PROBLEMS OF COMMERCIAL BANKS LOAN SYNDICATION ON THE NIGERIAN ECONOMIC AND THE IMPACT OF MICRO ECONOMIC VARIABLES ON GDP IN NIGERIA ECONOMY
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PROBLEMS OF COMMERCIAL BANKS LOAN SYNDICATION ON THE NIGERIAN ECONOMIC AND THE IMPACT OF MICRO ECONOMIC VARIABLES ON GDP IN NIGERIA ECONOMY
1.0 INTRODUCTION TO CHAPITRE ONE
Finance is required for a variety of reasons by individuals, organisations, and other economic agents. There are numerous financial institutions that provide the necessary financing. These establishments are known as financial institutions.
Money and capital markets are two types of financial institutions. Commercial banks provide financial services in the form of intermediation in the money market.
This entails channelling funds from the surplus spending units of the economy to the economy’s deficient spending units, so converting bank deposits into credits.
Credit’s function in economic development has been recognised, since many economic agents obtain credit to pay operating expenses. For example, businesses may seek loans to purchase machinery and equipment. Farmers obtain loans to purchase seeds, fertiliser, and various agricultural structures.
Credits are obtained by government entities to cover a variety of recurring and capital costs. Individuals and families use credit to purchase and pay for products and services (Adeniyi, 2006).
According to Ademu (2006), providing finance with enough respect for the sector’s volume and price structure is one approach to develop self-employment chances.
Credit helps to generate and maintain an acceptable business size since it is used to establish and/or expand the business in order to take advantage of economies of scale.
It can also be utilised to improve and boost the efficiency of informal activities. This is accomplished through resource substitution, which is assisted by credit availability. While emphasising the importance of credit,
Ademu (2006) went on to describe how credit can be used to keep an economic activity from collapsing in the event of a natural disaster such as a flood, drought, disease, or fire. Credit might be obtained to help revive an economic activity that has suffered a setback.
The banking sector contributes to the availability of credit by mobilising surplus funds from savers who have no immediate need for such funds and channelling such funds in the form of credit to investors who have brilliant ideas on how to create additional wealth in the economy but lack the necessary capital to put the ideas into action (Nwanyanwu, 2010).
It is instructive to note that the banking sector has emerged as the most important in the financial sector, because in many developing nations around the world, it is basically the only financial method of drawing huge amounts of private deposits (Adeniyi, 2006).
There is a lot of research on the role of banks as intermediaries in economic growth. However, there appears to be widespread agreement that the role of banks in intermediation aids in economic progress.
According to Akintola (2004), banks’ traditional functions include financing agriculture, manufacturing, and syndicating credit to productive areas of the economy.
According to the Central Bank of Nigeria Annual Report (2012), the sectoral distribution of commercial banks’ loans and advances (in N’ Million) in the fourth quarter of 2012 was 316,364.0 for agriculture, forestry, and fishing, 1,068,341.7 for manufacturing, 1,771,496.3 for mining and quarrying, and 539,759.8 for real estate and construction.
The totals for export and import are 65,612.8 and 690,962.4, respectively. The respective figures for public utilities, transportation and communication, and credit to financial institutions were 29,270.5, 966,251.3, and 249,083.4.
Adekanye (1986) remarked that by making loans available, banks provide a significant social function by increasing productivity, expanding capital investment, and realising a higher standard of life.
Given the foregoing and the function of commercial banks as intermediaries in economic growth, the purpose of this study is to investigate the influence of commercial bank loan on economic growth in Nigeria.
1.1 BACKGROUND OF THE RESEARCH
Financial institutions play an important role in lubricating the wheels of progress in any economy around the world. They act as financial mediators between depositors and various investors. They make many commercial activities possible.
Commercial banks in Nigeria have changed dramatically over the years, both in terms of the number of institutions, ownership structures, and the depth and breadth of operations meant to position it as Africa’s financial hub.
As a result of the changes, a financial landscape with strong and large banks, improved financial infrastructure, and an efficient payment system has emerged.
This is reflected in commercial banks’ average capital adequacy ratio (CAR), which was at 16.7 percent at the end of March 2014. According to the CBN news bulletin (2013), the primary goal of the reform is to ensure a stable and efficient financial system.
Reforms are essential to enable the banking system to build the necessary resilience to support the nation’s economic development by efficiently performing its job as a pillar of financial intermediation (Aburime, 2008). Nigeria has the African continent’s second largest economy in terms of GDP, after only South Africa.
GDP growth has averaged 6 to 7% since 2003. GDP per capita increased from less than $700 in 2004 to $1418 in December 2009, indicating economic progress.
Nonetheless, wealth distribution is skewed, with 54% of the population living below the poverty line (CBN Annual Report 2013). Because of the Fed’s tight monetary policy since 2011, a single-digit inflation target has been set. In December 2011, inflation was 10.3%, but by January 2012, it had risen to 12.6%.
