LOAN SYNDICATION AS AN ALTERNATIVE BUSINESS FINANCING STRATEGY IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.1Â Â AN OVERVIEW OF THE STUDY
The insufficiency of fund for capital investment is a known common factor in every economy especially in developing countries of the world. In developing countries like Nigeria, the low level of capital investment manifests in high unemployment rate, low productivity and a corresponding low standard of living affects a greater majority of the population. Providing solution to this problem has been a major investment preoccupation of financial institutions in Nigeria. Beyond the traditional term loan, bonds, offers and so on, business organizations and financial institutions as well have sought out an avenue to tackle the problem of insufficient fund for capital investment.
One of the solutions they have come up with is loans syndication.
According to Peter S. Rose and Sykia C. Hudglus (2008), a syndicated loan consists of a loan package extended to a corporation by a group of lenders, the loans may be drawn by the borrowing company with the funds used to support business operations or expansions. A syndicated loan can also be defined as an agreement between two borrowers with credit facility utilizing common loan documentation. This study is centered on several variables which are loans and advances being the independent variable while debentures, ordinary shares and preference shares are its dependent variables.
Signoriello, Vincent J. (1991) defined loans as a debt provided by one entity to another entity at an interest rate and evidenced by a note which specifies among other things the principal amount, interest rate and date of repayment.
Advances are sums paid or received before the fulfillment of an obligation such as supply of goods or provisions of services.
Debentures are long term promissory note issued by a borrowing company to the lender acknowledging a substantial debt on which interest is earned, Oye Akinsulere (2002).
Ordinary shares are generally referred to as equity shares, they do not carry any fixed rate of dividend right.
Preference shares normally carry prior right as regards participation in the sharing of profits or in the return of capital and generally carry specified rates of dividend.
In Nigeria, loan syndication can be traced to the 60’s when a consortium of the commercial banks and acceptance house discounted trade bills for the marketing board under the produce bill financial scheme. Although formalize loan syndication came into been during the oil boom of the 70’s where there was need for adequate capital to finance the industrialization programme. Currently, there exist no comprehensive enacted law on loan syndication in the country as to regulate the activities of the financial institutions that load the lead bank and participants in the syndication.
1.2Â Â STATEMENT OF PROBLEM
There are conflicting views as to whether business organizations should be financed by syndicated loan or not.
The opposition to the use of the alternative especially in Nigeria argues that syndicated loan is expensive and involves much administration work.
Also, a review of the role of financial institutions in financing Nigeria business organizations through syndicated loan is of paramount importance. From the above presentations, the following are the statement of the problem;
a)Â Â Â Â Â The effect of loans and advances on ordinary shares
(b)Â Â Â Â The issue of loans, advances and preference shares
(c)Â Â Â Â The impact of loans and advances on debentures.
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