
To recommend that syndication loan is not different
from other loan. Rather it is subject to
conditional attraction higher interest rate subject to default and time lapses
in packaging as result of bureaucracy involved by consortium banks.
1.4 SIGNIFICANCE OF THE STUDY
This
study is expected to have provided useful information on loan syndication to
following:
Studies: the students by the use of this project make
researches and source information an the rule of financial institution in the
management of loan syndication.
Financial institution: Financial institution via this
project will lean how to keep to their loan syndication agreements, it will
also encourage the financial to give financial accommodation through loan
syndication because it is more beneficial to the financial institution which will
also loan how to reduce the time frame in packaging a syndication loan.
Borrower: The borrower with the aid of this project
will know the appropriate producers involved in obtaining loan through
syndication.
Since loan syndication contributes immensely tot eh
development of our economy both the government and the targeted audience will
benefit from the project. The government
with the help of this project will know more about the benefit of loan
syndication in our economy.
1.5 RESEARCH QUESTION
The researcher
formed some research question that will guide her to carry out this work so as
to have a focal point in the study. Which the question are:
1.
What are the fundamental problems confronting
commercial banks loan syndication?
2.
In your own opinion suggest how this problem
can be solved?
3.
What are the effect of loan syndication in the
economic development?
1.6 LIMITATION OF THE STUDY
During the course of
performing/researching this project work, the researcher encountered a lot of
challenges as well as opposition which ranges from financial constraints, time
factor. This factors in their own ways, slowed down the speedy progress of this
work that resulted to the researcher not being able to finish the research work
on time as is required
Also, within
the area of study the researcher was faced with some other forms of constrains
that contributed to the limitation of this researcher work, like accessibility
to data, information and facts concerning the present study due to some reasons
or the other, some not willing to give out information that it is to be within
the workers.
1.7 DEFINITION OF TERMS
Adjusted Capital: It is the paid up capital plus
statutory reserve of Bank.
Commitment Fee: This is a fee paid to lender for a
formal line of credit.
Default: This is referred to the failure to pay
interest and or principle at Maturity
Financial Intermediation: This brings saving surplus
unit together with saving deficit unit so that saving can be redistributed to
their most productive use.
Financial Market: This is an arrangement or place in
which the creation and transferee of financial assets and financial liabilities
take place.
Loan/Agent Bank; It could be the original bank of
syndication the first bank the borrower consulted or the bank that contribute
the interest amount for the financing of the loan.
Inter Bank Agreements: This is the document that
spells out common agreement binding all the participating banks
Loan Agreement: This is the document that commits the
borrower and the participating lender to terms and conditions of the loan.
Loan Syndication: It is the agreement between two or
more lending institution with credit facility utilizing common loan
documentation
Offer/Commitment Letter: This letter spells out the
terms and conditions governing the credit while the forma is the offer for an
acceptance.
Participating Banks: They are banks involved in a
particular loan syndication
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