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PROBLEMS OF COMMERCIAL BANK LOAN SYNDICATION ON THE NIGERIA ECONOMY AND THE IMPACT OF MACRO ECONOMIC VARIABLES ON GDP IN NIGERIA ECONOMY

CHAPTER ONE

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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