This was due to the partial elimination of fuel subsidies. In order to mitigate inflationary pressures, three distinct steps were implemented in January 2012. The cash reserve requirement (CRR) was increased from 1.0% to 8.0%,
the monetary policy rate (MPR) from 6.25% to 12.0%, and the liquidity ratio (LR) from 25.0% to 50.0%. (CBN, Annual Report, 2012) demonstrates that money supply movement has been slow. The high interest rate is due to the economy’s comparatively high inflation.
In May 2012, commercial banks in Nigeria raised their maximum lending rates from 22% to 33% to 25% to 27%, resulting in high operating costs and deteriorating infrastructure.
According to Rose (1999), profitability is the net after-tax income of banks, which is typically proxied by return on assets and return on equity ratios. This ratio is influenced by a variety of external factors, including real GDP,
import and export levels, and Nigeria, commercial banks have long played important roles in economic development, and their activities are always influenced by macroeconomic conditions (CBN news bulletin 2011).
Nigerian banks have faced economic indicators issues in recent decades. There has been a lot of work done in foreign literatures, Tanna and Pasiousras (2005) Staikouras and Wood (2004) gives evidence of significant contribution of external factors to bank earnings, but in Nigeria, only Aburime (2008) has done a research into this topic covering only up to 2006.
Loan syndication began in Nigeria in the 1960s, when a consortium of commercial banks and acceptance houses reduced trade bills for marketing boards under the generated bill financing programme.
Formalised loan syndication emerged during the 1970s oil boom, when substantial finance was required to fund industrialization schemes. During this time, only a few merchant banks had been established.
1.2 STATEMENT OF THE RESEARCH PROBLEM
To study why loan syndication is not well managed despite monetary authorities giving it priority attention. Regardless of its strategic importance in financing feasible projects capable of pumping foreign cash, creating jobs, and promoting rapid economic development.
To critically investigate the role of financial institutions in loan syndication management in the economy.
Loan syndication is the result of situations such as legal lending limits, risk sharing, and liquidity issues. The researcher would like to discover if, despite these constraints, it is still a viable choice for business funding.
1.3 OBJECTIVES OF THE STUDY
A additional source of financing viable investment initiatives beyond the constraints of an individual financial institution is required for an economy to thrive. We would like to define the objective on this basis.
The research study is included below.
1. To identify the main issues confronting commercial bank loan syndication and to propose how much of the problem can be handled.
2. Determine the impact of loan syndication on economic development.
3. To emphasise the economic benefits of loan syndication.
4. To urge that syndicated loans be treated the same as any other loan. Rather, it is subject to conditional attractiveness at a higher interest rate subject to default and time lags in packaging as a result of consortium bank bureaucracy.
1.4 SIGNIFICANCE OF THE STUDY
This study is likely to have supplied important loan syndication information to the following:
Studies: Using this project, students do research and gather knowledge on the rules of financial institutions in loan syndication management.
Financial institution: Through this project, financial institutions will learn how to stick to their loan syndication agreements. It will also encourage financial institutions to provide financial accommodations through loan syndication because it is more beneficial to the financial institution. It will also teach how to reduce the time frame in packaging a syndication loan.
Borrower: With the help of this project, the borrower will be aware of the suitable producers involved in securing a loan through syndication.
The project will benefit both the government and the targeted audience because loan syndication contributes significantly to the development of our economy. The government will learn more about the benefits of loan syndication in our economy as a result of this endeavour.
1.5 RESEARCH QUESTION
The researcher developed some research questions to guide her as she carried out her task in order to have a focal point in the study. Which of the following are the questions:
1. What are the primary issues affecting commercial banks in loan syndication?
2. In your opinion, how should this problem be solved?
3. What is the impact of loan syndication on economic development?
1.6 LIMITATIONS OF THE STUDY
During the process of performing/researching this project task, the researcher met numerous problems and opposition, ranging from money limits to time constraints.
These variables, in their own ways, hampered the rapid pace of this job, resulting in the researcher not being able to complete the research work on time.
Furthermore, within the area of study, the researcher encountered some other types of constraints that contributed to the limitation of this researcher’s work, such as access to data, information, and facts concerning the current study due to various reasons, some not willing to give out information that is to be within the workers.
1.7 DEFINITION OF TERMS
Adjusted capital is the paid-up capital plus the bank’s statutory reserve.
Commitment Fee: A fee paid to the lender in exchange for a formal line of credit.
Failure to pay interest and/or principle at maturity is referred to as default.
Financial intermediation brings together saving surplus and saving deficit units so that savings can be transferred to their most profitable use.
Financial Market: This is an arrangement or location where financial assets and liabilities are created and transferred.
Loan/Agent Bank; This could be the initial bank of syndication, the first bank contacted by the borrower, or the bank that contributes the interest amount for loan financing.
Inter Bank Agreements: This is the document that spells out the common agreement that all participating banks must follow.
Loan Agreement: This is the contract that binds the borrower and the participating lender to the loan’s terms and conditions.
Loan syndication is an agreement between two or more lending institutions to provide credit using common loan documents.
The offer/commitment letter explains down the terms and conditions of the credit, whereas the forma is the offer for acceptance.
Participating Banks: These are banks that are involved in a specific loan syndication.
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