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CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The relative insufficiency of fund for capital investment is a common factor in every economy especially in developing counties of the world. In developing counties like Nigeria; the low level of capital investment manifest in high unemployment rates; low productivity and corresponding low standard of living for greater majority of the population.Finding a solution to this problem of providing fund for capital investment has been a major  pre-occupation of financial institutions in Nigeria. Beyond the traditional term loan; share offers; bonds and on; business organizations and financial institutions alike have sought out avenue to tackle the problem of insufficient fund for capital investment. One of the solutions they have come up with is syndicated load or multiple  credit facilities, which is aimed at spreading risks and weakening the impact of restricting laws and regulation on lending by financial institutions. Syndicate has been defined as an association of industrialist, or financial or banking consortium forced to carry out some industrial projects. Accordingly, loan syndication is basically defined as an agreement between two or borrower with credit facility utilizing common loan documentation. The spectacular growth of loan syndication as an alternative financial instrument for business organization occurred as response to several economic factors in Nigeria. Notable among these were:- The National industrial policy of 1989, which is aimed at achieving, accelerated pace of industrial growth in Nigeria economy.- The Introduction of structural adjustment programmed in 1986, culminating in the establishment of foreign Exchange market (F E M) and depreciation of the aria, This made imported machinery and equipment very expensive and requiring hung capital outlays which most companies or financial institution can not comfortably afford.  - Restriction on credit expansion by government and monetary authorities to minimize inflation.

Central bank of Nigeria dose not included syndicated loan finance with in the credit checking, banks are there fore, able to syndicate loans with out interfering with the credit ceiling.- The scrapping of import license regime which enabled more users of imported equipment and machineries to source and bring into the country. - Deregulation of interest rate made loan syndication attractive to both business organizations and financial institutions. The above factors concerned with the persistent domestic inflation and arising cost of domestic production have increased the magnitude of credits demand by vanoys users of fund particularly the industrial producers.In addition, there are certain legal and regulatory limitations on lending activities of commercial and merchant banks such as the statutory lending limit as provided in the banking act of 1969s. 13 (1) , the liquidity requirement ,e t c . In order to surmount these legal and regulatory limitations on lending activities of commercial bank (union bank) and merchant banks, loan syndication has become an attractive credit delivery technique aimed at spreading risks reducing the impact of the restricting laws and regulations.

Currently, there exists no comprehensive enacted law on loan syndication in the country as to regulate the activities of the financial institution that lead and participate in the syndication. What is perhaps significant about loan syndication in the country is not the rapid growth of the financial institutions involved loan syndication, but their activities which have been quite remarkable over the years. Also, the study of the extent to which union bank of Nigeria plc. Employ syndicated loan as an alternative financing means with particular reference to Anambra and Enugu states respective financing means with loan as an alternatively have been carried out in this study. The researcher carefully appraised all aspects of loan syndication as financing alternative in the country from the point of view of the borrower. It is also made clear in this work that consideration of numerous merits of syndicated loan financing as against its demerits. It is not to be used as a last resort but should be considered alongside with equivalent alternatives.All these notwithstanding the most important of this study (it empirical study) is to know the popularity of syndicated loan financing among business organization in the country and the extent to which they employ it as financing alternative, no such study has been carried out in Nigeria.  For the empirical study, Anambra and Enugu State respectively have been chosen due to constraint imposed by cost and short-term on the researcher, otherwise the researcher could have conducted the survey throughout the country.

1.2 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 this alternative, especially in Nigeria, argues that syndicated loan is expensive and involves much administrative work. Also, there is need to point  out in every clear terms the advantages inherent in syndicated loan as medium and long term financing alternative. Besides, a review of the role of financial institutions in financing Nigeria business organization through syndicate loan is of paramount importance. In addition to the above, the extent to which syndicated loan financing is embraced by Union bank of Nigeria Plc. In the country need to be studies to know actually whether the much emphasized syndicated loan financing is being employed as financing alternative in Nigeria.

1.3 OBJECTIVE OF THE STUDY

The purpose of this study includes inter-allies; 

- An examination in general terms of the various issues involved in loan syndication.

- To find out whether loan syndication is really a new approach to or another form of borrowing.

- To synthesize the merits and demerits of syndicated loan-financing vis-à-vis other sources of medium and long-term financing both by cost and code less.

- To survey the extent and prospects of loan syndication business in Nigeria analyzing critically the role of business organizations and financial institutions.

-To find out whether loan syndication can help in industrial development of the country, especially under the current economic situation.

- To examine the extent of penetration of syndicated loan financing among business organizations in the country.

1.4 SIGNIFICANCE OF THE STUDY

This study will be of crucial benefit to the borrowers. The attention of the researcher was drawn by the need for loan syndication in Nigeria especially in the area of providing the borrower with credit facilities. This becomes obvious that will be a need to grant study that could examine loan syndication as it affects the investment and capital project outlays.Therefore, the significant of this study is to look into ways of making it easy for financing a capital project outlays which requires a syndicated loan, and also to encourage financial firms to jointly finance project which one financial firm cannot single handedly finance. It is hoped that after this study. It will be useful to every bank especially those in merchant banking and development banking. It will also provide information to general public on how to employ loan syndication as alternative business financing. This work is expected to be of immense values to the students in financial studies and other related courses mostly accountancy, banking and finance and so on, since this is part of what they are going  to practice in their various place of work. Lastly, it will and government and other institutions to formulate suitable policy that will guide them in financing a big projects jointly with other financing firm.

1.5 SCOPE OF THE STUDY

This research work only covers the loan syndication as an alternative business financing strategy in Nigeria. I took a close looks at the needs, functions and various benefit associated with Nigeria loan syndication. 

LIMITATIONS OF THE STUDY

The first limitation, which was obvious, is the dearth of statistical data. Lack of statistical data from our financial institutions like central bank of Nigeria (CBN), ministry of finance, including commercial and merchant banks where the researcher visited at Enugu, Onitsha and Lagos to collect list of corporations they have financed through syndicated loan adhered strictly to the rule of secretly in banking, thus they refused to release such information.Another problem is the time constraint. A research of this nature need relatively long time during which information for accurate in firmness could be drawn, the period for the study is short , hence time posed as a constraint to the researcher.Lastly, as the cost, the researcher would have extended the survey to other states at the empirical level and this would have produced accurate and more comprehensive work but for the hinge cost of transportation and accommodation in the various state of the federation. It is not possible.

1.6 STATEMENT OF HYPOTHESIS:

Ho: Syndicated loan has been employed against other alternatives as a medium long term financing strategy.

Hi: Syndicate loan has not been employed against other alternatives as a medium long term financing strategy.

Ho: Syndicate loan does not have any impact on our national economy.

Hi: Syndicated loan has much impact in our national economy.

1.7 DEFINITION OF TERMS:

The research topic has some key words, which call for treatment before anything else.

SYNDICATE: It has been defined as an association of industrialist, or financials or banking consortium forced to carry out come industrial projects.

LOAN SYNDICATION: It is defined as an agreement between two or more lending financial institutions to provide a borrower with credit facility utilizing common loan documentation.

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